Chapter 6

Economic Integration

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 Learning Objectives
To review types of economic integration
among countries
To examine the costs and benefits of
integrative arrangements
To understand the structure of the
European Union and its implications for
firms within and outside Europe
To explore the emergence of other
integration agreements, especially in the
Americas and Asia
To suggest corporate response to
advancing economic integration
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 Introduction
Economic integration is best
viewed as a spectrum with the
various integrative agreements
in effect today lying in the
middle of this spectrum
The level of integration defines
the nature and degree of
economic links among countries
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 Levels of Economic
Integration
Trading bloc: Trading blocs
preferential may take
economic various forms:
arrangement Free trade area
among a group Customs union
of countries Common market
Economic union

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 The Free Trade Area and
the Customs Union
The free trade area Members of a
is the least customs union
restrictive and dismantle barriers
loosest form of to trade in goods
economic and services
integration among among themselves
countries A customs union
In a free trade area, establishes a
all barriers to trade common trade
among member policy with respect
countries are to nonmembers
removed
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 The Common Market and
the Economic Union
A common market The creation of a true
has no barriers to economic union requires
trade among integration of economic
members and has a policies in addition to
common external the free movement of
trade policy goods, services, and
factors of production
Factors of production
are mobile among Under this union,
members members would
harmonize monetary
Members of a policies, taxation, and
common market government spending
must be prepared to and a common currency
cooperate closely in would be used by all
monetary, fiscal, and members
employment policies 6
 Arguments Surrounding
Economic Integration
A number of arguments
surround economic
integration
These arguments center on:
Trade creation and diversion
The effects of integration on
import prices, competition,
economies of scale, and factor
productivity
The benefits of regionalism
versus nationalism
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Trade Creation and Trade
Diversion
Whereas trade
creation is positive in
moving toward freer
trade, and therefore
lower prices for
consumers within the
EU, the impact of trade
diversion is negative

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Reduced Import Prices
When a small country imposes a
tariff on imports, the price of the
goods will typically rise, which
will in turn result in lower
demand for the imported goods
When a bloc of countries imposes
the tariff, the fall in demand for
the imported goods will be
substantial
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 Increased Competition
and Economies of Scale
Integration increases market
size and may result in a lower
degree of monopoly in the
production of certain goods
and services
Certain industries may not be
economically viable in smaller,
trade protected countries
Internal economies of scale
External economies of scale

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 Higher Factor Productivity
and Regionalism Versus
Nationalism
When factors of The biggest
production are impediment to
freely mobile, the economic
wealth of the
common market integration
countries, in remains the
aggregate, will reluctance of
likely increase nations to
Factor mobility will surrender a
not benefit each measure of their
country in the autonomy
common market
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 European Integration
Economic integration in Europe
from 1948 to the mid 1980s:
Organization for European Economic
Cooperation (OEEC)
Treaty of Rome
European Free Trade Association
(EFTA)
Common agricultural policy (CAP)
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 European Integration

The European
Union since the
mid 1980s:
1992 White Paper
European Union
(EU)

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Organization of the EU
The executive body of the EU
is the European Commission,
headquartered in Brussels
The Council of Ministers has
the final power to decided EU
actions
The future expansion of the EU
will cause changes in the
decision making processes
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 Implications of the
Integrated European
Market
Perhaps the most important implication
for Europe is the economic growth that
is expected to result
Several specific sources of increased
growth have been identified:
Gains from eliminating transaction costs
Achievement of economies of scale
More intense competition
Cheaper transaction costs and reduced
currency risks
Many U.S. firms fear a unified Europe
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North American Economic
Integration
Although the EU is undoubtedly the most
successful and well-known integrative
effort, integration efforts in North
America has gained momentum and
attention
North American integration has an
interest in purely economic issues and
there are no constituencies for political
integration
U.S.-Canada Free Trade Agreement
North American Free Trade Agreement (NAFTA)

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 Other Economic
Alliances
The world’s
developing countries
have perhaps the
most to gain from
successful
integrative efforts
Import substitution

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 Integration in Latin
America
Before the signing of the U.S.-
Canada Free Trade Agreement, all of
the major trading bloc activity in the
Americas had taken place in Latin
America
One of the longest lived integration
efforts among developing countries
was the Latin America Free Trade
Association (LAFTA), formed in 1961

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 Integration in Asia and
Integration in Africa and the
MiddleAfrica’s
East economic
The development
in Asia has been groupings range from
currency unions
different from that among European
in Europe and the nations and their
Americas former colonies to
Asian interest in customs unions
among neighboring
regional
states
integration is
Countries in the Arab
increasing for world have made
pragmatic reasons some progress in
economic integration
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 Economic Integration
and the International
Manager
Regional economic integration creates
opportunities and challenges for the
international manager
Economic integration may have an impact on
a company’s entry mode
Decisions regarding integrating markets
must be assessed from four different
perspectives
Effects of change
Strategic planning
Reorganization
Lobbying
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 Cartels and Commodity
Price Agreements
An important characteristic that
distinguishes developing countries
from industrialized countries is the
nature of their export earnings
This distinction is important for
several reasons
A cartel is an association of
producers of a particular good
Commodity price agreements involve
both buyers and sellers in an
agreement to manage the price of a
certain commodity

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