CONCEPTUAL QUESTIONS
2.1 INTEGRATION OF THE WORLD’S MARKETS
The world’s markets for goods, services, and financial assets and liabilities have become increasingly integrated across national boundaries during the past several decades. An integrated market is one in which equivalent assets sell for the same price in every location. Insegmented markets,the price of an asset is not necessarily the same in all markets. Factors that contribute to market segmentation include transaction costs, regulatory and institutional interference, informational barriers, and labor immobility. As barriers to trade progressively fall, foreign markets are playing an increasingly important role in the viability of domestic industries and the global economy.
Markets are becoming more integrated across national borders.
Cross-Border Integration of Markets for Goods and Services
The pessimistic tone of daily news reports about efforts to integrate world trade highlights the substantial barriers to a truly global economy. Yet viewed through the
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long lens of history, trade barriers today are lower than ever. In the goods markets, the world’s businesses are turning to foreign sales, foreign sourcing, foreign direct investment, and cross-border partnerships as paths toward business consolidation and expansion. The markets for services also have seen an explosion of cross-border trade, particularly in telecommunications, information technology, and financial services. This increasing globalization has been hastened by many trends and events.
■ The global trend toward free-market economies and an international equity culture
■ The rise of regional and global trade pacts, including the 1995 creation of the World Trade Organization (WTO)for the negotiation and resolution of trade disputes
■ The 1991 breakup of the Soviet Union, the reunification of East and West Germany, and the migration of many Central and Eastern European countries toward theEuropean Union (EU)
■ The emergence of China as a major economic power and international trading partner, symbolized by China’s 2001 entry into the WTO
■ The rapid industrialization of the Far East and Pacific Rim
■ The 1999 creation of the euro, and its adoption by an expanding set of European countries
Foreign trade is a mainstay of industrialized economies as they struggle for market share in a competitive global marketplace. Foreign trade is equally important to emerging markets, as they strive to develop their industrial bases and increase local living standards. National governments reduce trade barriers through trade agreements that provide a forum for peacefully resolving trade disputes between member nations. These pacts promote economic growth and stability.
Figure 2.1 lists the world’s major trade agreements. There are ongoing dis- cussions aimed at extending these pacts.EU enlargement has expanded the EU to 27 countries, with a growing number of Eurozone nations adopting the euro ( ) as their currency. There are ongoing efforts to link North America’s Free Trade Agreement (NAFTA) with South America’s Union of South American Nations (UNASUR). There are also active bilateral and regional trade talks in Africa, Asia, and the Middle East.
Developing economies often undergo a ‘‘life cycle’’ of industrial growth. In developing countries without a rich endowment of natural resources such as oil, early growth tends to be based on labor cost advantages. As countries industrialize and labor costs increase, labor-intensive industries begin to migrate toward countries with even lower labor costs, and developing economies find themselves directly competing with industrialized economies. This transition from a low-tech, labor- driven economy into a globally competitive, capital-intensive, high-tech economy is difficult, and these countries face vexing social and public policy issues as their workforce lays claim to the newfound wealth.1
Cross-border trade is becoming increasingly important to the world economy.
Figure 2.2 shows the growth in U.S. imports and exports of merchandise trade from 1960 – 2010, restated in 2010 dollars. Other nations have experienced similar growth in cross-border trade, with some countries experiencing even more rapid growth.
ASEAN – Association of South-East Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam Asian Nations(www.aseansec.org)
APEC – Asia-Pacific Economic Cooperation 21 Pacific Rim members including Australia, Canada, China, Indonesia, Japan, Korea, Malaysia, Russia, and the United States (www.apec.org)
AU – African Union (www.au.int) Includes all 54 states on the African continent
CIS – Commonwealth of Independent States Several members of the former Soviet Union including Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan
(www.cisstat.com/eng)
EU (http://europa.eu/index_en.htm) 27 members in a pan-European market (see Figure 2.7) 17 countries use the euro (symbol ) as their currency
NAFTA Canada, Mexico, and the United States
OPEC – Organization of Petroleum Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela Exporting Countries (www.opec.org)
UNASUR (www.unasursg.org) An agreement combining Mercosur (Argentina, Brazil, Paraguay, Uruguay) and the Andean Community (Bolivia, Colombia, Ecuador, and Peru) with several other states (Chile, Guyana, Suriname, and Venezuela)
WTO (www.wto.org) In 1994, 121 nations signed the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). GATT slashed tariffs, established intellectual property protection, and created a dispute resolution process. The WTO — with more than 150 members — now oversees the agreement.
FIGURE 2.1 The World’s Major Economic Cooperation and Free Trade Agreements
Globalization has an enormous influence on individuals and their societies.
Globalization increases interdependence among national economies and leads to business cycles that are regional or global in nature. Globalization also changes the business environment within and across a country’s borders, creating both opportunities and challenges for multinational corporations.
−1000 0 1000 2000 3000
1960 1970 1980 1990 2000 2010
Imports Exports
Trade deficit
FIGURE 2.2 U.S. Merchandise Trade (in billions of 2010 U.S. dollars)
Source:Trade figures from www.bea.gov are restated in 2010 dollars using CPI deflators from www.bls.gov.
Cross-Border Integration of the World’s Financial Markets
Integration is proceeding at an even faster pace in financial markets as advances in electronic communication and data processing reduce physical and institutional barriers to the free flow of capital. Developments in information technology (IT) and telecommunications have been especially important in hastening the integration of international financial markets. Trading in currency derivatives continues to enjoy explosive growth. Although some of this growth is a consequence of the growth in import and export trade, a considerable portion is due to the introduction of new financial markets and instruments that facilitate trade and the transfer of ownership, risks, and returns.
IT assists financial market integration.
Along with the reduction of barriers in the world’s goods markets, the demise of capital flow barriers in international financial markets has had several consequences.
■ An increase in cross-border financing as multinational corporations (MNCs) raise capital in whichever market and in whatever currency offers the most attractive rates (see Chapter 14)
■ Increasingly interdependent national financial markets, including an increasing number of cooperative linkages among securities exchanges (see Chapters 5 – 7 and 18)
■ An increasing number of cross-border partnerships, including many interna- tional mergers, acquisitions, and joint ventures (see Chapter 17)
The global financial crisis of 2008 provides a striking example of the interdependence of the world’s financial markets and reminds us that we all live on the same small planet.