Kdqt eng chap008


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  • 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 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
  • The correct answer is b.
  • The correct answer is a.
  • The answer is c.
  • Management Focus: The European Commission and Media Industry Mergers Summary This feature explores the efforts of the European Commission to influence the strategies of media companies as they joined forces in Europe. The European Commission, concerned that proposed joint ventures and mergers between companies would negatively affect competition within the industry, demanded that some companies alter their plans to work together, and indeed abandon relationships all together. Discussion of the feature can begin with the following questions. 1. Why did Timer Warner and EMI agree to drop their proposed joint venture? How did the European Commission convince AOL and Time Warner to change their strategy? Discussion Points: Time Warner and EMI, bowing to pressure from the European Commission, agreed to drop their joint venture plans after the European Commission raised concerns about the size of a jointly owned company, which would have been three times that of the next largest competitor. According to the European Commission, the joint venture would have too much market power. The European Commission’s goal was to preserve a competitive market for consumers. A similar situation existed with the Time Warner AOL deal, which if approved would dominate the emerging market for downloading music over the Internet. The companies involved had little choice in the matter, if they wanted to operate in the European market, they had to follow the rules. 2. In your opinion, were the actions of the European Commission reasonable? Why or why not? Do you feel that the governing bodies of one nation should have the power to restrict the actions of foreign companies? Discussion Points: Students will probably be divided on this issue. Some will argue that the European Commission had no right to become involved in the business decisions of the companies, especially the ones from the United States. Others however, will probably note that one of the roles of the European Commission is to preserve a fair market system that protects consumers. In this particular case, that meant that the deals had to be blocked. Teaching Tip: To learn more about the companies in this feature, go to { http://www.timewarner.com/corp/ }, { http://www.aol.com/ }, and { http://www.emi.com/index.html }.
  • The answer is a.
  • The answer is d.
  • Country Focus: Creating a Single European Market in Financial Services Summary This feature 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. Discussion of this feature can begin with the following questions. 1. What are the benefits of creating a single financial market in the European Union for companies? Does it make sense for consumers? Discussion Points: A single financial market involving a common currency eliminates numerous challenges for companies and consumers. Not only are transactions and the associated paperwork greatly simplified, a single currency system also facilitates price comparisons across borders which should force companies to become more competitive. In addition, a single financial system would encourage competition in the financial services sector and increase liquidity in capital markets. 2. What are the impediments to creating a single financial market in the European Union? What does the potential for this type of market mean for countries like Great Britain that have not joined the euro-zone? Discussion Points: Creating a single financial market is not easy. Countries which have a long history of operating autonomously have to work together for common economic goals, a common regulatory framework must be developed, and cultural and linguistic barriers must be overcome. Countries that choose not participate in the system will retain control over their monetary policy, but may also lose investments or sales as companies seek to simplify their financing alternatives.
  • Many of these groups have been dormant for years. Significant political turmoil in several African nations has persistently impeded any meaningful progress. Also, deep suspicion of free trade exists in several African countries. The argument most frequently heard is that because these countries have less developed and less diversified economies, they need to be “protected” by tariff barriers from unfair foreign competition. Given the prevalence of this argument, it has been hard to establish free trade areas or customs unions.
  • The answer is a.
  • Kdqt eng chap008

    1. 1. InternationalBusiness 7e by Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Chapter 8 Regional Economic Integration
    3. 3. IntroductionRegional economic integration refers to agreementsbetween countries in a geographic region to reducetariff and non-tariff barriers to the free flow of goods,services, and factors of production between each otherRegional trade agreements are designed to promotefree trade, but instead the world may be moving towarda situation in which a number of regional trade blockscompete against each other 8-3
    4. 4. Levels Of Economic IntegrationThere are five levels of economic integration:1. a free trade area eliminates all barriers to the trade ofgoods and services among member countries, butmembers determine their own trade policies fornonmembersthe European Free Trade Association (betweenNorway, Iceland, Liechtenstein, and Switzerland), andthe North American Free Trade Agreement (betweenthe U.S., Canada, and Mexico) are both free tradeareas 8-4
    5. 5. Levels Of Economic Integration2. a customs union eliminates trade barriers betweenmember countries and adopts a common external tradepolicyThe Andean Pact (between Bolivia, Columbia,Ecuador and Peru) is an example of a customs union3. a common market has no barriers to trade betweenmember countries, a common external trade policy, andthe free movement of the factors of productionMERCOSUR (between Brazil, Argentina, Paraguay,and Uruguay) is aiming for common market status 8-5
    6. 6. Levels Of Economic Integration4. An economic union has the free flow of products andfactors of production between members, a commonexternal trade policy, a common currency, aharmonized tax rates, and a common monetary andfiscal policyThe European Union (EU) is an imperfect economicunion5. A political union involves a central political apparatusthat coordinates the economic, social, and foreign policyof member statesThe EU is headed toward at least partial politicalunion, and the United States is an example of evencloser political union 8-6
    7. 7. Levels Of Economic Integration Figure 8.1 8-7
    8. 8. Classroom Performance SystemAll barriers to the free flow of goods and servicesbetween member countries are removed, and acommon policy toward nonmembers is established in aa) Free trade areab) Customs unionc) Common marketd) Economic union 8-8
    9. 9. Classroom Performance SystemNAFTA is an example of a(n)a) Free trade areab) Customs unionc) Common marketd) Economic union 8-9
    10. 10. The Economic Case For Regional IntegrationAll countries gain from free trade and investmentRegional economic integration is an attempt to exploitthe gains from free trade and investment 8-10
    11. 11. The Political Case For Regional IntegrationLinking countries together, making them moredependent on each other:creates incentives for political cooperation andreduces the likelihood of violent conflictgives countries greater political clout when dealingwith other nations 8-11
    12. 12. Impediments To IntegrationEconomic integration can be difficult because:while a nation as a whole may benefit from a regionalfree trade agreement, certain groups may loseit implies a loss of national sovereignty 8-12
    13. 13. The Case Against Regional IntegrationRegional economic integration is only beneficial if theamount of trade it creates exceeds the amount it divertsTrade creation occurs when low cost producers withinthe free trade area replace high cost domesticproducersTrade diversion occurs when higher cost supplierswithin the free trade area replace lower cost externalsuppliers 8-13
    14. 14. Classroom Performance SystemWhen higher cost suppliers within the free trade areareplace lower cost external suppliersa) The bloc as a whole benefitsb) There is trade creationc) There is trade diversiond) External suppliers benefit 8-14
    15. 15. Regional Economic Integration In EuropeEurope has two trade blocs:The European Union (EU) with 27 membersThe European Free Trade Area (EFTA) with 4membersThe EU is seen as the world’s next economic andpolitical superpower 8-15
    16. 16. Regional Economic Integration In EuropeMap 8.1: Member States of the European Union in 2007 8-16
    17. 17. Evolution Of The European UnionThe EU was formed as a result of the devastation oftwo world wars on Western Europe and the desire for alasting peace, and the desire by the European nationsto hold their own on the world’s political and economicstageThe forerunner of the EU was the European Coal andSteel Community, which had the goal of removingbarriers to trade in coal, iron, steel, and scrap metalformed in 1951The European Economic Community was formed in1957 at the Treaty of Rome with the goal of becoming acommon market 8-17
    18. 18. Political Structure Of The European UnionThere are five main institutions of the EU:the European Council - resolves major policy issues and setspolicy directionsthe European Commission - responsible for implementingaspects of EU law and monitoring member states to ensure theyare complying with EU lawsthe Council of the European Union - the ultimate controllingauthority within the EUthe European Parliament - debates legislation proposed by thecommission and forwarded to it by the councilthe Court of Justice - the supreme appeals court for EU law 8-18
    19. 19. Classroom Performance System_______ is the ultimate decision making body of theEuropean Union.a) Council of the European Unionb) European Parliamentc) Court of Justiced) European Commission 8-19
    20. 20. Classroom Performance System_______ is responsible for proposing EU legislation.a) Council of the European Unionb) European Parliamentc) Court of Justiced) European Commission 8-20
    21. 21. The Single European ActThe Single European Act:was adopted by the EU in 1987committed the EC countries to work towardestablishment of a single market by December 31, 1992was born out of frustration among EC members thatthe community was not living up to its promiseprovided the impetus for the restructuring ofsubstantial sections of European industry allowing forfaster economic growth than would otherwise havebeen the case 8-21
    22. 22. The Establishment Of The EuroThe Maastricht Treaty committed the EU to adopt asingle currencyBy adopting the euro, the EU has created the secondlargest currency zone in the world after that of the U.S.dollarThe euro is used by 12 of the 25 member statesFor now, three EU countries, Britain, Denmark andSweden, that are eligible to participate in the euro-zone,are opting out 8-22
    23. 23. The Establishment Of The EuroBenefits of the Euro:There are savings from having to handle one currency, ratherthan manyA common currency will make it easier to compare prices acrossEuropeEuropean producers will be forced to look for ways to reducetheir production costs in order to maintain their profit marginsIt should give a strong boost to the development of highly liquidpan-European capital marketA pan-European euro denominated capital market will increasethe range of investment options open both to individuals andinstitutions 8-23
    24. 24. The Establishment Of The EuroCosts of the Euro:National authorities lose control over the monetarypolicyThe EU is not an optimal currency area (an areawhere similarities in the underlying structure if economicactivities make it feasible to adopt a single currency anduse a single exchange rate as an instrument of macro-economic policy) 8-24
    25. 25. The Establishment Of The EuroSince its establishment January 1, 1999, the euro hashad a volatile trading history with the U.S. dollarInitially, the euro fell in value relative to the dollar, butstrengthened to a five year high of $1.30 in February2006 8-25
    26. 26. Enlargement Of The European UnionMany countries have applied for EU membershipTen countries joined on May 1, 2004 expanding theEU to 25 states, with population of 450 million people,and a single continental economy with a GDP of €11trillionIn 2007, Bulgaria and Romania joined bringmembership to 27 countriesThe new countries will not be able to adopt the eurountil at least 2007, nor will there be free movement oflabor between new and existing countries until then 8-26
    27. 27. Regional Economic Integration In The AmericasThere is a move toward greater regional economicintegration in the AmericasThe biggest effort is the North American Free TradeArea (NAFTA)Other efforts include the Andean Community andMERCOSURA hemisphere-wide Free Trade of the Americas isunder discussion 8-27
    28. 28. The North American Free Trade AgreementThe North American Free Trade Area (NAFTA)became law January 1, 1994NAFTA’s participants are the United States, Canada,and Mexico 8-28
    29. 29. The North American Free Trade AgreementMap 8.2 8-29
    30. 30. The North American Free Trade AgreementNAFTA:abolished tariffs on 99 percent of the goods traded betweenmembersremoved most barriers on the cross-border flow of servicesprotects intellectual property rightsremoves most restrictions on FDI between the three membercountriesallows each country to apply its own environmental standards,provided such standards have a scientific baseestablishes two commissions to impose fines and remove tradeprivileges when environmental standards or legislation involvinghealth and safety, minimum wages, or child labor are ignored 8-30
    31. 31. The North American Free Trade AgreementNAFTA’s supporters argue that:Mexico will benefit from increased jobs as low costproduction moves south, and will attain more rapideconomic growth as a resultThe U.S. and Canada will benefit from the access to alarge and increasingly prosperous market and from thelower prices for consumers from goods produced inMexicoU.S. and Canadian firms with production sites inMexico will be more competitive on world markets 8-31
    32. 32. The North American Free Trade AgreementCritics of NAFTA’s argued that:that jobs would be lost and wage levels would declinein the U.S. and CanadaMexican workers would emigrate northpollution would increase due to Mexicos more laxstandardsMexico would lose its sovereignty 8-32
    33. 33. The North American Free Trade AgreementResearch indicates that NAFTA’s early impact wassubtle, and both advocates and detractors may havebeen guilty of exaggerationThe agreement has helped to create the backgroundfor increased political stability in MexicoSeveral other Latin American countries have indicatedtheir desire to eventually join NAFTACurrently both Canada and the U.S. are adopting await and see attitude with regard to most countries 8-33
    34. 34. The Andean CommunityThe Andean Pact:was 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 acustoms unionsigned an agreement in 2003 with MERCOSUR torestart negotiations towards the creation of a free tradearea 8-34
    35. 35. MERCOSURMERCOSUR:originated in 1988 as a free trade pact between Braziland Argentinawas expanded in 1990 to include Paraguay andUruguayhas been making progress on reducing trade barriersbetween member statesmay be diverting trade rather than creating trade, andlocal firms are investing in industries that are notcompetitive on a worldwide basis 8-35
    36. 36. Central American Common Market And CARICOMThere are two other trade pacts in the Americas:the Central American Trade Market (CAFTA) – tolower trade barriers between the U.S. and membersCARICOM – to establish a customs unionNeither pact has achieved its goals yetIn 2006, six CARICOM members formed theCaribbean Single Market and Economy (CSME) - tolower trade barriers and harmonize macro-economicand monetary policy between members 8-36
    37. 37. Free Trade Of The AmericasTalks began in April 1998 to establish a Free Trade ofThe Americas (FTAA) by 2005The FTAA was not established and now support fromthe U.S. and Brazil is mixedIf the FTAA is established, it will have majorimplications for cross-border trade and investment flowswithin the hemisphereThe FTAA would create a free trade area of nearly800 million people 8-37
    38. 38. Regional Economic Integration ElsewhereSeveral efforts have been made to integrate in Asiaand AfricaOne of the most successful is the Association ofSoutheast Asian Nations (ASEAN) 8-38
    39. 39. Association Of Southeast Asian NationsThe Association of Southeast Asian Nations (ASEAN):was formed in 1967currently includes Brunei, Indonesia, Malaysia, thePhilippines, Singapore, Thailand, Vietnam, Myanmar,Laos, and Cambodiawants to foster freer trade between member countriesand to achieve some cooperation in their industrialpoliciesan ASEAN Free Trade Area (AFTA) between the sixoriginal members of ASEAN came into effect in 2003 8-39
    40. 40. Association OfSoutheast Asian Nations Map 8.3 8-40
    41. 41. Asia-Pacific Economic CooperationThe Asia-Pacific Economic Cooperation (APEC):currently has 21 members including the UnitedStates, Japan, and Chinawants to increase multilateral cooperation in view ofthe economic rise of the Pacific nations and the growinginterdependence within the region 8-41
    42. 42. Asia-Pacific Economic Cooperation Map 8.4 8-42
    43. 43. Regional Trade Blocs In AfricaProgress toward the establishment of meaningfultrade blocs in Africa has been slowMany countries are members of more than one of thenine dormant blocs in the regionKenya, Uganda, and Tanzania committed to re-launching the East African Community (EAC) in 2001,however so far, the effort appears futile 8-43
    44. 44. Implications For ManagersThe EU and NAFTA currently have the mostimmediate implications for business 8-44
    45. 45. OpportunitiesRegional economic integration:opens new marketsmakes it possible for firms to realize potentiallyenormous cost economies by centralizing production inthose locations where the mix of factor costs and skillsis optimal 8-45
    46. 46. ThreatsWithin each grouping, the business environmentbecomes competitiveEU companies are becoming more capableThere is a risk of being shut out of the single marketby the creation of a “trade fortress”The EU is becoming more willing to intervene andimpose conditions on companies proposing mergersand acquisitions which could limit the ability of firms tofollow the strategy of their choice 8-46
    47. 47. Classroom Performance SystemWhich of the following is not true of NAFTA?a) It created a free trade area of nearly 800 millionpeopleb) It created the background for increased politicalstability in Mexicoc) Several other Latin American countries haveindicated their desire to eventually join NAFTAd) Its participants are the United States, Canada, andMexico 8-47