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Chapter
8 Outline
Chapter Summary
This chapter pursued three main objectives: to examine
the economic and political debate surrounding regional economic integration;
to review the progress toward regional economic integration in Europe,
the Americas, and elsewhere; and to distinguish the important implications
of regional economic integration for the practice of international business.
This chapter made the following points:
- A number of levels of economic integration are possible
in theory. In order of increasing integration, they include a free trade
area, a customs union, a common market, an economic union, and full
political union.
- In a free trade area, barriers to trade between member
countries are removed, but each country determines its own external
trade policy. In a customs union, internal barriers to trade are removed
and a common external trade policy is adopted. A common market is similar
to a customs union, except that a common market also allows factors
of production to move freely between countries. An economic union involves
even closer integration, including the establishment of a common
currency and the harmonization of tax rates. A political union is the
logical culmination of attempts to achieve ever-closer economic integration.
- Regional economic integration is an attempt to achieve
economic gains from the free flow of trade and investment between neighboring
countries.
- Integration is not easily achieved or sustained. Although
integration brings benefits to the majority, it is never without costs
for the minority. Furthermore, concerns over national sovereignty often
slow or stop integration attempts.
- Regional integration will not increase economic welfare
if the trade creation effects in the free trade area are outweighed
by the trade diversion effects.
- The Single European Act sought to create a true single
market by abolishing administrative barriers to the free flow of trade
and investment between EU countries.
- The Maastricht Treaty aims to take the EU even further
along the road to economic union by establishing a common currency.
The economic gains
from a common currency come from reduced exchange costs,
reduced risk associated with currency fluctuations, and increased price
competition within the EU.
- Although no other attempt at regional economic integration
comes close to the EU in terms of potential economic and political significance,
various other attempts are being made in the world. The most notable
include NAFTA in North America, the Andean Pact and MERCOSUR in Latin
America, ASEAN in Southeast Asia, and (perhaps) APEC.
- The creation of single markets in the EU and North America
means that many markets that were formerly protected from foreign
competition are now more open. This creates major investment and export
opportunities for firms within and outside these regions.
- The free movement of goods across borders, the harmonization
of product standards, and the simplification of tax regimes make it
possible for firms based in a free trade area to realize potentially
enormous cost economies by centralizing production in those locations
within the area where the mix of factor costs and skills is optimal.
- The lowering of barriers to trade and investment between
countries within a trade group will probably be followed by increased
price competition.
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