Intro to Global Business Chapter 3

developed countries seek the regional trading blocs close to world markets to

(1) expand their growth potential abroad as domestic markets mature, and (2) deliver low-cost manufacturing platforms for locally based firms.

Various regional integration blocs exist for "sea-locked" countries:

(1)the Commonwealth of Independent States and the Shanghai Cooperation Organization, both focused on Central Asia; (2)the Central African Customs and Economic Union, the East African Community, the Economic Community of West African States, and the Economic Community of Central African States, all dealing with Africa; and (3)the Asia Pacific Economic Cooperation (APEC), which addresses Pacific Island issues as well as Asian Pacific Rim issues *The challenge for these three regions is to find ways to successfully integrate regionally and internationally*

Pros of Regional Integration

*Creating a larger pool of consumers with growing incomes and similar cultures, tastes, and social values. *Encouraging economies of scale in production, increasing the region's level of global competitiveness, and enhancing economic growth through investment flows. *Freeing the flow of capital, labor, and technology to the most productive areas in the region. *Increasing cooperation, peace, and security among countries in the region. *Encouraging member states to enhance their level of social welfare to match that of the most progressive states.

Cons of Regional Integration

*Undermining the most-favored-nation status rule (the lowest tariff applicable to one member must be extended to all members), an essential principle of the WTO. *Imposing laws and regulations that are uniform and that at times do not take into account national economic, cultural, and social differences. *Eliminating jobs and increasing unemployment in protected industries. *Losing sovereignty, national independence, and identity. *Reducing the powers of the national government. *Increasing the probability of rising crime associated with illegal drugs and terrorism because of the ease of cross-border labor movements.

NAFTA has three major objectives:

1) expansion of trade in goods and services through the phased elimination of all trade barriers including tariffs, quotas, and licensing restrictions, among the parties. 2) protection of intellectual property rights (enforcement of patent and copyright laws for software, music recordings, etc.). 3) creation of institutions to address potential problems (unfair trade practices, disputes between companies or governments, environmental protection, worker's rights, competition policies, and the implementation of NAFTA rules and regulations).

When the various regional integration blocs are analyzed from an economic geography perspective, they fall under three general categories:

1) regional blocs close to major world markets 2) remote regions with large local markets 3) remote regions with small local markets

ASEAN's two main objectives are:

1) to accelerate economic growth, social progress, and cultural development in the region; and 2) to promote regional peace and stability through the rule of law in relationship among countries in the region.

Steps to Regional Integration

1)start small 2)think global 3)compensate the least fortunate

Remote Regions with Large Local Markets

A large local market gives countries the advantage of attracting industrial activities.

In recognition of security interdependence in the Asia-Pacific region, ASEAN established the __________________ to discuss major security issues in the region, including relationships with the major powers, nonproliferation, counterterrorism, and transnational crime.

ASEAN Regional Forum (ARF)

In 2003, ASEAN leaders agreed to establish an ASEAN Community based on three pillars:

ASEAN Security Community ASEAN Economic Community ASEAN Socio-Cultural Community.

The Future of ASEAN

If all goes as planned, the ASEAN inspired FTAs will create the world's largest free-trade area, which will comprise much of Asia.

Compensate the least fortunate (third step to regional integration)

Concentration of economic activity generally follows regional integration, because firms will want to specialize by increasing the scale of production in fewer places. This is an inevitable and desirable part of the regional integration process and will lead to increased efficiency and competitiveness; however, it also means that some regions will gain more than others, at least initially. As people migrate to the efficient regions, they will spread their benefits by sending remittances home. However, explicit compensation programs may be required to ensure access to social services and basic infrastructure in lagging areas

Remote Regions with Small Local Markets

International integration is most difficult for countries in regions that are divided, far from world markets, and lack the economic size of a large local economy "bottom billion" these regions could gain from effective regional cooperation

The European Union

Is an economic and political union between 27 member countries, located primarily in Europe. Committed to regional integration, it has developed a single market through a standardized system of laws which apply in all member states, ensuring the free movement of people, goods, services, and capital. It maintains common policies on trade, agriculture, fisheries, and regional development.

Two additional, peripheral agreements addressing Mexican labor laws and environmental quality were signed by the United States and Mexico to make sure that

Mexico would not practice unfair labor laws and would enforce agreed-on environmental quality standards

The North American Free Trade Agreement

NAFTA is a comprehensive free-trade agreement among Canada, the United States, and Mexico that addresses issues ranging from the protection of workers' rights and the environment to phased reduction of tariff and nontariff trade barriers

Think global (second step to regional integration)

Regional integration should not create unconnected or isolated countries. Instead, it should help countries gain access to world markets that they may not have access to otherwise. While larger countries may be able to choose between global integration and regional or bilateral integration, small and landlocked countries need regional integration in order to achieve economies of scale, efficiency, and global integration

ASEAN Economic Community

The goal is to create a stable, prosperous, and highly competitive ASEAN economic region, in which there is a free flow of goods, services, investment, and capital; and simultaneously to reduce poverty and socioeconomic disparities

What is the purpose of the ASEAN Regional Forum (ARF)?

To discuss major security issues in the region

Trans-Pacific Partnership

Trans-Pacific Partnership (Obama); new trade deal between U.S. and Asian countries (except China); controversial because of past trade deals and secretive process

The first step toward free trade in Latin America was taken with the signing of the

Treaty of Montevideo in 1960, creating the Latin American Free Trade Association (LAFTA)

Regional trading blocs that are close to world markets have all benefited from privileged access to

U.S. markets

Association of Southeast Asian Nations (ASEAN)

a geopolitical and economic organization of several countries located in southeast Asia formed as a display of solidarity against communism, but now has been more refined to include acceleration of economic growth and the promotion of regional peace

customs union

a group of free-trade member countries that have adopted a common external tariff with nonmember countries

common market or single market

a market formed when member countries of a customs union remove all barriers to allow the movement of capital and labor within the customs union

economic and monetary union

a union formed when members of a common market agree to implement common social programs (on education, employee benefits and retraining, health care, etc.) and coordinated macroeconomic policies (such as fiscal and monetary policies) that would lead to the creation of a single regional currency and a regional apex central bank

Some governments may initiate regional pacts (such as the TPP agreement) to

cement diplomatic, environmental, or security ties and risk slowing the momentum behind multilateral (global) trade liberalization.

free-trade area (first step to regional integration)

an area in which two or more countries agree to eliminate all barriers to trade, such as tariffs, quotas, and nontariff barriers like border restrictions, while at the same time keeping their own external tariffs (within WTO guidelines) against nonmembers

The primary objectives of economic integration are

economic gain; that is, to work together rather than separately to increase economic growth and efficiency (through economies of scale in production to become globally competitive and tap world markets), to raise employment, skills, and the quality of life for the citizens of the region and to promote peace and prosperity as well

The study of principles that govern the efficient spatial allocation of economic resources and the resulting consequences is referred to as ______

economic geography

ASEAN Security Community (ASC)

ensure that countries in the region live in peace with one another and rely exclusively on peaceful processes in the settlement of intra-regional difference

Other major integration-related economic activities in the ASEAN Economic Community include:

financial sector liberalization; road, railway, pipeline, seaport, and airport connectivity and modernization; interconnectivity of telecommunication services; and human resource development.

Regional integration

implementation of a multitude of economic and/or political steps by member states to increase their global competitiveness, including preferential trade access

Effective institutions, good governance, and solid regional infrastructure can help resource-rich economies grow through

increased production, specialization, and access to world markets

Regional integration is paramount for resource-led economic growth and to more broadly spread the benefits of this growth. This will require:

institutional reform increasing infrastructure investments to improve market access incentives such as preferential access to world markets, liberalized rules of origin, and skills development

the policy instruments needed for successful integration include:

institutions that unify the markets, infrastructure that efficiently connects these markets, and lower economic barriers to facilitate trade

ASEAN Socio Cultural Community aims to make the workforce well prepared by putting programs in place through

investments in basic and higher education, training, R&D, and raising the standard of disadvantaged groups and rural population through better public health care and social protection

Market access is essential for economic growth, and proximity to major world markets is an asset for

just-in-time production, exports of perishable goods (fresh fruits, vegetables, and flowers), and tradable services, such as marketing, research, and complex IT tasks

Countries close to ______________ have the advantage of connecting to markets, suppliers, and ideas

major markets

The WDR (World Development Report) concludes that positive changes within ____________, _________________, and ___________________ are essential for successful regional integration

market size, location, openness to trade

The effect of regional integration will depend on the

net impact of the benefits and costs.

a free-trade agreement with ASEAN would mean strengthening its

regional influence.

The development of _________________ could take place through sector-wide transformations in agriculture, manufacturing, and services

regional integration

Regional integration helps countries scale up their supply capacity through

regional production networks and become more globally competitive.

Start Small (first step to regional integration)

should have clear goals and initially address a narrow, well-defined area of cooperation in which the costs and benefits are easily defined

reasons for regional integration

social, economic, security, or political

For regional integration to be successful, member countries need to undertake ___________________ and allow efficient geographic distribution of economic activities within and among countries

spatial transformations

The Euro

the common currency created by the Maastricht Treaty in 1992 between member nations of the European Union. Began circulating in 2002

spatial transformations

the process of allowing efficient geographic distribution of business activities within and among countries

economic geography

the study of principles that govern the efficient spatial allocation of economic resources and the resulting consequences

political union

the union created when member countries of an economic and monetary union work closely with one another to arrive at common defense and foreign policies and behave as a single country. A group of countries that will behave as a single country

regional integration strategies need to be customized to the economic geography of the countries involved and their openness to interaction with major world markets

to make the best use of the size and location

Economic integration occurs when

two or more countries join together to form a larger economic bloc