82.
What are the five levels of economic integration? Briefly describe each
form.
There are five levels of economic integration. From least integrated to most
integrated, they are a free trade area, a customs union, a common market,
an economic union, and, finally, a full political union. In a free trade area, all
barriers to the trade of goods and services among member countries are
removed. Each country, however, is allowed to determine its own trade
policies with regard to nonmembers. A customs union eliminates trade
barriers between member countries and adopts a common external policy. A
common market eliminates trade barriers between member countries and
adopts a common policy toward nonmembers. In addition, factors of
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Topic: Levels of Economic Integration
83.
Which is the most enduring free trade area in the world?
The most enduring free trade area in the world is the European Free Trade
Association (EFTA). Established in January 1960, EFTA currently joins four
countries—Norway, Iceland, Liechtenstein, and Switzerland—down from
seven in 1995. EFTA was founded by those Western European countries
that initially decided not to be part of the European Community. The
emphasis of EFTA has been on free trade in industrial goods. Agriculture
was left out of the arrangement, each member being allowed to determine
its own level of support. Members are also free to determine the level of
protection applied to goods coming from outside EFTA.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Topic: Levels of Economic Integration
84.
Compare and contrast a free trade area and a common market. Provide
examples.
All barriers to the trade of goods and services among member countries are
removed in a free trade area, however, each country maintains the right to
establish its own policies toward nonmembers. In contrast, a common
market eliminates barriers to trade between member countries, but also
includes a common external trade policy toward nonmembers. The factors
of production are also allowed to move freely between member countries. In
addition, in a common market, labor and capital are free to move because
there are no restrictions on immigration, emigration, or cross-border flows
of capital between member nations. The European Free Trade Area is an
example of a free trade area. For years, the European Union functioned as a
common market, although it has now moved beyond this stage.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Topic: Levels of Economic Integration
85.
Discuss the economic case for economic integration. How does it relate to
trade theory?
Economic theories of international trade predict that unrestricted free trade
will allow countries to specialize in the production of goods and services so
that they can produce most efficiently. Consequently, economic theory
suggests that free trade and investment is a positive-sum game, in which all
parties stand to gain. Regional economic integration is an attempt to
achieve additional gains from the free flow of trade and investment
between countries beyond those attainable under international agreements
such as the WTO.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 09-02 Understand the economic and political arguments for regional economic integration.
Topic: The Case for Regional Integration
86.
What is the political case for integration? How did political arguments
influence the establishment of the European Union?
Linking neighboring economies and making them increasingly dependent on
each other creates incentives for political cooperation between the
neighboring stages, and reduces the potential for violet conflict.
Furthermore, by linking countries together, countries have greater clout and
are politically much stronger in dealing with other nations. These
considerations were instrumental in the establishment of the EU. Europe
had suffered through two world wars in the first half of the century, and the
desire for unity was high. In addition, many Europeans felt that after World
War II the European nation-states were no longer large enough to hold their
own in world markets and world politics. The need for a united Europe to
deal with the U.S. on one side and the former Soviet Union on the other
loomed large in the minds of the EC’s founders.
AACSB: Analytic
Blooms: Understand
87.
How easy is it for countries to integrate?
Even with strong economic and political support for integration, there are
two impediments that make integration difficult in many cases. First,
although economic integration typically benefits the majority of the people
in a country, certain groups may lose. These groups are likely to be at the
forefront of efforts to stop economic integration. Second, the issue of
national sovereignty becomes important. In many cases, these impediments
to integration are very difficult to overcome.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 09-02 Understand the economic and political arguments for regional economic integration.
Topic: The Case for Regional Integration
88.
Some economists have expressed concerns that the benefits of regional
integration have been touted while the costs have been ignored. Explain the
view of these economists.
While there is a general movement toward the establishment of regional
free trade agreements, some economists have suggested that caution be
used. According to these economists, the benefits of regional integration
may have been oversold, while the costs have been ignored. They point out
that the benefits of regional integration are determined by the extent of
trade creation as opposed to trade diversion. Trade creation occurs when
high-cost domestic producers are replaced by low-cost producers within the
free trade area. It may also occur when higher-cost external producers are
replaced by lower-cost external producers with the free trade area. Trade
diversion occurs when lower-cost external suppliers are replaced by higher-
cost suppliers within the free trade area. A regional free trade agreement
will benefit the world only if the amount of trade it creates exceeds the
amount it diverts.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
89.
What prompted the formation of the European Union?
The European Union is the product of two political factors. First, the
devastation of Western Europe during two world wars and the desire for
lasting peace prompted countries to join forces. Second, the union was
formed out of a desire by European nations to hold their own on the world’s
political and economic stage. Furthermore, many Europeans were aware of
the potential benefits that could arise from economic integration.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 09-04 Explain the history; current scope; and future prospects of the world’s most important regional
economic agreements.
Topic: Regional Economic Integration in Europe
90.
Briefly describe the four main institutions that make up the political
structure of the EU.
There are four main institutions that make up the political structure of the
EU. The European Commission is responsible for proposing EU legislation,
implementing it, and monitoring compliance with EU laws. The European
Council represents the interests of member states. The European
Parliament acts a consultative body and debates legislation proposed by the
commission and forwarded to it by the council. Finally, the Court of Justice
is the supreme appeals court for EU law.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-04 Explain the history; current scope; and future prospects of the world’s most important regional
economic agreements.
Topic: Regional Economic Integration in Europe
91.
What is the Single European Act? What was the effect of the Single
European Act on the EU economy? Did the Single European Act achieve its
goals?
The Single European Act, which was adopted in 1987, committed member
countries to work toward the establishment of a single market by December
31, 1992. The act proposed that all frontier controls between EC countries
be removed, that the principle of mutual recognition be applied to product
standards, that lower-cost suppliers be permitted into national economies,
that barriers to competition be lifted in the retail banking and insurance
businesses, that all restriction on foreign exchange transactions between
member countries be removed, and that restrictions on cabotage be
abolished. To signify the importance of the Act, the European Community
also decided to change its name to the European Union. The Single
European Act had a significant effect on the EU economy as it provided the
impetus for restructuring substantial sections of European industry. Faster
92.
Discuss the Maastricht Treaty. What did it accomplish?
The Maastricht Treaty, signed in 1991 by EC members, committed
signatories to adopting a common currency, the euro, by 1999. The
establishment of the euro created the second largest currency zone in the
world, second only to the U.S. dollar. While the 12 participating countries
locked their exchange rates against each other in 1999, euro notes and
coins were not actually issued until 2002. By mid-2002, all prices and
routine economic transactions within the euro zone were in euros.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-04 Explain the history; current scope; and future prospects of the world’s most important regional
economic agreements.
Topic: Regional Economic Integration in Europe
93.
How will EU countries benefit from the establishment of a single currency?
What, if any, are the costs of a single currency?
There were several reasons that promoted the establishment of the euro.
First is the belief that businesses and individuals will realize significant
savings from having to handle one currency rather than many. Second, the
adoption of a common currency will make it easier to compare prices across
Europe. Third, faced with lower prices, European producers will be forced to
look for ways to reduce their production costs to maintain their profit
margins. Fourth, the euro should give a strong boost to the development of
a highly liquid pan-European capital market. Finally, the range of
investment options open to both individuals and institutions will increase.
However, in establishing a common currency, nations have had to give up
control over monetary policy. Another drawback of the euro is that the EU is
not what economists would call an optimal currency area, or an area in
94.
Debate the ratification of the North American Free Trade Agreement.
NAFTA is a free trade agreement between the United States, Canada, and
Mexico. When the agreement was initially proposed in 1988, there was
much debate as to whether the agreement should be ratified. Proponents of
NAFTA argued that NAFTA should be seen as an opportunity to create an
enlarged and more efficient productive base for the entire North American
region. They argued that while some lower-income jobs would move from
the United States and Canada to Mexico, new jobs would be created in the
U.S. and Canada as economic growth occurred in Mexico as a result of the
job transfers. In addition, the international competitiveness of U.S. and
Canadian firms that move production to Mexico to take advantage of lower
labor costs will be enhanced, enabling them to better compete against
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 09-04 Explain the history; current scope; and future prospects of the world’s most important regional
economic agreements.
Topic: Regional Economic Integration in the Americas
95.
Explain how MERCOSUR has changed over time. What are the implications
of these changes?
MERCOSUR originated in 1988 as a free trade pact between Brazil and
Argentina. Initially, the reductions in trade barriers resulting from the
agreement led to an 80 percent increase trade between the two countries.
Encouraged by this early success, the pact was expanded to include
Paraguay and Uruguay. The initial objective was to establish a free trade
area and move toward a full customs union. According to critics, the effects
of MERCOSUR outweigh its trade creation effects. MERCOSUR hit a
significant roadblock in 1998, when its member states slipped into
recession and intrabloc trade slumped. Trade fell further in 1999 following a
financial crisis in Brazil that led to the devaluation of the Brazilian real. As
96.
Discuss the Free Trade Area of the Americas. What is hindering its
progress? What is the position of the U.S. on the agreement? How does
Brazil feel about the FTAA?
The Free Trade Area of the Americas (FTAA) was proposed in 1994. After
several years, a goal was established to form the FTAA by 2005, a goal that
was not met. Support for the movement has waned, and the future of the
proposed free trade area is in question. Two of the original advocates, the
U.S. and Brazil, are sending mixed signals about the agreement. The U.S.
wants the southern countries to commit to tougher enforcement of
intellectual property rights and lower manufacturing tariffs, requests that
have so far fallen on deaf ears. Similarly, Argentina and Brazil want the U.S.
to reduce agricultural subsidies and put an end to tariffs on agricultural
products. The U.S. has thus far ignored these requests. If countries can
overcome these obstacles, the proposed market would involve more than
850 million people.
97.
What is ASEAN? What is its basic goal? How successful is ASEAN?
The Association of Southeast Asian Nations (ASEAN) was formed in 1967.
The grouping, which includes Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand, and Vietnam, creates a regional
grouping of 500 million people. The basic goal of ASEAN is to foster freer
trade between member countries and to achieve cooperation in their
industrial policies. To date, however, progress has been limited. The ASEAN
Free Trade Area came into effect in 2003 between the original six members
of ASEAN and has been successful at cutting tariffs on manufacturing and
agricultural products to less than 5 percent.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-04 Explain the history; current scope; and future prospects of the world‘s most important regional
economic agreements.
Topic: Regional Economic Integration Elsewhere
98.
Describe the state of economic integration in Africa. What factors have
hindered the process?
There have been efforts to establish trading bloc in Africa for half a century,
however, meaningful progress has been slow. Political turmoil in several
nations has hindered the process as has the suspicion that free trade will
result in unfair foreign competition. The most recent effort at integration
came in 2001 when Kenya, Uganda, and Tanzania attempted to establish a
customs union, regional court, legislative assembly, and, eventually, a
political federation.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-04 Explain the history; current scope; and future prospects of the world’s most important regional
economic agreements.
Topic: Regional Economic Integration Elsewhere
99.
Discuss the opportunities arising from the creation of the EU for
international businesses.
The creation of a single market through regional economic integration
presents significant opportunities to companies. Countries within the EU,
such as Italy and France, are now much more open to foreign competition.
Companies should also see their costs drop as they do business in a single,
large market as opposed to 27 national markets in the case of the EU or
three national markets in the case of NAFTA. Production can be centralized
in the EU location where the mix of factor costs and skills is optimal.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-05 Understand the implications for business that are inherent in regional economic integration
agreements.
Topic: Implications for Managers
100.
Describe the disadvantages of economic integration for international
businesses. How can firms protect themselves from these threats?
Economic integration presents a number of difficulties for companies.
Certainly, the more competitive business environment that will result from
integration would be considered a disadvantage. To survive, firms will have
to capitalize on the opportunities presented by the creation of an integrated
marketplace and rationalize their production and reduce their costs.
Companies that are outside of trading areas such as the EU may find
themselves facing a trade fortress with high barriers to imports and
investment. Consequently, firms may find that to protect themselves, they
will need to establish operations “on the inside.” Finally, firms may find their
strategic choice limited by restrictions on proposed acquisitions and
mergers. Firms may find that they must make significant concessions in
order for their proposed plans to move ahead.
AACSB: Analytic
Blooms: Understand