Political union

A political union is the ultimate type of regional cooperation because it involves the integration of both economic and political policies. With France and Germany leading the way, the EU has been moving toward social, political, and economic inte- gration. The EU’s goal is to form a political union similar to the fifty states of the USA. The EU’s debate over political union involves issues such as having common defense and foreign policies, strengthening the role of the EU Parliament, and adopting an EU-wide social policy. In late 1991, the member countries of the EU have given the EU authority to act in defense, in foreign, and in social policies.

It is doubtful that pure forms of economic inte- gration and political union can ever become reality. Even if they did, they would not last long because different countries eventually have different goals and inflation rates. More important is that no country would be willing to surrender its sover- eignty for economic reasons. The EU, despite great strides, has been plagued by infighting among member states with conflicting national interests.

Although the Treaty of Rome calls for a free internal market and permits market forces to equalize national economic differences, Germany, France, and the Netherlands – which have expen- sive social welfare programs – argue that the social dimension must be taken into account in order to prevent social dumping. In other words, they seek to prevent a movement of business and jobs away from areas with high wages and strong labor organizations to areas with low wages, less organized labor forces, and weak social welfare policies. As a result, the EC Commission adopted the Social Charter in 1989 to establish workers’ basic rights and to equalize EU social regulations (e.g., a minimum wage, labor par- ticipation in management decisions, and paid holi- days for education purposes). Member countries accused of social dumping must subject their prod- ucts to sanctions. European socialists believe that the Social Charter is necessary to prevent countries with the lowest social benefits from gaining a com- parative advantage.

Countries with lower labor costs (e.g., Portugal, Spain, and Greece), however, view the Social Charter as something that forces capital-poor coun- tries to adopt the expensive social welfare policies, in effect increasing the cost of labor and unemploy- ment. To them, the Social Charter is nothing more than protectionism in the guise of harmonization. Such expensive policies are also a major concern to European industry. As may be expected, several initiatives are the subject of heated debate.

The European Union is a good case study of how to form economic and political cooperation at a high level. The EU will be the first group of industrial nations to deal with: (1) how to redefine national sovereignty in light of new economic alliances; (2) how to combine various national priorities with a single decision-making process; and (3) how to deregulate separate economies to induce competi- tion among national monopolies.22

Economic and marketing implications

Marketers must pay attention to the effects of regional economic integration or cooperation

because the competitive environment may change drastically over time. As in the case of the EU, although EU member countries still maintain their national identities, national borders are no longer trade barriers. Marketers must treat the EU as a single market rather than as numerous separate and fragmented markets. They need to rethink their marketing, finance, distribution, and production strategies. Foreign businesses need to make an effort to become familiar with new regulations so as to take full advantage in the changing market. For example, even though standard harmonization may exclude some US firms from the EU markets, the USA should work to influence the process in order to turn the potential barrier into an advantage.

Whereas countries that are not members of the EU view the EU’s ambitious goals with some concern, outsider firms can still cope successfully with the Single Internal Market program. Instead of viewing the EU’s developments as obstacles, mar- keters should regard them as both challenges and opportunities. Not unlike coping with a single country’s protectionist measures (except on a larger scale), the key to competing effectively in the EU is for an external firm to become an insider. Figure

2.7 shows how the United Kingdom can serve as a strategic location for this purpose.

General Electric Co. has formed joint ventures in major appliances and electrical equipment with Britain’s largest electronics firm, has acquired France’s largest medical equipment maker, and has planned to build a plastics factory in Spain. Coca- Cola has terminated some licensing agreements and has consolidated its European bottling operations to cut costs and prices. Using acquisitions to build up its European position, Sara Lee Corp. purchased a Dutch coffee and tea company and took control of Paris-based Dim, Europe’s largest maker of panty- hose. In addition, Sara Lee has experimented with the “Euro-branding” strategy by printing several languages on a single package and distributing it to several countries.

Initially, new trade policies generally tend to favor local business firms. For example, IBM encountered problems in Europe, where the EU

members wanted to protect their own computer industry. Alternatively, outsider firms may be able to take advantage of the situation to overcome the barriers erected by a particular member of a regional economic cooperation. Facing France’s troublesome entry procedure, Japan could first ship its products into Germany before moving them more freely into France.

Because of the favorable economic environment in a cooperative region, additional firms desire entry and the competitive atmosphere intensifies. Firms inside the region are likely to be more com- petitive owing to the expansion of local markets, resulting in better economies of scale. External firms (those outside the area) are faced with over- coming trade barriers, perhaps through the estab- lishment of local production facilities. For example, Ireland tried to attract foreign investment by men- tioning in its advertisements that it is a member of the EU. Nike, a US firm, was able to avoid the EU tariffs by opening a plant in Ireland.

Over time, a region will grow faster than before owing to the stimulation caused by trade creation effects, favorable policies, and more competition, but economic cooperation can create problems as well as opportunities within international markets. The expanded market offers more profit potential, but it may create an impression of collusion when subsidiaries or licensees are granted exclusive rights in certain member countries. The long-term result may be an area-wide antitrust among new firms or nonmember countries wishing to trade within the economically integrated region.

Economic cooperation may either improve or impede international trade, depending on how the result of the cooperation is viewed. Economic inte- gration encourages trade liberalization internally, while it promotes trade protection externally. The tendency is for a member of an economic group to shift from the most efficient supplier in the world to the lowest-cost supplier within that particular economic region. As in the case of NAFTA, the results have been generally positive. Promoting trade between the USA and Mexico has been highly successful. While the US Labor Department has

Figure 2.7 The United Kingdom and its strategic location

certified that some 316,000 US jobs have been lost or threatened due to trade with Mexico and Canada, the number is far lower than predicted. On balance, NAFTA has increased jobs and reduced inflation without affecting wages.23

QUESTIONS

1 Is trade a zero-sum game or a positive-sum game?

2 Explain (a) the principle of absolute advantage and (b) the principle of relative advantage.

3 Should there be trade if (a) a country has an absolute advantage for all products over its trading partner, and (b) if the domestic exchange ratio of one country is identical to that of another country?

4 What is the theory of factor endowment?

5 Explain the Leontief Paradox.

6 Discuss the validity and limitations of trade theories.

7 Distinguish among (a) free trade area, (b) customs union, (c) common market, (d) economic and monetary union, and (e) political union.

8 Does economic cooperation improve or impede trade?

NOTES

1 Adam Smith, Wealth of Nations (1776; reprint, Homewood, IL: Irwin, 1963).

2 David Ricardo, The Principles of Political Economy and Taxation (1817; reprint, Baltimore: Penguin, 1971).

3 “A Fresh Look at Keynes,” Finance & Development (December 2001): 60–3.

4 Richard S. Tedlow, Giants of Enterprise: Seven Business Innovators and the Empires They Built (New York, NY: HarperBusiness, 2003).

5 Eli Heckscher, “The Effects of Foreign Trade on the Distribution of Income,” in Readings in the Theory of International Trade, ed. Howard S. Ellis and Lloyd A. Matzler (Homewood, IL: Irwin, 1949); and Bertil Ohlin, Interregional and International Trade (Cambridge, MA: Harvard University Press, 1933).

6 Leslie Lipschitz, Timothy Lane, and Alex Mourmouras, “The Tosovksy Dilemma,” Finance & Development, September 2002, 30–3.

7 Michael E. Porter, The Competitive Advantage of Nations (New York, NY: Free Press, 1990).

8 Paul Cashin, Paolo Mauro, and Ratna Sahay, “Macroeconomic Policies and Poverty Reduction: Some Cross- Country Evidence,” Finance & Development (June 2001): 46–9.

9 Porter, Competitive Advantage.

10 Offshore Finance U.S.A. (September/October 2001): 66.

11 G. D. A. MacDougall, “British and American Exports: A Study Suggested by the Theory of Comparative Costs,” Economic Journal (December 1951); Robert Stern, “British and American Productivity and Comparative Costs in International Trade,” Oxford Economic Papers (October 1962); Bela Balassa, “An Empirical Demonstration of Classical Comparative Cost Theory,” Review of Economics and Statistics (August 1963).

12 Wassily W. Leontief, “Domestic Production and Foreign Trade: The American Capital Position Re-examined,” Proceedings of the American Philosophical Society (September 1953); Wassily W. Leontief, “Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis,” Review of Economics and Statistics 38 (November 1956): 386–407.

13 “Trade Specialist Calls Current Rules Outdated,” IMF Survey, July 15, 1991, 209, 216.

14 “Opening Up to Capital Flows? Be Prepared Before Plunging in,” IMF Survey, May 19, 2003, 137.

15 “‘Let Chaos Reign,’ Grove Urges Execs,” San José Mercury News, September 27, 1995.

16 “Economists Discuss Transition to Market-Oriented Economies,” IMF Survey, February 4, 1991, 34–7.

17 J. E. Meade, Trade and Welfare (New York, NY: Oxford University Press, 1955); R. G. Lipsey and K.

Lancaster, “The General Theory of Second Best,” Review of Economic Studies 24 (1956): 11–32.

18 “Report Highlights Benefits of Economic and Monetary Union in Europe,” IMF Survey, November 26, 1990,

363–5.

19 “Denmark to Lift Ban on Drinks in Cans,” San José Mercury News, January 15, 2002.

20 “Common Past Fuels Drive to Agree Biggest EU Expansion,” Financial Times, December 10, 2002.

21 “European Central Bank Plans Reforms to Cope with EU Enlargement,” IMF Survey, February 3, 2003,

31–2.

22 C. Michael Aho, “‘Fortress Europe’: Will the EU Isolate Itself from North America and Asia?” Columbia

Journal of World Business 29 (fall 1994): 33–9.

23 “NAFTA’s Scoreboard: So Far, So Good,” Business Week, July 9, 2001, 54–5.

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