Chapter 8 Flashcards
Cross-National Cooperation and Agreements
Economic integration
the political and monetary agreements among nations and world regions in which preference is given to member countries
Effects of regional integration
- Static effects (trade creation, trade diversion)
- Dynamic effects
- Economies of scale
Global integration
Countries from all over the world decide to cooperate through the World Trade Organization (WTO)
Bilateral integration
Two countries decide to cooperate more closely together, usually in the form of tariff reductions
Regional integration
A group of countries located in the same geographic proximity decide to cooperate (e.g. European Union)
Approaches to economic integration - political & economic agreements among countries in which preference is given to member-countries may be
- bilateral
- regional
- global
Regional trade agreements
integration confined to a region and involving more than two countries
Geographic proximity
is an important reason for economic integration
Major types of economic integration
- Free trade area | no internal tariffs
- Customs union | no internal tariffs plus common external tariffs
- Common market | customs union plus factor mobility, etc.
Common market
Adding free mobility of production factors to a customs union
Regional integration
has social, cultural, political, and economic effects
Static effects of integration
the shifting of resources from inefficient to efficient companies as trade barriers fall
Dynamic effects of integration
the overall growth in the market and the impact on a company caused by expanding production and by the company’s ability to achieve greater economies of scale
Trade creation
production shifts to more efficient producers from reasons of comparative advantage
Trade diversion
trade shifts to countries in the group at the expense of trade with countries not in the group
Economies of scale
the average cost per unit falls as the number of units produced rises; occurs in regional integration because of the growth in the market size
The European Union:
- Changed from the European Economic Community to the European Community to the European Union
- The largest and most successful regional trade group
- Free trade of goods, services, capital, and people
- Common external tariff
- Common currency
European Free Trade Association
FTA involving Iceland, Liechtenstein, Norway, and Switzerland, with close ties to the EU
European Commission
provides political leadership, drafts laws, and runs the various daily programs of the EU
Council of the EU
composed of the heads of state of each member country, the President of the European Commission, and the High Representative of Foreign Affairs and Security Policy
European Parliament
3 major responsibilities:
- legislative power
- control over the budget
- supervision of executive decisions
European Court of Justice
ensures consistent interpretation and application of EU treaties
Treaty of Maastricht
sought to foster political union and monetary union
The euro €
- is a common currency in Europe
- is administered by the European Central Bank
- was established on January 1, 1999
- resulted in new banknotes in 2002
Migration and terrorism
are threatening the open borders that are at the heart of the Schengen Agreement
EU History
expanded from 15 to 25 countries in 2004 with countries from mostly Central & Eastern Europe. Romania & Bulgaria were admitted in 2007 and Croatia in 2013, bringing the number to 27, after the loss of the UK.
Implications of the EU for corporate strategy:
- Companies need to determine where to produce products
- Companies need to determine what their entry strategy will be
- Companies need to balance the commonness of the EU with national differences
North American Free Trade Agreement (NAFTA)
- includes Canada, the United States, and Mexico
- went into effect on January 1, 1994
- involves free trade in goods, services, and investment
- is a large trading bloc but includes countries of different sizes and wealth
NAFTA rationale:
- U.S.-Canadian trade is the largest bilateral trade in the world
- The U.S. is Mexico’s and Canada’s largest trading partner
US|M|CA
calls for the elimination of tariff and nontariff barriers, the harmonization of trade rules, the liberalization of restrictions on services and foreign investment, the enforcement of intellectual property rights, and a dispute settlement process
USMCA
is a good example of trade diversion; some U.S. trade with and investment in Asia has been diverted to Mexico
Rules of origin
goods and services must originate in North America to get access to lower tariffs
Regional content:
- The % of value that must be from North America for the product to be considered North American in terms of the country of origin
- Regional content for USMCA was raised from 62.5% under NAFTA to 75% on autos
A major challenge to NAFTA
is illegal immigration
Caribbean Community (CARICOM)
working to establish an EU-style form of collaboration
Mercosur
is a customs union among Argentina, Brazil, Paraguay, and Uruguay
Pacific Alliance
Mexico, Colombia, Peru, Chile
Andean Community
one of the original regional economic groups but has not been successful in achieving its original goals.
ASEAN Free Trade Area
is a successful trade agreement among countries in Southeast Asia
Asia Pacific Economic Cooperation (APEC)
comprises 21 countries that border the Pacific Rim; progress toward free trade is hampered by size and geographic distance between member countries and by the lack of a treaty
African trade groups
There are several, but they rely more on their former colonial powers and other developed markets for trade than they do on each other
The UN was established in
1945 following World War II to promote international peace and security. It deals with economic development, antiterrorism, and humanitarian movements
United Nations Conference on Trade and Development (UNCTAD)
established to help developing countries participate in international trade
Nongovernmental Organizations (NGOs)
private nonprofit institutions that are independent of the government
The attempts of countries to stabilize commodity prices
through producer alliances and commodity agreements have been largely unsuccessful
Many commodity agreements now exist for the purpose of
- discussing issues
- disseminating information
- improving product safety
Organization of the Petroleum Exporting Countries (OPEC)
is a producers’ alliance in oil that has been successful in using quotas to keep oil prices high
The downside of high oil prices for OPEC:
- producers investing in countries outside of OPEC
- complication of balancing social, political, and economic objectives
