International Business

Sixteenth Edition

Chapter 7
Economic Integration
and Cooperation
Learning Objectives
• Define the three major types of international
economic integration
• Explain what the World Trade Organization is
and how it is working to reduce trade barriers
on a global basis
• Summarize the major benefits of regional
economic integration
• Compare and contrast different regional trading groups
• Describe the forces that affect the prices of commodities
and their impact on commodity agreements
• BREXIT: Different modalities of a customs union divorce
 What is Economic Integration?
• Economic Integration a term used to describe the political and
monetary agreements among nations and world regions in which
preference is given to member countries. Post WWII
development.

• Global integration—Countries from all over the world decide to

cooperate through the World Trade Organization (WTO)

• Bilateral integration—Two countries decide to cooperate more

closely together, usually in the form of tariff reductions

• Regional integration—A group of countries located in the same

geographic proximity decide to cooperate, as with the European
Union
• significant influence on MNE strategies
GATT: Predecessor to WTO
– General Agreement on Tariffs and Trade: In 1947, 23 countries formed
GATT under the auspices of the United Nations to abolish quotas and
reduce tariffs.

– By the time WTO replaced GATT in 1995, 125 nations had become
members.

Trade without Discrimination

Most Favored Nation (MFN) clause

GATT ran into difficulties over time.

The WTO
WTO adopted principles of GATT but expanded its mission to include trade
in services, investment, intellectual property, sanitary measures, plant health,
agriculture and textiles as well as technical barriers to trade.

– Its 162 members account for most of the world trade.

– Provisions for majority voting in case of non-consensus among members

• WTO continued the MFN clause but allowed some exceptions for developing
countries or countries that are part of a regional or bilateral trading group.

• WTO and Dispute Settlement

• Geography Matters
• Trade is likely to rise by 80 percent between countries with a common
border, 200 percent with a common language, and 340 percent with a
common currency
• Trade among bloc members is likely to rise by 330 percent once an
agreement is established.

• Different Forms of Economic Integration

• Free Trade Area
• Customs Union
• Common Market
• Economic Union
 Benefits of Regional Economic Integration
• Regional integration has social, cultural, political, and economic effects.

• Static Effects: Trade creation and trade diversion

• Dynamic Effects: Overall growth in the market in the absence of trade barriers
and the impact on a company caused by expanding production and by its ability to
achieve greater economies of scale.
• Economies of scale—the average cost per unit falls as the number of units
produced rises; occurs in regional integration because of the growth in the market
size.

• Many MNEs in Europe have attempted to grow through mergers and acquisitions
to achieve the size necessary to compete in the larger market.
The Impact of Trade Agreements
MNEs are interested in regional trading groups for their markets,
sources of raw materials, and production locations.

The larger and richer the new market, the more likely it is to attract the
attention of the major investor countries and companies.
The European Union (EU)
• The largest and most comprehensive economic group.
• From its inception in 1957, the EU has been moving towards complete
economic integration.
• A common agricultural policy, and agreed on a value-added tax
system
• The initial six members were Belgium, Germany, France, Italy,
Luxembourg and the Netherlands (BGFILN).
• 28 members

• Sweden, Denmark – EU members with their own national currency

• EEA – free movement of goods, services, labour and capital, but no
customs union or monetary union
The European Union (EU)
MNEs need to familiarize with governance structure of each country as
well as the Organizational Structure of EU:
1. The European Commission: Provides political leadership, drafts laws
and runs the various daily programs of the EU.
2. The European Council: Is composed of the heads of states of the
each member country.
3. The European Parliament: The three major responsibilities of the
European parliament are legislative power, control over the budget
and supervision of executive decisions.
4. The European Court of Justice: Ensures consistent interpretation
and application of EU treaties.
5. The European Central Bank: conduct of monetary policy
 The European Union (EU)
Monetary Union: In 1992, the members of EU signed the Treaty of
Maastricht in part to establish a monetary union.
Other European countries also use Euro although they are not EU members.
Debt crisis that began with Ireland and then spread to Greece, Spain,
Portugal, Italy and Cyprus.
The inability of these countries to meet their external debt obligations has
threatened the banking system and forced other European countries to come
to the rescue.
As possibly the EU’s single biggest challenge, this threatens the future of the
Euro.
Anti Trust investigations
 The European Union (EU)

Migration: A threat to Schengen: Two things have hindered the free flow of
people across national borders in Europe in recent years: terrorism and
migration.
Terrorist attacks in France and the fear that migrants would cross the border
from France to Belgium;
large numbers of migrants from Syria to Greece
Closed borders harms commerce.
Membership expansion.
Bilateral Trade agreements – negotiate as one entity
TTIP,
European agricultural safety standards
 The European Union (EU)
How to do business with the EU: Implications for corporate
strategy: The EU is a tremendous market in terms of both population
and income – one that companies cannot ignore.
It is also a good example of how geographic proximity and the
removal of trade barriers can influence trade.
More than half the merchandize exports and imports of EU countries
are considered to be intra zonal trade.
That is far better than other regional or bilateral trade agreements.
Geographic proximity, a common currency for most of the member
countries and the length of time the EU has been in existence are key
reasons why the intra zonal trade is so high.
 The European Union (EU)
Doing Business in the EU can influence corporate strategy, especially
for foreign MNEs in three ways:
• Determining where to produce
• Determining whether to grow through new investments, through
expanding existing investments or through joint ventures and
mergers
• Balancing common denominators with national differences
NAFTA
North American Free Trade Agreement
• Various forms of mutual economic cooperation have historically
existed between the United States and Canada such as the Canada-
U.S. Free Trade Agreement of 1989, which eliminated all tariffs on
bilateral trade.

• In February 1991, Mexico approached the United States to establish a

free trade agreement. Canada was included in the formal negotiations
and NAFTA became effective on January 1, 1994.

• Includes countries of different sizes. U.S. biggest trading partner for

Canada as well as Mexico.
NAFTA
• Static and Dynamic Effects
• Trade Diversion:
• Rules of Origin
• Regional Value content requirement

• Canada is the largest export market for U.S. goods, and Mexico is
number two. Canada and Mexico are the second- and third-largest
suppliers of goods to the United States.
• Mexico’s trade with Canada is less than 5 percent for both exports and
imports.
• Challenge of immigration
• Doing Business with NAFTA
Economic Integration in Caribbean and
Central America
Economic Integration in Latin America
Rationale for Latin American integration
• The post–World War II strategy of import substitution to
resolve balance-of-payments problems in much of Latin
America was doomed because of the region’s small
national markets.
• Some form of economic cooperation was needed to
enlarge the potential market size so that Latin American
companies could achieve economies of scale and be more
competitive worldwide.
• Focus shifted from free trade agreement to common
market.
• Export reliance challenge
MERCOSUR, Pacific Alliance and CAN

Mercosur – major goal is to become customs union

Classified as a customs union by the WTO for trade in goods
and as an economic integration agreement for trade in services.
75 percent of South America’s GDP. Third largest trading bloc.
Pacific Alliance
more hospitable to trade and investment due to their adherence
to democracy and the rule of law.
Bridge between LA and Asia Pacific.
CAN - focus has shifted from isolationism and statism to being
open to foreign trade and investment.
Columbia and Peru – bilateral agreements with U.S.
Asia’s Economic Integration Agreements
• ASEAN Free Trade Area
• China and Japan, which are not members of
ASEAN/AFTA, are significant players in the region in terms
of trade and investment.
• Free trade is crucial to the member countries because their
ratio of exports to GDP is almost 70 percent.
• Reduced tariffs attracted FDI and turned the region into a
huge network of production – Factory of Asia
• As wages continue to rise in China, there are opportunities
for ASEAN countries to attract more FDI
• ASEAN Economic Community (AEC) in 2015
• Asia Pacific Economic Cooperation (APEC)
• comprises 21 countries that border the Pacific Rim;
• progress toward free trade is hampered by size and
geographic distance between member countries and by the
lack of a treaty.
It is not an RTA. Includes US, Australia, Russia, China etc
• Trans-Pacific Partnership (TPP)
• Trump withdrew from TPP.
• Massive trade agreement signed by twelve Pacific Rim
countries, including the United States, that together
comprised 40 percent of the global economy.
ASEAN Free Trade Area
Africa Regional Integration
AFRICAN ECONOMIC INTEGRATION
• Although most African nations are members of more than
one regional trade group, the total amount of trade among
members remains relatively small.

• African nations tend to rely heavily on trading relationships

with countries elsewhere in the world—notably with former
colonial and other industrialized nations.

• The different trade groups have political as well as

economic underpinnings.
Commodity Agreements
• Dependence on commodity exports by developing
countries has risen in recent years, inspite of price
volatility.

Purpose of Commodities Agreements

• The attempts of countries to stabilize commodity prices
through producer alliances and commodity agreements
have been largely unsuccessful.
• Exception - OPEC
• 2000s- rise in commodity prices due to Chinese growth
Walmart Case Study
• Commercial Mexicana S.A. (Comerci), one of Mexico’s largest retail
chains, is faced with a serious dilemma.
• Since, Walmart’s aggressive entry into the Mexican retail market,
Comerci has found it increasingly difficult to remain competitive.
• Walmart’s strong operating presence and low prices since NAFTA’s
lifting of tariffs have put pressures on Comerci.
• Mexico’s retail sector has benefited greatly from the increasing trade
liberalization the government has been pushing.
Walmart Case Study
• Prior to 1990, Walmart had never made moves to enter Mexico or any
country other than the United States.
• Once it started growing in Mexico, management created the Walmart
International division in 1993.
• By 2016, Walmart had expanded to 28 countries outside the United
States through new-store construction and acquisitions.
• With growth stalling in the United States, Walmart is looking to
international expansion.
• It currently has more than 11,500 retail units world wide, of which more
than 6,200 are outside the continental United States, and it employs
more than 800,000 people outside the United States.
• Successful in Japan and Canada.
Walmart Case Study
• Given its hit and miss success rate on the international scene, how
much can be attributed to the close economic ties shared by the
United States with the two countries through NAFTA.
• Walmart’s competitive advantage:
• Walmart’s is known for the slogan “Everyday low prices” which is the
core of their value proposition.
• It has expanded that internally to “Everyday low costs” to inspire
employees to spend company money wisely and work hard to lower
costs.
• Because of sheer size and volume of purchases, Walmart can
negotiate with suppliers to drop prices to agreeable levels.