International Business

UNIT -2
Prof. Sangeeta Mehrolia

International Business 2-1

 Economic Integration
• Economic and Political agreements among nations that give
preference to member countries to the agreement
• Three ways of economic integration
– Global Integration through WTO (promotes multilateralism)
– Bilateral Integration – two countries cooperate closely to reduce trade barriers
– usually neighbors
– Regional Integration – a group of countries, usually within the same
geographic region, decide to cooperate
• WTO is slow in integration at global level (multilateralism) so
countries started forming Regional trading agreement (regionalism).
• Trading groups are an important influence of IB strategies of
companies
• The agreements define the size of market and rules under which
business must be conducted
• Economic integration increases market size, choice of production
facilities
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 Regional Trading agreement
• WTO promotes multilateralism where RTAs
and FTAs promotes regionalism.
• Countries have started taking benefits of RTAs
and FTAs because they are fast in reducing
barriers.

International Business
 Role of WTO
GATT
• The General Agreement on Tariffs and Trade
(GATT), begun in 1947, created a continuing
means for countries to negotiate the reduction
and elimination of trade barriers and to agree
on simplified mechanisms for the conduct of
international trade

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 Issues –GATT failed to Address
Related to services
Related to intellectual Property Right
Related to Investments
Related to subsidies
Related to Licensing system
Related to harmonisation of trade
Related to custom valuation

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 WTO
• The World Trade Organization (WTO)
replaced GATT in 1995 as a continuing means
of trade negotiations that aspires to foster the
principle of trade without discrimination and to
provide a better means of mediating trade
disputes and of enforcing agreements

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 Principles of WTO
Non discrimination
Most favoured nation
exceptions:
Regional trade agreements and bilateral
trade agreements

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 Regional Economic Integration

• Proliferation of free trade agreements happened

because of slow working style of WTO. So
multilateralism is slow.
• Regionalism promoted by regional integration in
form of bilateral and regional trade agreements.
• Mostly regional agreements are happening between
close countries or nearby countries:
❑ Distance is less
❑ taste and preferences are same
❑ common history and interest

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International Business
 Regional Economic Integration
• The major types of economic integration are:
– the free trade area : abolish all tariff between
signing parties and different for non
members
– the customs union : no tariff among member
countries and common external tariff policy
for non members
– the common market : abolish tariff and non
tariff barriers, common external tariff policy
and lastly factor movement is free. Ex : EU

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 Benefits of Free Trade Agreements

– Boosts Economic Growth

– Volume of Trade via big market access
– Quality and Variety of Goods
– Wide variety of high-quality products,
businesses can improve customer
satisfaction.

International Business
 Impact of Free Trade Agreements

• Static Effect : Shifting the resources from

inefficient to efficient companies as trade
barrier falls.
• Dynamic Effect: Overall growth of the market
due to economies of scale.

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 The Effects of Integration
Two effects :
Trade creation: Once protection is eliminated
among member countries, trade shifts from
inefficient to efficient, trade creation allows
MNEs to specialize.
Trade diversion occurs when the supply of
products shifts from countries that are not
members of an economic bloc to those that are

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Impact of Free Trade Agreements

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 European Union
• Regional, as opposed to global, economic integration occurs
because of the greater ease of promoting cooperation on a
smaller scale
• The European Union (EU) is an effective common market that
has abolished most restrictions on factor mobility and is
harmonizing national political, economic, and social policies
• The EU is comprised of 27 countries, including 12 countries
from mostly Central and Eastern Europe that joined since 2004
• The EU has abolished trade barriers on:
– intrazonal trade
– instituted a common external tariff
– created a common currency, the euro

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 Implications of the EU for
corporate strategy
• Companies need to determine where to
produce products.
• Companies need to determine what their entry
strategy will be.
• Companies need to balance the commonness
of the EU with national differences.

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 ASEAN
Association of south east Asian Countries
10 members : Indonesia, Singapore, Vietnam, Philippines,
Thailand, Malaysia, LaOs, Brunei, Cambodia, Myanmar
Benefits if India signs agreement with ASEAN
- Free movement of people, capital and Resources
-Economies of Scale
- Increase in Job Opportunities
- Benefit of free market
- - more choices
- - More jobs

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 The North American Free Trade
Agreement (NAFTA)
• The North American Free Trade Agreement
(NAFTA) is designed to eliminate tariff barriers
and liberalize investment opportunities and
trade in services
• Key provisions in NAFTA are labor and
environmental agreements

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Regional economic integration in the Americas

• Caribbean Community (CARICOM) –Bahamas, Jamaica,

Guyana, Dominica
• Central American Common Market (CACM) -Guatemala,
Honduras, El Salvador, Nicaragua and Costa Rica.
• Andean Community (CAN)
• The Southern Common Market (MERCOSUR) -
Argentina, Brazil, Paraguay, Uruguay and Venezuela

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Regional economic integration in Asia & Africa

• Association of Southeast Asian Nations

(ASEAN)
• Asia Pacific Economic Cooperation (APEC)
• The African Union

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 Forms of International Cooperation

• The United Nations is comprised of

representatives of most of the countries in the
world and international trade and
development in a number of significant ways

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