Regional trade agreements are changing the landscape of the global marketplace. They are lowering trade barriers and opening up new markets for goods and services. Markets otherwise off limits because tariffs made imported products too expensive can become attractive after tariffs are lifted. But trade agreements can also be double-edged swords for companies. Not only do they allow domestic companies to seek new markets abroad, they also let competitors from other nations enter the domestic market. Such mobility increases competition in every market that participates in such an agreement.
Despite increased competition that often accompanies regional integration, there can be economic benefits, such as those provided by a single currency. Companies in the European Union clearly benefit from its common currency, the euro. First, charges for converting from one member nation’s currency to that of another can be avoided. Second, business owners need not worry about potential losses due to shifting exchange rates on cross-border deals. Not having to cover such costs and risks frees up capital for greater investment. Third, the euro makes prices between markets more transparent, making it more difficult to charge different prices in different markets. This helps companies compare prices among suppliers of a raw material, intermediate product, or service.
Another benefit for companies is lower or no tariffs. This allows a multinational to reduce its number of factories that supply a region and thereby reap economies of scale benefits. This is possible because a company can produce in one location, then ship products throughout the low-tariff region at little additional cost. This lowers costs and increases productivity.
One potential drawback of regional integration is that lower tariffs between members of a trading bloc can result in trade diversion. This can increase trade with less efficient producers within the trading bloc and reduce trade with more efficient nonmember producers. Unless there is other internal competition for the producer’s good or service, buyers will likely pay more after trade diversion.
Integration and Employment
Perhaps most controversial is the impact of regional integration on jobs. Companies can affect the job environment by contributing to dislocations in labor markets. The nation that supplies a particular good or service within a trading bloc is likely to be the most efficient producer. When that product is labor intensive, the cost of labor in that market is likely to be quite low. Competitors in other nations may shift production to that relatively lower-wage nation within the trading bloc to remain competitive. This can mean lost jobs in the relatively higher-wage nation.
Yet job dislocation can be an opportunity for workers to upgrade their skills and gain more advanced training. This can help nations increase their competitiveness because a more educated and skilled workforce attracts higher-paying jobs. An opportunity for a nation to improve its competitiveness, however, is little consolation to people finding themselves suddenly out of work.
Although there are drawbacks to integration, there are potential gains from increased trade such as raising living standards. Regional economic integration efforts are likely to continue rolling back barriers to international trade and investment because of their potential benefits.