Chapter 8 Introduction

Introduction

In this chapter, after describing various types of economic integration arrangements, we examine the theory of economic integration. Economic integration is a discriminatory trade mechanism in that member countries can trade goods and services and, perhaps, productive resources (e.g., capital) freely or at low cost while imposing restrictions on trade from non-member countries. While WTO rules are based on the most-favoured-nation (MFN) principle whereby all countries are treated in the same way (i.e., in a non-discriminatory way), the WTO does permit the formation of trading blocs once they do not involve raising trade barriers against non-member countries.

We will see that the formation of a trading bloc (an economic integration arrangement) can be good from a resource allocation standpoint in that it represents a movement toward freer trade. However, the formation of a trading bloc may not be desirable because it encourages higher-cost production and consumption and inefficient resource allocation. Whether there is an overall economic benefit for participating countries depends on the extent to which new trade is achieved (trade creation) against how much prior trade is lost. That is, the overall economic benefit depends on trade creation versus trade diversion. In addition, trading blocs can foster international friction between member countries and non-member countries, with the potential for international trade wars.

We will then consider the experience with economic integration arrangements in order to identify the practical effects on economic well-being. In particular, we will look at the experience of the European Union and the North American Free Trade Agreement (NAFTA) and its successor, the United States–Mexico–Canada Agreement (USMCA). We will see that there have been static gains or losses from the formation of trading blocs. However, there can be a number of economic benefits that come over time. These dynamic benefits stem largely from the larger markets available to producers within trading blocs and heightened market competition.

Next, we will examine the economic effects of international labour migration. Much international migration occurs because of economic reasons. Labour moves from one country to another in search of higher wages and better economic opportunity. As with trade in goods and services, we will see that both sending and receiving countries benefit from international migration. However, some groups gain while other groups lose. In the receiving country, workers in receiving countries lose economic well-being as they compete with immigrants for available jobs. Employers, on the other hand, benefit because they are able to expand their workforces and pay lower wages. The receiving country as a whole is better off economically because the benefit that employers get outweighs the losses that native workers experience. In sending countries, immigration lifts wages domestically for non-migrating workers, and the migrants receive higher wages abroad.

In a similar way, physical and the associated financial capital move internationally in search of better returns. This brings benefits to both home and host countries, manifested in higher production levels and greater efficiency. Multinational enterprises are an important representation of the movement of capital internationally. Accordingly, we discuss foreign direct investment and the role played by multinational enterprises in that regard. We also provide some explanation as to why multinational enterprises exist. We close with a discussion of trends in foreign investment (consider limiting this to FDI) into and out of Canada.