CHAPTER 8

Economic
Intergration

Building block Toward Worldwide Free Trade
Regional groupings based on economics became increasingly important in the last ten years.Thirty-two such groupings are estimated to be in existence : three in Europe,four in the Middle east,five in asia ,and ten each in afrika and the Americas .trade within the three major blocs s,the American,European and asian,has grown rapidly,while trading among these blocs or with outsiders is either declining or growing far more moderately.This chapter will begin with an explanation of tha various levels of economic integration.The level of integration defines the nature and degree of economic links among countries .the major arguments both for and against economic integration will be reviewed.Next, the European union,the north American Free Trade Agreement,Asia Pasific Economic Cooperation and other economic ooperation,and other economic alliances will bediscussed . Finally,possible strategic moves by international managers in response to integration are outlined.
Levels of Economic integration
THE FREE TRADE AREA>>The free trade area is the least restrictive and loosest from of economic integration among countries.
THE CUSTUMS UNION>>one step further along the spectrum of economic integration.
THE COMMON MARKET>>further still along the spectrum of economic integration.
THE ECONOMIC UNION>>the creation of a true economic union requires integration of economic policies in addition to the free movement of good,services,and factors of production across borders.
Arguments surrounding Economic Integration
TRADE CREATION AND TRADE DIVERSION>> The increased export of wheat and other products by Spain to the EU as a result of its membership is termed trade creation.The elimination off the tariff literally created more trade between Spain and the EU.at the same time ,because the United States was still outside of The EU ,its products suffered the higher price as a result of tariff application .U.S exports to the E.U fell.when the source of trading competitiveness is shifted in this manner from one country to another,it is termed trade diversion.
REDUCED IMPORT PRICES>>When a small country imposes a tarrif on imporst ,the price of the goods will typically rise because sellers will increase prices to cover the cost of the tariff.This increase in price,in turn,will result in lower demand for the imported goods.if a bloc of countries imposes the tariff ,however ,the fall in demand for the imported goods will be substantial.the exporting country may then be forced to reduce the price of the goods.
INCREASED COMPETITION AND ECONOMIES OF SCALE >>These lower production cocts resultingfrom greater production for an enlarged market are called internal economies of scale.this is evident if the region adopts common standards ,thus aloowing not only for bigger markets for the companies but enabling them to become global powerhouses.
HIGHER FACTOR PRODUCTIVITY>>When factors of production are freely mobile,the wealth of the common market countries ,in aggregate ,will likely increase.the theory behind this contention is straightforward:factor mobility will lead to the movement of labor and capital from areas of low productivity to areas of hight productivity.In addition to the economic gains from factor mobility,there are other benevfits not so easily quantified .The free movement of labor fosters a higher degree of cross-cultural understanding;as people move ,their adeas ,skill,and ethnicity move with them.
REGIONALISM VS NATIONALISM>>Economists have composed elegant and compelling arguments in favor of the various levels of economic integration .It is difficult,howefer ,to turn these arguments into reality in the face of intense nationalism.The biggest impediment to economic integration remains the reluctance of nations to surrender a measure of their autonomy.Integration,by its is very nature ,requires the surrender of national power and self determinism.An example of this can be seen in Focus on Ethics.

THE most successful example of economic integration is the European Union.The E.U has succeded in eliminating most barriers to the free flow of goods,services,and factors of production .In addition ,the EU has made progress toward the evolution of a common currency and central bank,which are fundamental requirements of an economic union.In the Americas,NAFTA is paving the way for a hemispheric trade bloc.
A number of regional economic alliances exist in Africa,Latin America,and Asia,but they have achieved only low levels of development,and problems with cohesiveness have impeded integrative progress among many developing countries.However,many nations in these areas are seeing economic integration as the only way to prosperity in the future.
International commodity price agreements and cartels represent attempts by producers of primary products to control sales revenues and export earning.the former involves an agreement to buy or sell a commodity to influence prices.The latter is an agreement by suppliers to fix prices,set production quotas ,or allocate sales territories.OPEC for example,has had inestimable influence on the global economiy during the past 40 years.