Chapter 8 Summary

LO 8.1 Types of Economic Integration Arrangements

• Economic integration arrangements span a spectrum, depending on the extent to which barriers to trade and factor mobility are reduced and other forms of cooperation are involved.
• Major types of economic integration arrangements include free trade agreements, customs unions, common markets, and economic unions.
  In a free trade agreement, participating countries remove barriers to trade among themselves but adopt their own policies with regard to trade with other countries.
• In a customs union, countries remove barriers among themselves and adopt a common external tariff with respect to other countries.
• In a common market, countries engage in free trade in a market protected by a common external tariff, along with the free movement of factors of production (e.g., labour, capital) among themselves.
• In an economic union, countries harmonize economic policies, including monetary and fiscal policies, as well as policies relating to trade and factor mobility.

LO 8.2 The Theory of Economic Integration, Distinguishing Trade Creation from Trade Diversion

• There are static and dynamic effects that arise from participation in a regional trading arrangement. With regard to the static effects, a participating country can experience an improvement in well-being depending on whether the benefits of trade creation exceed the costs of trade diversion.
• The dynamic effects of economic integration arise over time and are the result of heightened competition, economies of scale, increased investment, productivity improvements, and greater product diversity, with the driving factor being the expansion of the market.
• Trade creation occurs because higher-cost production of a member of a customs union is replaced by lower-cost imports from another member. Trade creation raises consumer surplus and produces an efficiency gain in production.
• Trade diversion arises because a country participating in a customs union chooses to consume higher-cost production from within the trading bloc instead of lower-cost production from non-member countries.

LO 8.3 Gains from Regional Economic Integration Such as EU and NAFTA/USMCA

• Two examples of regional trading blocs are the European Union (EU) and NAFTA/USMCA. The EU is further along the road to economic integration, with free trade among participating countries, a common external tariff, free movement of labour and capital, and the harmonization of some economic policies (e.g., monetary policy).
• Studies of the impact of the European Union on member countries indicate that the net benefits from the formation of the EU were positive but relatively small. However, these studies focused on the manufacturing sector and also considered only the static effects of economic integration.
• There is general agreement that NAFTA/USMCA has promoted significant increases in the volume of trade in goods and services among Canada, Mexico, and the United States. Some studies have indicated that trade creation exceeded trade diversion, producing positive net benefits for the countries involved.
• Economic integration likely produced dynamic effects in both the EU and NAFTA/USMCA, driven by the creation of a larger market.

LO 8.4 Effects of International Labour Migration on Countries

• International migration is the movement of people from one country to another in which they plan to live for a relatively long period of time.
• International migration occurs primarily for economic reasons, with labour moving from countries where it is less productive and receives lower wages to countries where it is more productive and receives higher wages.
• The sending country definitively loses economic well-being as a result of immigration, while the receiving country gains well-being.
• While non-migrating workers in the sending country are better off because of higher wages, their gain is less than the losses incurred by employers. In contrast, employers in the receiving country experience an improvement in their well-being while native workers suffer losses amid a fall in their wages.
• The world benefits from immigration as productivity improves as a result of a reallocation of global labour resources.
  Although there is the initial disparity in wages between sending and receiving countries narrows, the gap is not eliminated because of transaction costs and the risks of immigration.

LO 8.5 Reasons for the Existence of Multinational Enterprises (MNEs)

• The international movement of capital is significantly conducted by multinational enterprises (MNEs) through foreign direct investment and is at least partly motivated by differences in returns (expected profits) across countries.
• Foreign direct investment (FDI) is a flow of funding provided by an investor or a lender to set up or acquire foreign production facilities or to expand or finance an existing foreign business that the investor already owns or controls.
• An MNE owns and controls business operations in more than one country, with a parent firm located in the home country having one or more subsidiaries located in host countries.
• While the search for returns might prompt the reallocation of capital across countries, several other factors help to explain why MNEs develop. These factors include inherent disadvantages of being foreign, certain advantages specific to the firm, considerations related to location, internalization advantages, and oligopolistic rivalry.
• MNEs are heavily involved in international trade, with intra-firm trade estimated to represent between half and two-fifths of the total volume of world trade in goods and services. While FDI can substitute for trade or complement it, studies generally conclude that FDI is complementary to international trade.

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