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International Business and Trades Chapter 9, Study notes of International Business

Saint Paul University Philipinnes (SPUP)International Business

This document is based on my understanding about our book in IBT.

Typology: Study notes

2022/2023

Uploaded on 11/16/2023

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Regional Economic Integration – the process whereby countries in a geographic region
cooperate to reduce or eliminate barriers to the international flow of products, people and, or
capital.
Regional Trading Bloc – a group of nations in a geographic region undergoing economic
integration.
In the past two decades brought in many regional trade blocs that promote regional
economic integration.
By entering into regional agreements, group of countries aim to reduced trade barriers
more rapidly than achieved under WTO.
Levels of Economic Integration:
Free Trade Area (Lowest Extent)
Customs Union
Common Market
Economic Union
Political Union (Greatest)
Free Trade Area
All barriers to the trade of goods and services among member countries are
removed, but members determine their own trade policies for nonmembers.
The most enduring free trade area in the world is the European Free Trade
Association (EFTA). Currently joins four countries – Norway, Iceland,
Liechtenstein, Switzerland. (Austria, Finland, and Sweden joined the EU).
Emphasis of the EFTA – industrial goods.
Other Free Trade Area include the North American Free Trade Association
(NAFTA) and its successor, the United States-Canada-Mexico Agreement
(USCMA).
Customs Union
Eliminates trade barriers between member countries and adopts a common
external trade policy.
most countries that enter customs union desire further integration in the future.
The Andean Community formerly known as the Andean Pact is a free trade area
that includes Bolivia, Colombia, Ecuador and Peru which aspires to be a customs
union, but that so far has been imperfectly implemented.
Common Market
No barriers to trade among member countries, includes a common external
trade policy, and allows factors of production to move freely among members.
Labor and Capital are free to move because there are no restrictions on
immigration, emigration, or cross-border flows of capital among member
countries.
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Regional Economic Integration – the process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people and, or capital. Regional Trading Bloc – a group of nations in a geographic region undergoing economic integration.  In the past two decades brought in many regional trade blocs that promote regional economic integration.  By entering into regional agreements, group of countries aim to reduced trade barriers more rapidly than achieved under WTO.  Levels of Economic Integration:  Free Trade Area (Lowest Extent)  Customs Union  Common Market  Economic Union  Political Union (Greatest)  Free Trade Area  All barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies for nonmembers.  The most enduring free trade area in the world is the European Free Trade Association (EFTA). Currently joins four countries – Norway, Iceland, Liechtenstein, Switzerland. (Austria, Finland, and Sweden joined the EU).  Emphasis of the EFTA – industrial goods.  Other Free Trade Area include the North American Free Trade Association (NAFTA) and its successor, the United States-Canada-Mexico Agreement (USCMA).  Customs Union  Eliminates trade barriers between member countries and adopts a common external trade policy.  most countries that enter customs union desire further integration in the future.  The Andean Community formerly known as the Andean Pact is a free trade area that includes Bolivia, Colombia, Ecuador and Peru which aspires to be a customs union, but that so far has been imperfectly implemented.  Common Market  No barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members.  Labor and Capital are free to move because there are no restrictions on immigration, emigration, or cross-border flows of capital among member countries.

 Establishing common market demands a significant degree of harmony and cooperation on fiscal, monetary, and employment policies.  Mercosur – the South American grouping of Argentina, Brazil, Paraguay, and Uruguay – hopes to eventually establish itself as a common market. Venezuela was accepted as a full member of Mercosur, but then was indefinitely suspended from the group in December 2016 due to its undemocratic policies.  Economic Union  Entails even more closer economic integration and cooperation than a common market.  Involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries’ tax rates, and a common monetary and fiscal policy.  Involves sacrificing a significant amount of national sovereignty to that bureaucracy.  EU is an economic union, although an imperfect one because not all members of the EU have adopted the euro, the currency of the EU; differences in tax rates and regulations across countries remain; and some markets, such as the market for energy are still not fully regulated.  Political Union  Independent states combined into single union.  Requires that a central political apparatus coordinate economic, social, and foreign policy for member states.  The EU is headed toward at least partial political union.  The United States is an example of even closer political union.  European Parliament which plays an important role in the EU has been directly elected by citizens of the EU countries since the late 1970s.  The Council of Ministers – the controlling, decision-making body of the EU – is composed of government ministers from each EU member. THE CASE FOR REGIONAL INTEGRATION  Both economic (The Economic Case for Integration) and political (The Political Case for Integration) and is typically not accepted by many groups within a country. The Economic Case for Integration  Straightforward  All countries gain from free trade and investment (positive-sum game).

 Europe has two trade blocs:  the European Union with 28 members (Britain has voted to exit)  European Free Trade Association (EFTA) with 4 members  The European Union is expected to become a superpower of the same order as the United States. EVOLUTION OF THE EUROPEAN UNION  The European Union (EU) is the result of:  the devastation of western Europe during two world wars and the desire for a lasting peace.  the European nations’ desire to hold their own on the world’s political and economic stage.  The forerunner of the EU , the European Coal and Steel Community, was formed in 1951.  The Treaty of Rome established the European Economic Community (EC) in 1957.  1973 (Great Britain, Ireland, Denmark).  1981 (Greece), 1986 (Spain and Portugal), 1995 (Austria, Finland and Sweden).  another 10 countries joined the EU on May 1,2004.  Bulgaria and Romania joined in 2007.  Croatia in 2013.  Through these enlargements, the EU has become a global economic power. POLITICAL STRUCTURE OF THE EUROPEAN UNION  European Commission

  • responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states to ensure they are complying with EU laws.
  • Headquartered in Brussels, Belgium
  • Important to business in recent years.
  • Proposes and implement laws.  European Council
  • resolves major policy issues and sets policy directions.
  • Represents the interests of member states.
  • The ultimate controlling authority within the EU
  • To clear the resulting logjams, the Single European Act formalized the use of majority voting rules on issues.
  • Sets political direction.  European Parliament
  • Approves or rejects.
  • Has 751 members and is directly elected by the populations of the member states.
  • Meets in Strasbourg, France, is primarily a consultative rather than legislative.
  • debates legislation proposed by the commission and forwarded to it by the council. Treaty of Lisbon o December 2007; under which the power of the European Parliament was increased. o When it took effect in December 2009, for the first time in history the EP was the co-equal legislator for almost all European laws.  Court of Justice
  • Interprets and settle disputes.
  • which is composed of one judge from each country, is the supreme appeals court for EU law. SINGLE EUROPEAN ACT
  • was born of a frustration among members that the community was not living up to its promise.
  • The EC responded by creating the Delors Commission (chairperson Jacques Delors), -- proposed that all impediments to the formation of a single market be eliminated by December 31, 1992. The result was the SEA, which became EC law in 1987. Objectives of the Act
  • to have one market in place by Dec. 31, 1992. Proposed the following changes:  Remove all frontier controls between EC COUNTRIES.  Apply the principle of mutual recognition to product standards.  Institute open procurement to non-national suppliers.  Lift barriers to competition in retail banking and insurance.  Remove all restrictions on foreign exchange transactions between member countries.  Abolish restriction on cabotage. THE ESTABLISHMENT OF THE EURO Maastricht Treaty
  • Privatize state assets.
  • Deregulate markets.
  • Restructure industries.
  • Tame inflation. They also had to:
  • Enshrine complex EU laws into their own systems.
  • Establish stable democratic governments.
  • Respect human rights. BRITISH EXIT FROM THE EU
  • Brexit Conservative Party led by Prime Minister Boris Johnson.
  • BREXIT is a certainty.
  • Britain is the EU’s second-largest national economy, an important counterweight to the economic power of Germany. REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)
  • Became law January 1, 1994.
  • Participants are the United States, Canada, Mexico. THE CASE FOR NAFTA Mexico - Increased jobs as low-cost production moves south and more rapid economic growth. U.S. and Canada
  • Access to a large and increasingly prosperous market and lower prices for consumers from goods produced in Mexico.
  • US and Canadian firms with production sites in Mexico are more competitive in world markets. THE CASE AGAINST NAFTA
  • Jobs could be lost, and wage levels could decline in U.S. and Canada.
  • Mexican workers could emigrate north.
  • Pollution could increase due to Mexico's lax standards.
  • Mexico would lose its sovereignty. THE UNITED STATES-CANADA-MEXICO AGREEMENT (USCMA)
  • USCMA is the new agreement who does some changes to the 25-year-old NAFTA treaty.
  • This agreement also mandates that by 2023, 40% of parts for any tariff free vehicles must come a so called "high wage " factory. THE ANDEAN COMMUNITY
  • Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement to create Andean Pact.
  • was formed in 1969 using the EU model and included an internal tariff reduction program, a common external tariff, a transportation policy, a common industrial policy, and special concessions for the smallest members, Bolivia and Ecuador.
  • was re-launched in 1990, and now operates as a customs union.
  • signed an agreement in 2005 with MERCOSUR to restart negotiations towards the creation of a free trade area. MERCOSUR
  • originated in 1988 as a free trade pact between Brazil and Argentina.
  • was expanded in 1990 to include Paraguay and Uruguay.
  • The initial aim was to establish a full free trade area by the end of 1994 and a common market sometime thereafter.
  • has been making progress on reducing trade barriers between member states.
  • may be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis.
  • Mercosur had its critics, including Alexander Yeats – a senior economist at the World Bank – who wrote a stinging critique. According to Yeats, the trade diversion effects of Mercosur outweigh its trade creation effects. The result, according to Yeats, is that Mercosur countries might not be able to compete globally once the group’s external trade barriers come down. CENTRAL AMERCIAN COMMON MARKET, CAFTA, AND CARICOM

U.S pursuing two major multilateral trade agreements: Trans Pacific Partnership (TPP) with 11 other Pacific Rim countries (Australia, New Zealand, Japan, South Korea, Malaysia, and Chile) and Transatlantic Trade and Investment Partnership (TTIP) with the European Union. REGIONAL ECONOMIC INTEGRATION THREATS Currently, the most significant developments in regional economic integration are occurring in the EU and NAFTA. Although some of the Latin American trade blocs and ASEAN may have economic significance in the future, developments in the EU and NAFTA currently have more profound implications for business practice. Accordingly, in this section, we concentrate on the business implications of those two groups. Similar conclusions, however, could be drawn about the creation of a single market anywhere in the world. OPPORTUNITIES  opens new markets.  makes it possible for firms to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs skills is optimal. THREATS  Within each grouping, the business environment becomes competitive.  EU companies are becoming more capable.  There is a risk of being shut out of the single market by the creation of a “trade fortress”.  the EU is becoming more willing to intervene and impose conditions on companies proposing mergers and acquisitions which could limit the ability of firms to follow the strategy of their choice.