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International Business

Chapter Eight

Cross-national Cooperation and

Agreements

Economic Integration

• Economic integration: is an economic agreement amongst nations to form an economic bloc by removing tariff and nontariff barriers. It can have political implication.
• Factors that favor economic integration are: cultural similarity, geographic proximity, and political will
• Approaches to economic integration include:
  • global integration via the World Trade Organization
  • bilateral integration between two countries via free trade agreements
  • regional integration via economic blocs

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Effects of Economic Integration

Static effects: the shifting of resources from inefficient to

efficient firms as trade barriers fall Trade creation: production shifts from less efficient domestic producers to more efficient regional producers Trade diversion: trade shifts from more efficient external sources to less efficient suppliers within the bloc following the imposition of common external barriers

Dynamic effects: the gains from overall market growth, the

expansion of production, the realization of greater economies of scale and scope, and the increasingly competitive nature of the market

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Types of Regional Economic Integration

• Regional Cooperation: initial moves, preferential

trade agreements

• Free Trade Area: no internal tariff
• Customs Union: no internal tariff and common

external tariff

• Common Market: no internal tariff, common external

tariff and factor mobility

• Economic Integration: no internal tariff, common

external tariff, factor mobility, common fiscal and

monetary policy, common currency, and political

integration

Regional Integration Groups

• Europe
  • European Union (EU)
  • European Free Trade Association (EFTA)
• Asia
  • Association of Southeast Asian Nations (ASEAN)
  • Asia Pacific Economic Cooperation (APEC)
  • South Asian Association for Regional Cooperation (SAARC)
  • Economic Cooperation Organization (ECO)
  • Gulf Cooperation Council (GCC)
• Africa
  • Southern African Development Community (SADC)
  • Common Market for Eastern and Southern Africa (COMESA)
  • Economic Community of West African States (ECOWAS)

Structure of European Union

• European Parliament (elected by the peoples of the

Member States)

• Council of the European Union (representing the

governments of the Member States)

• European Commission (driving force and executive

body)

• Court of Justice (ensuring compliance with the law)
• Court of Auditors (controlling sound and lawful

management of the EU budget)

MERCOSUR

• Established in 1991
  • Brazil
  • Argentina
  • Paraguay
  • Uruguay
• Generates 80% of South America’s GNP
• Signed free trade agreements with Bolivia and Chile
• Negotiating with EU for free trade agreements

Association of South East Asian

Nations (ASEAN)

• Organized in 1967
• Member countries are protected in terms of

tariff and nontariff barriers

• Holds tremendous potential market

opportunities with 500 million consumers

How to Study Regional Groups

(an approach)

Study area EU NAFTA MERCOSUR ASEAN

History and background

Membership: current and future

Organizational structure

Success/ failures, so far

Present and future role in the region and the world

Role beyond economics-- politics, culture etc.

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Chapter 8: Discussion Questions

1. Define economic integration and explain why

nations pursue economic integration.

2. Explain the static and dynamic effects of regional

economic integration.

3. Explain the five different types of regional

economic integration with examples.

4. How can we can study regional groups? Specifically,

explain the role of matrix we discussed in class.

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