1. International Business Chapter Seven Regional Economic Integrations and Cooperative Agreements International Business 10e Daniels/Radebaugh/Sullivan 2004 Prentice Hall, Inc7-1

2. 2004 Prentice Hall, Inc Regional Economic Integration Logic Distance goods need to travel between countries is short Distance goods need to travel between countries is short Consumers’ tastes are likely to be similar (Small Psychic Distance) Consumers’ tastes are likely to be similar (Small Psychic Distance) Distribution channels can be easily established in adjacent countries Distribution channels can be easily established in adjacent countries Neighboring countries may have common history and interests Neighboring countries may have common history and interests 7-3

3. 2004 Prentice Hall, Inc Basic Types of Regional Economic Integration Free Trade Area (FTA): abolishes all tariffs Free Trade Area (FTA): abolishes all tariffs Customs union: eliminate internal tariffs, and place common external tariff on goods being imported from nonmembers 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 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 Economic integration: economic harmonization through common economic policies Common currencyCommon currency Political integrationPolitical integration 7-4

4. 2004 Prentice Hall, Inc Effects of Integration Static effects Static effects Shifting of resources from inefficient to efficient companies as trade barriers fallShifting of resources from inefficient to efficient companies as trade barriers fall Dynamic effects Dynamic effects Overall growth in marketOverall growth in market Expanded productionExpanded production Greater economies of scaleGreater economies of scale 7-5

5. 2004 Prentice Hall, Inc Static Effects Trade creation Trade creation Production shifts to more efficient producers for reasons of comparative advantageProduction shifts to more efficient producers for reasons of comparative advantage Consumers access more goods at lower pricesConsumers access more goods at lower prices Less efficient products will failLess efficient products will fail Trade diversion Trade diversion Trade shifts to countries in the group at the expense of trade with countries not in the groupTrade shifts to countries in the group at the expense of trade with countries not in the group 7-6

6. 2004 Prentice Hall, Inc European Union Largest and most comprehensive regional economic group http://europa.eu.int/index_en.htm Largest and most comprehensive regional economic group http://europa.eu.int/index_en.htm http://europa.eu.int/index_en.htm Began as a customs union Began as a customs union Formed the Euro Parliament Formed the Euro Parliament European Commission European Commission Initiates proposals for legislationInitiates proposals for legislation Guardian of treatiesGuardian of treaties Manager and executor of Union policies and trade relationshipsManager and executor of Union policies and trade relationships Manages the annual budget of the EUManages the annual budget of the EU Established common currency (euro) Established common currency (euro) Expansion challenges Expansion challenges 7-7

7. 2004 Prentice Hall, Inc European Trade and Economic Integration Map 7.1 7-8

8. 2004 Prentice Hall, Inc European Union Issues Abolish the right of individual EU countries to run their own foreign policies Abolish the right of individual EU countries to run their own foreign policies Have the right to raise direct taxes Have the right to raise direct taxes Use common border controls Use common border controls Integrate the European police force Integrate the European police force Influence national governments’ budgets much more strongly Influence national governments’ budgets much more strongly Create a European president to run the Council of Ministers Create a European president to run the Council of Ministers 7-9

9. 2004 Prentice Hall, Inc North American Free Trade Agreement (NAFTA) Established in 1994 by: Established in 1994 by: United StatesUnited States CanadaCanada MexicoMexico Combined population and total GNP greater than 15-member EU Combined population and total GNP greater than 15-member EU NAFTA covers: NAFTA covers: Market access (tariff and nontariff barriers)Market access (tariff and nontariff barriers) Trade rules (subsidies and antidumping)Trade rules (subsidies and antidumping) ServicesServices InvestmentInvestment Intellectual propertyIntellectual property Dispute resolutionDispute resolution Good example of trade diversion Good example of trade diversion 7-10

10. 2004 Prentice Hall, Inc NAFTA Special Provisions Unique aspects of NAFTA include: 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)Labor lobby in US forced the inclusion of labor standards such as the right to unionize (to prevent massive job loss to Mexico) Improved working conditions Improved working conditions Living standards Living standards Environmental lobby pushed for an upgrade of environmental standards in Mexico and strengthened complianceEnvironmental lobby pushed for an upgrade of environmental standards in Mexico and strengthened compliance 7-11

11. 2004 Prentice Hall, Inc MERCOSUR Established in 1991 Established in 1991 BrazilBrazil ArgentinaArgentina ParaguayParaguay UruguayUruguay Generates 80% of South America’s GNP Generates 80% of South America’s GNP Signed free trade agreements with Bolivia and Chile Signed free trade agreements with Bolivia and Chile Negotiating with EU for free trade agreements Negotiating with EU for free trade agreements 7-12

12. 2004 Prentice Hall, Inc Association of South East Asian Nations (ASEAN) Organized in 1967 Organized in 1967 Member countries are protected by tariff and nontariff barriers Member countries are protected by tariff and nontariff barriers Tremendous potential market opportunities- 500 million consumers Tremendous potential market opportunities- 500 million consumers http://www.aseansec. org/home.htm http://www.aseansec. org/home.htm http://www.aseansec. org/home.htm http://www.aseansec. org/home.htm 7-13

13. 2004 Prentice Hall, Inc Latin American Integration Map 7.4 7-14

14. 2004 Prentice Hall, Inc Commodity Agreements Attempts to counteract price instability through: Attempts to counteract price instability through: Exercise of market power through international commodity agreementsExercise of market power through international commodity agreements Stabilization of producer revenues through risk-management instruments, such as commodities futuresStabilization of producer revenues through risk-management instruments, such as commodities futures Stabilization of government revenues through precautionary savings fundsStabilization of government revenues through precautionary savings funds 7-15

15. 2004 Prentice Hall, Inc Organization of Petroleum Exporting Countries (OPEC) Producer cartel Producer cartel Group of commodity-producing countries that control supply and price Group of commodity-producing countries that control supply and price OPEC controls price by establishing production quotas on member countries 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 OPEC member countries produce 41% of the world’s crude oil and 15% of its natural gas http://www.opec.org/ http://www.opec.org/ http://www.opec.org/ 7-16