Flashcards in International Business Ch. 9 Midterm Vocab/Ideas Deck (19):
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
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
eliminates trade barriers between member countries and adopts a common external trade policy
-Andean Community (Bolivia, Columbia, Ecuador, and Peru)
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)
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)
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
What are the levels of Regional Economic Integration
1. Free Trade Area (Lowest Integration)
2. Customs Union
3. Common Market
4. Economic Union
5. Political Union (Highest Integration)
occurs when low cost producers within the free trade area replace high cost domestic producers
occurs when higher cost suppliers within the free trade area replace lower cost external suppliers
What is the political structure of the European Union?
1) The European Council
2) The European Commission
3) The European Parliament
4) The Court of Justice
*The EU is trying to create a political economy that takes precedence over local governments.
*Few countries are approved for membership.
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
Is the Euro a good thing?
*Prof spent a lot of time talking about this in class:
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
Optimal Currency Area
similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchane rate as an instrument of macroeconomic policy.
What is NAFTA?
The North American Free Trade Area includes the United States, Canada, and Mexico
-abolished tariffs on 99% of the goods traded between members
-removed barriers on the cross-border flow of services
-protects intellectual property rights
-removes most restrictions on FDI between members
-allows each country to apply its own environmental standards
-establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
*A hemisphere-wide Free Trade of the Americas is under discussion to lessen China's threat and the EU's expansion.
-formed in 1969 using the EU model
-had more or less failed by the mid-1980s
-was re-launched in 1990, and now operates as a customs union
-renamed the Andean Community in 1997
-signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade area
-originated in 1988 as a free trade pact between Brazil and Argentina
-was expanded in 1990 to include Paraguay and Uruguay and in 2005 with the addition of Venezuela
-may be diverting trade rather than creating trade, and local firms are -investing in industries that are not competitive on a worldwide basis
-initially made progress on reducing trade barriers between member states, but more recently efforts have stalled
Caribbean Single Market and Economy
- to lower trade barriers and harmonize macro-economic and monetary policy between members.
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
--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”