What are the disadvantages of economic integration for international business?
Economic integration is taking place to a greater or lesser extent in various regional trading blocs. Examples are the North American Free Trade Agreement (NAFTA), the European Union (EU), the Association of South East Asian Nations (ASEAN) and the Mercosur grouping in Latin America. There are also regional trading blocs within Africa. From an international business point of view, economic integration of a region of the world can help to provide a level playing field, harmonize business laws and reduce or eliminate tariff barriers or import quotas. These advantages need to be weighed against the disadvantages to governments and to businesses.
The main disadvantage for business arises from the existence of a number of competing trading blocs. While trade is facilitated within each bloc, they tend to put up barriers to entry of certain goods into the blocs and there are frequent trade disputes. An example is the policy of the EU towards its own farmers which has tended to protect them from the effect of imports from countries where production costs are low. From the point of view of international business the advantages from operating in low cost countries may be cancelled out by tariffs imposed when the goods enter the European Union. This is a disadvantage for businesses and for the consumers who do not have access to the lower priced products.
Trade disputes between blocs can also disadvantage international business. If a bloc perceives that another country or grouping is imposing unfair tariffs or quotas on imports, the response may be restrictions on imports from that source. Sometimes other countries are seen as unfairly promoting or subsidizing their own firms and thereby distorting competition, and the response can be countervailing duties imposed on the unfairly priced imports and the imposition of import quotas or embargoes. The same response can occur when there is suspected dumping of excess goods at an unduly cheap price on the international market.
Even within a trading bloc the process of economic integration may give rise to unfair results. Harmonization of business laws and the freedom of location of business within a trading bloc can lead to a migration of firms towards the most developed part of the bloc, in terms of infrastructure and ease of doing business, away from areas where doing business remains difficult. This can create problems for the businesses left behind and can give rise to high unemployment rates among workers. Although these workers may also enjoy freedom of movement within the trading bloc there may be practical restrictions to migration such as language barriers and educational requirements.
An example of regional trading blocs acting as barriers to free trade can be seen in the slow progress of the Doha round of talks at the World Trade Organization (WTO). The main problems have arisen from protection of agricultural production in North America and the European Union. These regions are reluctant to give up help for exporters or incentives to domestic production. In the case of non-agricultural goods, higher tariffs are imposed by industrialized countries on finished and semi-finished goods with the objective of keeping out imports from less developed countries. Tariff peaks, which are much higher tariffs than would normally be charged by these countries, are imposed on products such as clothing and footwear that are seen as a particular threat to domestic industries in industrialized countries.
These tariff wars are obstructing progress on other trade measures. These measures include greater efficiency in border procedures; harmonization and simplification of customs documents; streamlining and automation of customs procedures and easier availability of trade related information. It has been estimated that the implementation of these measures throughout the world trading system would reduce the costs of trade by around 10% in industrialized countries and between 13% and 15.5% in developing countries. This type of progress in economic integration would bring much greater benefits to business.
