Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 09 ‒ Regional Economic Integration
9-11
QUESTION 1: NAFTA has produced significant benefits for the Canadian, Mexican, and
U.S. economy. Discuss.
ANSWER 1: NAFTA’s proponents argue that the agreement should be viewed as an
opportunity to create an enlarged and more productive base for the U.S., Canada, and
Mexico. As low-skilled jobs move from Canada and the United States to Mexico, the
QUESTION 2: What are the economic and political arguments for regional economic
integration? Given these arguments, why don't we see more substantial examples of
integration in the world economy?
ANSWER 2: The economic case for regional integration is straightforward. As we saw in
Chapter 5, unrestricted free trade allows countries to specialize in the production of goods
and services that they can produce most efficiently. If this happens as the result of economic
integration within a geographic region, the net effect is greater prosperity for the nations of
the region. From a more philosophical perspective, regional economic integration can be
seen as an attempt to achieve additional gains from the free flow of trade and investment
QUESTION 3: What in general was the effect of the creation of a single market and a single
currency within the EU on competition within the EU? Why?
ANSWER 3: By creating a single market and currency, member countries can expect
significant gains from the free flow of trade and investment. This will result from the ability
of the countries within the EU to specialize in the production of the product that they
manufacture the most efficiently, and the freedom to trade those products with other EU
Chapter 09 ‒ Regional Economic Integration
9-12
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
European companies by high tariffs, quotas, or administrative trade barriers. Companies
from those countries that have not adopted the euro may find that their costs are higher as
they deal with currency exchanges. In addition, because it will be easier to compare prices
across markets, firms in the euro zone will be pushed to lower prices and become more
efficient.
QUESTION 4: Do you think it is correct for the European Commission to restrict mergers
between American companies that do business in Europe? (For example, the European
Commission vetoed the proposed merger between WorldCom and Sprint, both U.S.
companies, and it carefully reviewed the merger between AOL and Time Warner, again
both U.S. companies.)
ANSWER 4: Many students will probably suggest that the European Commission has a
right to regulate the European market, even if the regulation involves American companies.
QUESTION 5: What were the causes of the 2010–2012 sovereign debt crisis in the EU?
What does this crisis tell us about the weaknesses of the euro? Do you think the euro will
survive the sovereign debt crisis?
ANSWER 5: Since 2008, the euro has weakened, reflecting persistent concerns over slow
economic growth and large budget deficits among several EU members, particularly Greece,
Portugal, Ireland, Italy, and Spain. Before the global recession, the governments of these
QUESTION 6: How should a U.S. firm that currently exports to only ASEAN countries
respond to the creation of a single market in this regional grouping?
ANSWER 6: A U.S. business firm that is currently exporting to only ASEAN countries
should seriously consider opening a facility somewhere in this grouping, as the economics
of a common market suggest that outsiders can be at a disadvantage to insiders. The opening
Chapter 09 ‒ Regional Economic Integration
9-13
QUESTION 7: How should a firm with self-sufficient production facilities in several
ASEAN countries respond to the creation of a single market? What are the constraints on its
ability to respond in a manner that minimizes production costs?
ANSWER 7: The creation of the single market means that it may no longer be efficient to
operate separate duplicative production facilities in each country. Instead, the facilities could
either be linked so that each specializes in the production of only certain items or several
sites should be closed down and production consolidated at the most efficient locations.
QUESTION 8: After a promising start, Mercosur, the major Latin American trade
agreement, has faltered and made little progress since 2000. What problems are hurting
Mercosur? What can be done to solve these problems?
ANSWER 8: Mercosur originated in 1988 as a free trade pact between Brazil and
Argentina. The pact was expanded in 1990 to include Paraguay and Uruguay with the goal
of becoming a full free trade area by 1994, and a common market sometime after. While
initially considered a success, critics began to question whether the trade diversion effects of
Mercosur outweighed it trade creation effects. Then in 1998, member states slipped into a
recession and in 1999, Brazil’s financial crisis led to a significant devaluation of its currency
Another Perspective: Students can check the current status of the agreement online at:
{http://www.sice.oas.org/agreements_e.asp}.
QUESTION 9: Read the Management Focus feature in this chapter, “NAFTA’s Tomato
Wars,” then answer the following questions:
a. Was the establishment of a minimum floor price for tomatoes consistent with the free
trade principles enshrined in the NAFTA agreement?
b. Why, despite the establishment of a minimum floor price, have imports from Mexico
grown over the years?
Chapter 09 ‒ Regional Economic Integration
9-14
c. Who benefits from the importation of tomatoes grown in Mexico? Who suffers?
d. Do you think that Mexican producers were dumping tomatoes in the United States?
e. Was the Commerce Department right to establish a new minimum floor price, rather than
scrap the agreement and file an antidumping suit? Who would have benefited from an
antidumping suit against Mexican tomato producers? Who would have suffered?
f. What do you think will be the impact of the new higher floor price? Who benefits from
the higher floor price? Who suffers?
g. What do you think is the optimal government policy response here? Explain your answer.
ANSWER 9:
a. No. A truly free system of trade would not involve government price interventions.
However, unrestricted free trade has proven to be more of an ideal than a reality, and the
b. Mexico has several competitive advantages that allow it to profit on tomatoes sold at the
floor price, while U.S. tomato growers find it difficult to compete, particularly when a large
c. The major beneficiaries of imported tomatoes in the United States are consumers and
food producers, who have year-round access to high-quality tomatoes. Without the reliable
shipments of tomatoes from Mexico, consumers would be at risk of experiencing long
d. Student answers will vary. It is possible that Mexican tomato growers found it beneficial
to produce more tomatoes than the U.S. market demanded in order to drive down prices and
e. Student answers will vary. Whether Florida tomato growers will be able to maintain their
competitiveness into the future depends on a number of variables, including the effects of
climate change, fluctuations in the economic conditions in the United States, and the
Chapter 09 ‒ Regional Economic Integration
9-15
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Mexican tomato industry. If the antidumping suit resulted in retaliation by the Mexican
government, many U.S. exporters would have suffered as well.
f. It is very likely that Mexican growers will continue to produce tomatoes at a cost well
below the floor price and that they will continue to provide the large majority of tomatoes
sold in the United States. Growers in Florida may benefit initially from the raised floor
g. Student answers will vary. Some may argue from a protectionist viewpoint, suggesting
that NAFTA itself was a mistake and that the government should actively discourage low-
cost imports in order to support domestic producers. Many economists, however, would
CLOSING CASE: The Push Toward Free Trade in Africa
Summary
The closing case explores free trade in Africa. Currently, there is very little intra-Africa
trade thanks to significant trade barriers limiting the movement of goods within the
continent. In fact, countries in Africa are more likely to trade with the European Union or
the United States than they are with each other. There is reason to believe, though, that that
could all change. In 2015, 26 countries signed an agreement to work toward creating a
common market known as the Tripartite Free Trade Area. If it is successful it will allow
African firms to achieve greater economies of scale and lower their costs. Discussion of the
case can begin with the following questions:
QUESTION 1: Why are African countries more likely to trade with Europe and America
than they are with each other?
ANSWER 1: Intra-Africa trade can be challenging thanks to the high barriers to trade that
countries have erected. Many countries have administrative barriers including customs
QUESTION 2: What are the likely gains from trade to be had from TFTA if it is fully
implemented as a common market?
Chapter 09 ‒ Regional Economic Integration
9-16
ANSWER 2: Currently, less than 20 percent of Africa’s trade is intra-Africa. If the TFTA is
fully implemented, that number should rise to a level closer to the 60 percent of trade in
QUESTION 3: Why do you think free trade areas established so far in Africa have not lived
up to their expectations?
ANSWER 3: Responses to this question will vary by student. Many will suggest that until
QUESTION 4: What will African countries need to do to make the TFTA a success? What
are the likely impediments to doing this?
ANSWER 4: Students will probably have differing ideas on how to make the TFTA a
success. Some will probably suggest that the fact that 26 countries have signed on to the
and wonder whether those differences will be insurmountable.
Another Perspective: Students can learn more about the TFTA by going to
{https://www.tralac.org/news/article/11860-the-tripartite-free-trade-area-a-breakthrough-in-
july-2017-as-south-africa-signs-the-tripartite-agreement.html} and
{https://www.ictsd.org/bridges-news/bridges-africa/news/the-tripartite-free-trade-area-
agreement-a-milestone-for-africa%E2%80%99s}.
Teaching Tip: To extend this discussion, consider World Bank: Let Africa Trade with Africa
in the International Business Library at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your
keyboard to search for the video title.
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Please click here to visit our International Business Video Library which provides an
ongoing stream of updated video suggestions correlated by key concept and major topic.
Every new clip posted is supported by teaching notes and discussion questions. Please feel
free to leave comments in the library that you feel might be helpful to your colleagues.
Chapter 09 ‒ Regional Economic Integration
9-17
INCORPORATING globalEDGE™ EXERCISES
Use the globalEDGE™ site {globaledge.msu.edu} to complete the following exercises:
Exercise 1
The World Trade Organization maintains a database of regional trade agreements. You can
search this database to identify all agreements that a specific country participates in. Search
the database to identify the trade agreements that Japan currently participates in. What
patterns do you see? Which region(s) of the world does Japan seem to be focusing on its
trade endeavors?
Exercise 2
Your company has assigned you with the task of investigating the various trade blocs in
Africa to see if your company can benefit from these trade agreements while expanding into
African markets. The first trade bloc you come across is COMESA. Prepare a short
executive summary for your company, explaining the level of integration the bloc has
currently achieved, the level it aspires to accomplish, and the relationships it has with other
African trade blocs.
Answers to Exercises
Exercise 1 Answer
Exercise 2 Answer
