Business Explain: Multinational Business

Describe the different types of regional economic integration and give an example of each type.

Answer:

a. Free trade area (FTA): The goal of a free trade area is to abolish all tariffs among member countries. Free trade agreements usually begin modestly by eliminating tariffs on goods that already have low tariffs, and there is usually an implementation period over which all tariffs are eliminated on all products. In addition, each member country maintains its own external tariffs against non-FTA countries. Examples: the North American Free Trade Agreement, the Association of South East Asian Nations

b. Customs union: In addition to eliminating internal tariffs, member countries levy a common external tariff on goods being imported from nonmembers. Example: MERCOSUR

c. Common market: A common market has all the elements of a customs union, plus it allows free mobility of production factors such as labor and capital. Example: the European Union

Explain the static effects and dynamic effects of economic integration. What is the difference between trade creation and trade diversion resulting from economic integration?

Answer: Static effects are the shifting of resources from inefficient to efficient companies as trade barriers fall. Dynamic effects are the overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale. Static effects may develop when either of two conditions occurs:

a. Trade creation: Production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration.

b. Trade diversion: Trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember company might be more efficient in the absence of trade barriers.

Dynamic effects of integration occur when trade barriers come down and the size of the market increases, allowing companies to achieve economies of scale.

What are the functions of the European Commission, the European Parliament, the Council, and the European Court of Justice?

Answer:

a. The European Commission provides the European Union's political leadership and direction. The commission is composed of commissioners nominated by each member government and approved by the European Parliament. It drafts laws that it submits to the European Parliament and Council of the EU.

b. The three major responsibilities of the European Parliament are: legislative power, control over the budget, and supervision of executive decisions. The commission presents community legislation to the parliament. Parliament may approve legislation, amend it, or reject it outright. Parliament also approves the EU's budget each year and monitors spending.

c. The Council is composed of the ministers of the member countries. The Council passes laws and makes and enacts major policies. It works closely with the Commission and Parliament in adopting policies.

d. The European Court of Justice ensures consistent interpretation and application of EU treaties. Member states, community institutions, or individuals and companies may bring cases to the court. The Court of Justice is an appeals court for individuals, firms, and organizations fined by the commission for infringing treaty law. The Court of Justice is relevant to MNEs because it deals mostly with economic matters.

What are the rules of origin and regional content provisions of NAFTA?

Answer: Because NAFTA is a free trade agreement and not a customs union, each country sets its own tariffs for the rest of the world. Rules of origin ensure that only goods that have been the subject of substantial economic activity within the free trade area are eligible for the more liberal tariff conditions created by NAFTA. According to regional content rules, at least 50 percent of the net cost of most products must come from the NAFTA region. The exceptions are 55 percent for footwear, 62.5 percent for passenger automobiles and light trucks and the engines and transmissions for such vehicles, and 60 percent for other vehicles and automotive parts.

What has been the impact of NAFTA on trade and employment in NAFTA nations?

Answer: Trade and investment among the NAFTA members has increased significantly since the agreement was signed in 1994. The U.S. is the largest trade partner of Canada and Mexico, and both countries are among the most important exporters and importers for the U.S. Due to lower wages in Mexico, a lot of FDI has poured into Mexico, potentially displacing jobs in the United States. U.S. firms have come under criticism for taking advantage of cheaper wages and lax environmental standards. In addition, the agreement has not stopped the flow of illegal immigrants from Mexico to the U.S.

Identify and briefly compare the major regional trading groups in Latin America, Asia, and Africa.

Answer:

a. The major trade group in South America is MERCOSUR. In 1991, Brazil, Argentina, Paraguay, and Uruguay established MERCOSUR. MERCOSUR is significant because of its size; it generates 75 percent of South America's GNP. Another major group in South America is the Andean Group (CAN), which is composed of Bolivia, Colombia, Ecuador, and Peru. There are three major regional trading groups in Central America and the Caribbean: the Central American Common Market, the Central American Free Trade Agreement-Dominican Republic (which includes the United States), and the Caribbean Community and Common Market (CARICOM). These groups are hampered by their small markets and dependence on the United States for trade.

b. In Asia, the key group is the Association of South East Asian Nations (ASEAN), which was organized in 1967 and comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. It is promoting cooperation in many areas, including industry and trade. In 1993, the ASEAN countries formed the ASEAN Free Trade Area (AFTA) to deal with the specific intrazonal trade issues.

c. The Asia Pacific Economic Cooperation (APEC) is massive since it includes every country that borders the Pacific Ocean. In spite of the size of APEC, it does not engage in treaties like the other trade agreements, so it has potential but not much teeth.

d. Africa is divided into many different trading groups based on geographic proximity and links to former colonial powers. Most groups are hampered by poverty, small market size, and dependence on former colonial powers. The African Union is modeled loosely on the EU, but that type of integration will likely be very difficult.