week 7 case study

profileThomas1122
IPPTChap09_ei_accessible.ppt
Home>Applied Sciences homework help>week 7 case study

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

Chapter 9
Regional Economic Integration

*

©McGraw-Hill Education.

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

*

While the move toward regional economic integration is generally seen as a good thing, some observers worry that it will lead to a world in which regional trade blocs compete against each other.

In this possible future scenario, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs.

The specter of the EU and NAFTA turning into economic fortresses that shut out foreign producers with high tariff barriers is worrisome to those who believe in unrestricted free trade. If such a situation were to materialize, the resulting decline in trade between blocs could more than offset the gains from free trade within blocs.

The Opening Case: Regional Trade Pacts Give the Mexican Auto Industry an Edge describes the growth of the Mexican auto industry due to a wave of foreign direct investment spurred by regional trade agreements. Beginning with the establishment of the North American Free Trade Agreement (NAFTA) in 1994, Mexico has established over 40 different free trade agreements that provide Mexican automakers duty-free access to markets throughout the world. These agreements, along with Mexico’s relatively low labors costs, have attracted investments from many of the world’s largest car companies and auto parts suppliers, making Mexico the sixth-largest car producer in the world.

©McGraw-Hill Education.

What Are The Levels Of
Regional Economic Integration? (1 of 4)

A free trade area eliminates all barriers to the trade of goods and services among member countries

  • European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, and Switzerland
  • North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico

*

LO 9-1: Describe the different levels of regional economic integration.

©McGraw-Hill Education.

What Are The Levels Of
Regional Economic Integration? (2 of 4)

A customs union eliminates trade barriers between member countries and adopts a common external trade policy

  • Andean Community (Bolivia, Colombia, Ecuador, and Peru)

A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production

  • Mercosur (Brazil, Argentina, Paraguay, and Uruguay)

*

©McGraw-Hill Education.

What Are The Levels Of
Regional Economic Integration? (3 of 4)

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

  • European Union (EU)

A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states

  • the EU is headed toward at least partial political union, and the U.S. is an example of even closer political union

*

The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, and differences in tax rates across countries still remain.

©McGraw-Hill Education.

What Are The Levels Of
Regional Economic Integration? (4 of 4)

Levels of Economic Integration

*

©McGraw-Hill Education.

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

*

LO 9-2: Understand the economic and political arguments for regional economic integration.

©McGraw-Hill Education.

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
  • Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts
  • trade creation occurs when low cost producers within the free trade area replace high cost domestic producers
  • trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

*

LO 9-3: Understand the economic and political arguments against regional economic integration.

©McGraw-Hill Education.

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

*

LO 9-4: Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.

©McGraw-Hill Education.

What Is The Status Of Regional Economic Integration In Europe?

Member States of The European Union in 2013

*

Source: Copyright © European Union, 1995–2013.

©McGraw-Hill Education.

What Is The European Union? (1 of 2)

  • The devastation of two world wars on Western Europe prompted the formation of the EU
  • Members wanted lasting peace and to hold their own on the world’s political and economic stage
  • Forerunner was the European Coal and Steel Community (1951)
  • The European Economic Community (1957) was formed at the Treaty of Rome with the goal of becoming a common market

*

©McGraw-Hill Education.

What Is The European Union? (2 of 2)

The Single European Act (1987)

  • committed the EC countries to work toward establishment of a single market by December 31, 1992
  • was born out of frustration among EC members that the community was not living up to its promise
  • provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case

*

©McGraw-Hill Education.

What Is The Political Structure
Of The European Union?

The main institutions in the EU include:

The European Council - the ultimate controlling authority within the EU

The European Commission - responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states

The European Parliament - debates legislation proposed by the commission and forwarded to it by the council

The Court of Justice - the supreme appeals court for EU law

*

Management Focus: The European Commission and Intel explores the record fine ($1.45 billion) handed down to Intel for anticompetitive behavior. According to the European Commission, Intel illegally used its market power to ensure that its rival, AMD, was at a competitive disadvantage, thereby harming “millions of European consumers.”

©McGraw-Hill Education.

What Is The Euro?

  • 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
  • Britain, Denmark, and Sweden opted out
  • since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar

*

Country Focus: Creating a Single European Market in Financial Services explores the European Union’s progress towards creating a single financial market. The quest, started in 1999, was to have been completed by 2005, however, progress has been slowed by various factors related to the member countries’ tradition of operating autonomously. So, while 41 measures designed to create a single market are in place, how to enforce the rules is still to be determined. In fact, some experts believe that it will be at least another decade before the benefits of the new rules become apparent.

©McGraw-Hill Education.

Is The Euro A Good Thing?

  • Benefits of the euro
  • savings from having to handle one currency, rather than many
  • it is easier to compare prices across Europe, so firms are forced to be more competitive
  • gives a strong boost to the development of highly liquid pan-European capital market
  • increases the range of investment options open both to individuals and institutions
  • Costs of the euro
  • loss of control over national monetary policy
  • EU is not an optimal currency area

*

Country Focus: The Greek Sovereign Debt Crisis explores concerns over the long-term viability and survival of the euro and the Euro Zone, with particular emphasis on the continuing debt crisis in Greece and the loans provided to the country by the Euro Zone and the IMF.

©McGraw-Hill Education.

Should The EU Continue To Expand?

  • Many countries have applied for EU membership
  • Ten countries joined in 2004 expanding the EU to 25 states
  • In 2007, Bulgaria and Romania joined bringing membership to 27 countries
  • Turkey has been denied full membership because of concerns over human rights

*

In July 2013, Croatia entered the European Union becoming the 28th member nation.

©McGraw-Hill Education.

What Is The Status Of Economic Integration In The Americas? (1 of 2)

  • There is a move toward greater regional economic integration in the Americas
  • The biggest effort is the North American Free Trade Area (NAFTA)
  • Other efforts include the Andean Community and Mercosur
  • A hemisphere-wide Free Trade of the Americas is under discussion

*

LO 9-4: Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.

©McGraw-Hill Education.

What Is The Status Of Economic Integration In The Americas? (2 of 2)

Economic Integration in the Americas

*

©McGraw-Hill Education.

9-24

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The establishment of the North American Free Trade Agreement (NAFTA) in 1994 was an important, if controversial, moment in the economic histories of Canada, the United States, and Mexico.

As the head of a major industrial machinery manufacturer in the United States, would you have welcomed economic integration with Canada and Mexico? What advantages or disadvantages would you expect to experience? How might your business operations be different today if NAFTA had not been passed?

*

©McGraw-Hill Education.

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”

*

LO 9-5: Understand the implications for businesses that are inherent in regional economic integration agreements.

The Closing Case: Tomato Wars explores the battle between Mexican tomato growers and Florida tomato growers and how NAFTA allowed lower-priced tomatoes into the United States. When the Commerce Department was going to scrap the minimum price per pound rule, several prominent agriculture growers protested because of the amount of business they do with Mexico. Recently, an agreement was reached with Mexican growers to raise the minimum floor price for a pound of tomatoes, as well as higher prices for specialty tomatoes from Mexico—acknowledging the billions of dollars invested by Mexican growers in controlled greenhouse environments.

©McGraw-Hill Education.

US EU Trade War?

©McGraw-Hill Education.

Final Course Project-Section IV

  • Look at your MNC home country, examine the host country, is there a trade agreement between them? If not why is this a challenge? Find a host country that does have a trade agreement and discuss the opportunities.
  • Include this in Section IV of your final course project and post about it in the IBCC forum this week.
  • http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx

Section IV 20 Conduct an analysis on the conditions of trade. Indicate opportunities and challenges that affect your MNC; including any current policies or agreements that have been recently passed.