978-1259929441 Chapter 9 Part 2

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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

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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

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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?

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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

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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?

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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.

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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