Transcript International Business

International Business 10e Daniels/Radebaugh/Sullivan
International Business
Chapter Seven
Regional Economic Integrations
and Cooperative Agreements
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Regional Economic Integration
Logic
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Distance goods need to travel
between countries is short
Consumers’ tastes are likely to be
similar (Small Psychic Distance)
Distribution channels can be easily
established in adjacent countries
Neighboring countries may have
common history and interests
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Basic Types of Regional Economic
Integration
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Free Trade Area (FTA): abolishes all tariffs
Customs union: eliminate internal tariffs, and
place common external tariff on goods being
imported from nonmembers
Common market: same elements as customs
union plus allows free mobility of production
factors such as labor and capital
Economic integration: economic harmonization
through common economic policies
• Common currency
• Political integration
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Effects of Integration
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Static effects
• Shifting of resources from inefficient to
efficient companies as trade barriers fall
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Dynamic effects
• Overall growth in market
• Expanded production
• Greater economies of scale
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Static Effects
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Trade creation
• Production shifts to more efficient producers
for reasons of comparative advantage
• Consumers access more goods at lower prices
• Less efficient products will fail
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Trade diversion
• Trade shifts to countries in the group at the
expense of trade with countries not in the
group
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European Union
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Largest and most comprehensive regional
economic group
http://europa.eu.int/index_en.htm
Began as a customs union
Formed the Euro Parliament
European Commission
• Initiates proposals for legislation
• Guardian of treaties
• Manager and executor of Union policies and trade
relationships
• Manages the annual budget of the EU
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Established common currency (euro)
Expansion challenges
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European Trade and Economic
Integration
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Map 7.1
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European Union Issues
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Abolish the right of individual EU countries
to run their own foreign policies
Have the right to raise direct taxes
Use common border controls
Integrate the European police force
Influence national governments’ budgets
much more strongly
Create a European president to run the
Council of Ministers
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North American Free Trade
Agreement (NAFTA)
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Established in 1994 by:
• United States
• Canada
• Mexico
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Combined population and total GNP greater than
15-member EU
NAFTA covers:
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Market access (tariff and nontariff barriers)
Trade rules (subsidies and antidumping)
Services
Investment
Intellectual property
Dispute resolution
Good example of trade diversion
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NAFTA Special Provisions
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Unique aspects of NAFTA include:
• Labor lobby in US forced the inclusion of
labor standards such as the right to
unionize (to prevent massive job loss to
Mexico)
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Improved working conditions
Living standards
• Environmental lobby pushed for an
upgrade of environmental standards in
Mexico and strengthened compliance
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MERCOSUR
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Established in 1991
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Brazil
Argentina
Paraguay
Uruguay
Generates 80% of South America’s GNP
Signed free trade agreements with Bolivia
and Chile
Negotiating with EU for free trade
agreements
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Association of South East Asian
Nations (ASEAN)
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Organized in 1967
Member countries are
protected by tariff and
nontariff barriers
Tremendous potential
market opportunities500 million consumers
http://www.aseansec.
org/home.htm
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Latin American Integration
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Map 7.4
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Commodity Agreements
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Attempts to counteract price
instability through:
• Exercise of market power through
international commodity agreements
• Stabilization of producer revenues
through risk-management instruments,
such as commodities futures
• Stabilization of government revenues
through precautionary savings funds
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Organization of Petroleum
Exporting Countries (OPEC)
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Producer cartel
Group of commodity-producing countries
that control supply and price
OPEC controls price by establishing
production quotas on member countries
OPEC member countries produce 41% of
the world’s crude oil and 15% of its
natural gas
http://www.opec.org/
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