Page 94 - Introduction to Business

68 PART 1 The Nature of Contemporary Business

raise employment opportunities and the quality of life for the citizens of the region,
and to promote peace and harmony within the region. As shown in Exhibit 2.4, while
some groups of countries may stop with regional trade and investment integration,
others may go further with the goal of having greater economic and social union
such that the members of those groups will have similar shared economic and social
values. In the ultimate case, some countries that share similar economic and politi-
cal systems may choose to form a union to fend off foreign aggression or threat.
Economic integration can take several forms, representing varying degrees of
2
integration. However, if a logical progression could be outlined along functional
lines, it could look something like this. 3
free trade area An area in which two or First, two or more countries may create a free trade area by eliminating all bar-
more countries agree to eliminate all riers to trade such as tariffs, quotas, and nontariff barriers like border restrictions,
barriers to trade such as tariffs, quotas,
and nontariff barriers like border while at the same time keeping their own external (against nonmembers) tariffs,
restrictions, while at the same time they usually within WTO guidelines.
keep their own external tariffs (usually Second, when countries within a free trade area have differential external tariffs,
within WTO guidelines) against imports will largely enter the free trade area through the country that has the low-
nonmembers
est external tariffs and trade restrictions, thereby causing other free trade member
customs union A group of free trade countries to lose out on import business. This may lead to the creation of a customs
member countries that have adopted a union, in which all free trade member countries will adopt a common external tar-
common external tariff with nonmember
countries iff with nonmember countries.
Third, within the member countries of the customs union, investment (hence
business and job opportunities) will flow to the countries that have the best labor
productivity and low capital cost. This in turn may encourage the removal of barri-
ers to the free movement of capital and labor within the customs union, thereby
common market or single market A creating a common market or single market.
market formed when member countries Fourth, within the common market, the free movement of labor and capital may
of a customs union remove all barriers encourage member states to implement common social programs (on education,
to the movement of capital and labor
within the customs union employee benefits and retraining, health care, retirement programs, etc.) and coordi-
economic and monetary union A union nated macroeconomic policies (such as common fiscal and monetary policies) that
formed when members of a common could lead to the creation of a single regional currency and an economic and monetary
market agree to implement common union. Finally, since member countries of the economic and monetary union will work
social programs (on education,
employee benefits and retraining, closely with each other on all major business and economic issues, the urge to have
health care, etc.) and coordinated common policies in other fields like defense and foreign policies may lead to the cre-
macroeconomic policies (such as fiscal ation of a political union, i.e., a group of countries that will behave as a single country.
and monetary policies) that would lead
to the creation of a single regional Pros and Cons of Regional Integration. The benefits and costs of regional
currency and an apex central bank
integration depend crucially on the level of integration achieved by the countries in
political union The union created when
member countries of an economic and
monetary union work closely with each EXHIBIT 2.4
other to arrive at common defense and
foreign policies and behave as a single Form and Stages of Regional Integration
country
Harmonization
Abolition of Common Abolition of and Unification
Tariffs and External Tariff Restrictions on of Economic
Stage of Quotas Among and Quota Factor Policies and
Integration Members System Movements Institutions

Free trade area Yes No No No
Customs union Yes Yes No No
Common market Yes Yes Yes No

Economic union Yes Yes Yes Yes
Source: From International Trade and Investment, 7th edition by Franklin R. Root. Copyright © 1994. Reprinted with
permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800-730-2215.
Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.