1. Regional Economic Integration
Chapter 9
Regional Economic Integration

2. What Is Regional Economic Integration?
Regional economic integration - agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other
Question: Do regional trade agreements promote free trade?
In theory, yes, but the world may be moving toward a situation in which a number of regional trade blocks compete against each other

3. What Are The Levels Of Regional Economic Integration?
A free trade area eliminates all barriers to the trade of goods and services among members
A customs union eliminates trade barriers between members and adopts a common external trade policy
A common market has no trade barriers between members, a common external trade policy, and the free movement of the factors of production
LO1: Describe the different levels of regional economic integration.

4. What Are The Levels Of Regional Economic Integration?
An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy
A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states

5. What Are The Levels Of Regional Economic Integration?
Levels of Economic Integration

6. Why Should Countries Integrate Their Economies?
All countries gain from free trade and investment - regional economic integration is an attempt to exploit the gains from free trade and investment
Linking countries together, making them more dependent on each other
creates incentives for political cooperation and reduces the likelihood of violent conflict
gives countries greater political clout when dealing with other nations
LO2: Understand the economic and political arguments for regional economic integration.

7. What Limits Efforts At Integration?
Economic integration can be difficult because
while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose
it implies a loss of national sovereignty
LO3: Understand the economic and political arguments against regional economic integration.

8. What Is The Status Of Regional Economic Integration In Europe?
Europe has two trade blocs
The European Union (EU) with 27 members
The European Free Trade Area (EFTA) with 4 members
The EU is seen as the world’s next economic and political superpower
LO4: Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.

9. What Is The Status Of Regional Economic Integration In Europe?
Member States of The European Union in 2011

10. What Is The European Union?
The devastation of two world wars on Western Europe prompted the formation of the European Union (EU)
members wanted lasting peace and to hold their own on the world’s political and economic stage
The Single European Act (1987) committed the countries to work toward establishment of a single market by December 31, 1992
The main institutions in the EU include:
The European Council
The European Commission
The European Parliament
The Court of Justice

11. What Is The European Union?
The Maastricht Treaty committed the EU to adopt a single currency
created the second largest currency zone in the world after that of the U.S. dollar
used by 17 of the 27 member states
Many countries have applied for EU membership
Turkey has been denied full membership because of concerns over human rights

12. What Is The Status Of Economic Integration In The Americas?
There is a move toward greater regional economic integration in the Americas
The most significant attempt is the North American Free Trade Area (NAFTA) between the United States, Canada, and Mexico
Two smaller trade pacts in the Americas are
the Central American Trade Agreement
CARICOM
LO4: Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.

13. What Is The Status Of Economic Integration In Africa?
Many countries are members of more than one of the nine blocs in the region
LO4: Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.

14. What Does Economic Integration Mean For Managers?
Regional economic integration
opens new markets
allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal
But
within each grouping, the business environment becomes competitive
there is a risk of being shut out of the single market by the creation of a “trade fortress”
LO5: Understand the implications for businesses that are inherent in regional economic integration agreements.

15. The Foreign Exchange Market
Chapter 10
The Foreign Exchange Market

16. Why Is The Foreign Exchange Market Important?
is used to convert the currency of one country into the currency of another
provides some insurance against foreign exchange risk - the adverse consequences of unpredictable changes in exchange rates
The exchange rate is the rate at which one currency is converted into another
events in the foreign exchange market affect firm sales, profits, and strategy
LO1: Describe the functions of the foreign exchange market.

17. When Do Firms Use The Foreign Exchange Market?
International companies use the foreign exchange market when
the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies
they must pay a foreign company for its products or services in its country’s currency
they have spare cash that they wish to invest for short terms in money markets
they are involved in currency speculation - the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

18. What Is The Nature Of The Foreign Exchange Market?
The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems
Future exchange rates are affected by
A country’s price inflation
A country’s interest rate
Market psychology

19. How Do Prices Influence Exchange Rates?
The law of one price - in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency
Purchasing power parity theory (PPP) argues that given relatively efficient markets the price of a “basket of goods” should be roughly equivalent in each country
predicts that changes in relative prices will result in a change in exchange rates
LO4: Understand the different theories explaining how currency exchange rates are determined and their relative merits.

20. The International Monetary System
Chapter 11
The International Monetary System

21. What Was The Jamaica Agreement?
A new exchange rate system was established in 1976 at a meeting in Jamaica
The rules that were agreed on then are still in place today
Under the Jamaican agreement
floating rates were declared acceptable
gold was abandoned as a reserve asset
total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion – today they are about $300 billion
LO1: Describe the historical development of the modern global monetary system.

22. What Has Happened To Exchange Rates Since 1973?
Since 1973, exchange rates have been more volatile and less predictable than they were between 1945 and 1973 because of
the 1971 and 1979 oil crises
the loss of confidence in the dollar after U.S. inflation in
the rise in the dollar between 1980 and 1985
the partial collapse of the EMS in 1992
the 1997 Asian currency crisis
the decline in the dollar from 2001 to 2009
LO1: Describe the historical development of the modern global monetary system.

23. What Is The Role Of The IMF Today?
Today, the IMF focuses on lending money to countries in financial crisis
There are three types of financial crises:
A currency crisis
A banking crisis
A foreign debt crisis
Greece and Ireland 2010

24. How Has The IMF Done?
By 2010, the IMF was making loans to 68 countries all of which require tight macroeconomic and monetary policy
However, critics worry
the “one-size-fits-all” approach to macroeconomic policy is inappropriate for many countries
the IMF is exacerbating moral hazard
the IMF has become too powerful for an institution without any real mechanism for accountability
However, in recent years, the IMF has started to change its policies and be more flexible
urged countries to adopt fiscal stimulus and monetary easing policies in response to the global financial crisis
LO5: Understand the debate surrounding the role of the IMF in the management of financial crises.

25. What Does The Monetary System Mean For Managers?
Managers need to understand how the international monetary system affects
Currency management - the current system is a managed float - government intervention can influence exchange rates
Business strategy - exchange rate movements can have a major impact on the competitive position of businesses
Corporate-government relations - businesses can influence government policy towards the international monetary system
LO6: Explain the implications of the global monetary system for currency management and business strategy.

26. The Global Capital Market
Chapter 12
The Global Capital Market

27. Why Do We Have Capital Markets?
Capital markets bring together investors and borrowers
investors - corporations with surplus cash, individuals, and non-bank financial institutions
borrowers - individuals, companies, and governments
markets makers - the financial service companies that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks)
capital market loans can be equity or debt
LO1: Describe the benefits of the global capital market.

28. Who Are The Main Players in Capital Markets?
The Main Players in a Generic Capital Market

29. What Makes The Global Capital Market Attractive?
Today’s capital markets are highly interconnected and facilitate the free flow of money around the world
Borrowers benefit from the additional supply of funds global capital markets provide
lowers the cost of capital
Investors benefit from the wider range of investment opportunities
diversify portfolios and lower risk

30. How Have Global Capital Markets Changed Since 1990?
Global capital markets have grown rapidly
the stock of cross-border bank loans was just $3,600 billion in 1990, but $32,430 in 2010
the international bond market has grown from $3,515 billion in 1997 to $26,613 in 2010
international equity offerings were just $18 billion in 1990, but grew to $750 billion in 2009
The growth in the markets is a result of
Advances in information technology
Deregulation by governments
LO2: Identify why the global capital market had grown so rapidly.

31. Exporting, Importing, and Countertrade
Chapter 16
Exporting, Importing, and Countertrade

32. Why Export? Exporting is a way to increase market size and profits
Large firms often proactively seek new export opportunities, but many smaller firms export reactively
often intimidated by the complexities of exporting
Exporting firms need to
identify market opportunities
deal with foreign exchange risk
navigate import and export financing
understand the challenges of doing business in a foreign market
LO1:Explain the promises and risks associated with exporting.
LO2: Identify the steps that managers can take to improve their firm’s export performance.

33. What Are The Pitfalls Of Exporting?
Common pitfalls include
poor market analysis
poor understanding of competitive conditions
a lack of customization for local markets
a poor distribution program
poorly executed promotional campaigns
problems securing financing
a general underestimation of the differences and expertise required for foreign market penetration
an underestimation of the amount of paperwork and formalities involved
LO1:Explain the promises and risks associated with exporting.

34. Where Can U.S. Firms Get Export Information?
The U.S. Department of Commerce
the most comprehensive source of export information for U.S. firms
The International Trade Administration and the United States and Foreign Commercial Service Agency
“best prospects” lists for firms
The Department of Commerce
organizes various trade events to help firms make foreign contacts and explore export opportunities
The Small Business Administration
Local and state governments
LO3: Identify information sources and government programs that exist to help exporters.

35. What Are Export Management Companies?
Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms
Two types of assignments are common
EMCs start export operations with the understanding that the firm will take over after they are established
EMCs start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products

36. How Can Firms Reduce The Risks Of Exporting?
To reduce the risks of exporting, firms should
hire an EMC or export consultant to identify opportunities and navigate paperwork and regulations
focus on one, or a few markets at first
enter a foreign market on a small scale in order to reduce the costs of any subsequent failures
recognize the time and managerial commitment involved
develop a good relationship with local distributors and customers
hire locals to help establish a presence in the market
be proactive
consider local production

37. How Can Firms Overcome The Lack Of Trust in Export Financing?
Because trade implies parties from different countries exchanging goods and payment the issue of trust is important
exporters prefer to receive payment prior to shipping goods, but importers prefer to receive goods prior to making payments
To get around this difference of preference, many international transactions are facilitated by a third party - normally a reputable bank
adds an element of trust to the relationship

38. How Can Firms Overcome The Lack Of Trust in Export Financing?
The Use Of A Third Party

39. What Is A Letter Of Credit?
A letter of credit is issued by a bank at the request of an importer
states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents
main advantage is that both parties are likely to trust a reputable bank even if they do not trust each other
LO4: Recognize the basic steps in export financing.

40. What Is A Draft?
A draft - an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time
also called a bill of exchange
A sight draft is payable on presentation to the drawee
A time draft allows for a delay in payment
normally 30, 60, 90, or 120 days
once a time draft has been “accepted” it becomes a negotiable instrument that can be sold at a discount from its face value

41. What Is A Bill Of Lading?
The bill of lading is issued to the exporter by the common carrier transporting the merchandise
It serves three purposes
It is a receipt - merchandise described on document has been received by carrier
It is a contract - carrier is obligated to provide transportation service in return for a certain charge
It is a document of title - can be used to obtain payment or a written promise before the merchandise is released to the importer

42. How Does An International Trade Transaction Work?
A Typical International Trade Transaction

43. What Is Countertrade?
Countertrade - a range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money
There are five distinct versions of countertrade
Barter
Counterpurchase
Offset
Buyback
Switch trading
LO5: Describe how countertrade can be used to facilitate exporting.

44. What Are The Pros Of Countertrade?
Countertrade is attractive because
it gives a firm a way to finance an export deal when other means are not available
it give a firm a competitive edge over a firm that is unwilling to enter a countertrade agreement
Countertrade arrangements may be required by the government of a country to which a firm is exporting goods or services

45. What Are The Cons Of Countertrade?
Countertrade is unattractive because
it may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably
it requires the firm to establish an in-house trading department to handle countertrade deals
Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade deals
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