Internacional Economic Integration: Challenges and opportunities for emerging economies

Por Lorena Palacio Chacón, Jahir Lombana Coy y Patricia Reynaga Alcalá

Due to different social, political, and economic cycles, international trade dynamics and protectionist initiatives become evident worldwide. Therefore, understanding international economic integration is highly significant. This textbook looks to understand international economic integration from a historical, theoretical, and practical outlook deriving essential lessons for developing economies. Each section contains specific exercises to apply a wide variety of concepts and tools. It is expected that the reader develops a critical perspective of the topics analyzed to use them in the dynamic and changing business environment. This book is suggested for people with basic knowledge in international business, economics, and related disciplines.

• Idioma: Español
• Editorial: Universidad del Norte
• Fecha de lanzamiento: 18 nov 2022
• ISBN: 9789587894790

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About this book

International Economic Integration.

Challenges and Opportunities for Developing Markets

Lorena A. Palacios-Chacón

Jahir Lombana-Coy

Patricia Margarita Reynaga-Alcalá

Due to different social, political, and economic cycles, international trade dynamics and protectionist initiatives become evident worldwide. Therefore, understanding international economic integration is highly significant. This textbook looks to understand international economic integration from a historical, theoretical, and practical outlook deriving essential lessons for developing economies. Each section contains specific exercises to apply a wide variety of concepts and tools. It is expected that the reader develops a critical perspective of the topics analyzed to use them in the dynamic and changing business environment. This book is suggested for people with basic knowledge in international business, economics, and related disciplines.

D.R. © Instituto Tecnológico y de Estudios Superiores de Monterrey, Mexico 2022.

D.R. © Universidad del Norte, Colombia 2022.

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About the authors

Lorena A. Palacios-Chacón

Full Time Professor of International Business at Tecnológico de Monterrey (ITESM). Dr. Palacios-Chacon earned her Ph.D. in management from the University of Puerto Rico and her two degrees in economics and finance and international trade from Sergio Arboleda University. One of her main interests is writing teaching cases; she has participated in several conferences, winning multiple best-case awards. She is a member of the Board of Directors of the Latin American Case Association (ALAC). Dr. Palacios-Chacon has written books and articles in the areas of internationalization of the firm, financial deepening in Colombia, the processes of offshore and outsourcing of companies, and international economic integration between countries. Her more recent line of research includes multinationals from emerging markets, especially multilatinas.

Jahir Lombana-Coy

Ph.D. in Economics at the University of Goettingen (Germany), Master’s Degree in International Studies at the University of Chile. Specialist in International Relations at the University of Chile with an undergraduate degree in Economics at the Universidad del Rosario (Colombia). He was a specialized professional at the Ministry of Foreign Trade in Colombia, Director/Editor of the foreign trade website of fresh fruits and vegetables: www.freshplaza.es and www.freshplaza.com; project consultant in Europe and Latin America in several organizations (e.g., FAO, Fredrich Ebert Stiftung, INRA France, AUGURA, Colombian Planning Department). Currently is an Associate Professor of Competitiveness and International Business at the Universidad del Norte (Colombia).

Patricia Margarita Reynaga-Alcalá

WW Regulatory Compliance Manager II for HP for 20 years generating policies, resolving compliance complex issues, due diligence, acquisitions, governmental relationship whit customs authorities, among other thinks.

Director of International Business, Business Management, and Innovation bachelor’s degrees at Tecnológico de Monterrey. She works as a professor of various subjects, and she also collaborates in defining 2019 study plans. She has participated as a speaker in workshops and as a company consultant.

Acknowledgments

To my parents for always being an inspiration and guide; to my sister for sharing the pleasure of teaching; and to my students because it is for them that every pedagogical initiative is worthwhile.

Lorena

To my parents in heaven and my family on earth. Especially to María Carolina, Sofía, and Lena for their patience and tolerance in time and space to successfully end this textbook.

Jahir

I thank life for giving me so much for so long, for the opportunity to learn from my parents, my family, and the students. Thanks to Lorena and Jahir for this opportunity and experience.

Patricia

Gratitude

The authors thank Heidy Fontalvo for the pedagogical accompaniment and the monitors Jesús López and Elsa Baños for their effective collaboration in the different stages of the process. To Eduanys Anaya, who was invaluable support from the Textos Guía project; to the entire Editorial team of the Universidad del Norte and the Directorate of Quality and Academic Projects of the same university, who led us in the development of this work in academic and publishing aspects. Likewise, we are grateful for the support of Alejandra González and Elizabeth López from the Tecnológico de Monterrey Digital Publishing House for leading the entire co-editing effort. Finally, we are thankful to the anonymous peers who supported us with constructive feedback and the style editor who put a final touch on our words.

Introduction

One of the most relevant skills for university students is the capacity to adapt to an ever-changing world. International Integration is an example of a highly dynamic activity, and understanding it is key to acknowledging countries, enterprises, and social relationships. The main objective of this book is to address this topic through four sections, each one highlighting the challenges and opportunities for developing countries, especially emerging ones, as they hold the largest growth potential and the greatest possibility of becoming modern, industrial economies with a higher standard of living (Kolodko, 2002).

Chapter 1 is an overview of the evolution of international economic integration and some of its main concepts. It starts by offering a historical background beginning in WWII, in which the relevance of different integration processes is highlighted. Next, it describes the different levels of integration, explaining the benefits of each. The third section presents the main trade barriers and analyzes the advantages and disadvantages of international economic integration. Lastly, the chapter considers the relationship between trade and development as viewed through the lenses of the aid for trade and trade for trade approaches.

As a complement to the first section, Chapter 2 explores the Multilateral Trading System. First, it provides the World Trade Organization (WTO) background. It then looks at its definition, principles, and functions, emphasizing the most controversial topics in the international trade arena, for example, the Government Procurement Policies, the Sanitary and Phytosanitary Measures, and the Technical Barriers to Trade. The chapter ends with an explanation of the Trade Facilitation Agreement and a forecast of the organization’s future.

Next, Chapter 3 focuses on describing and understanding Regional Trade Agreements (RTAs). Under the Most Favored Nation principle, if a member of the WTO offers a benefit to another country, it must extend that benefit to the rest of the WTO members. This principle is the cornerstone of the Multilateral Trading System. Among its exceptions, however, are the RTAs, which have proliferated in the world mainly because of countries' pressing needs to associate. Knowledge of such regionalization is relevant due to its implications for globalization and business relations. Additionally, understanding the integration processes and their resulting opportunities can differentiate success and failure in internationalization activities. For some countries, however, economic integration is not a priority; therefore, the chapter ends with a discussion on the drawbacks of this process.

Following the increasing number of RTAs that have been signed and ratified, Chapter 4 describes Global Value Chains (GVCs) as a new way of fostering economic development in any type of country. Thus, the section defines GVCs and explains their implications on trade dynamics. After outlining the new challenges from the COVID-19 pandemic outbreak and its resulting lockdowns, it describes strategies to reconfigure GVCs under uncertainty.

Throughout each of the chapters, there are questions designed to test the comprehension of each topic. Moreover, at the end of each section, students will find interrogations and exercises to help them consolidate their learning process. The book ends with a set of conclusions emphasizing the recent growth of most developing economies that have changed free trade geopolitics and how the new world relations bear both challenges and opportunities for these types of economies.

Chapter 1. An Overview of International Economic Integration

1.1 Pedagogical framework

1.1.1 Learning outcomes

After reviewing this chapter, the student will be able to:

• Recognize the historical events that determine the relevance of international economic interactions.

• Describe levels of integration and understand the characteristics, benefits, and challenges of each one.

• Identify different trade barriers.

• Establish pros and cons of international economic integration.

• Understand the relationship between international trade, economic integration, and development.

1.1.2 Overview

Currently, world interactions are defined by interdependency, and international trade has become one of the most vivid examples of collaboration and shared needs. From a positive perspective, research and economic data have shown the benefits of free trade just as presented by neoclassical theories, but, as new trade theorists argue, the downsides have also been apparent. Since the beginning of the 21st century, the world has been witnessing large economic crises, from the Wall Street breakdown in 1929 and the impressive growth and expansion of emerging markets into multinationals to significant ups and downs in commodity prices, the proliferation of Regional Trade Agreements (RTAs), and the waves of protectionism in different parts of the globe. With such a changing scenario as a backdrop, this chapter will provide relevant definitions, historical facts, and main features to understand international economic integration. And rather than predicting the future, it will shed light on recent events that will help to shape the way we see and understand international economic relations.

1.1.3 Outline of key concepts

The end of World War II (WWII) signaled the beginning of new trade relations in the modern and contemporary era. Having twice experienced destruction, European countries decided to work together to rebuild their economies and work for their populations’ well-being. On the one hand, it has been said that countries that trade do not fight, and through the years, this seems to have been so; the world has not witnessed any other conflict as significant as the one that ended in 1945. On the other hand, 2016 saw concerns begin to arise regarding the political reorientation of the United States, the world's biggest economy at the time, as the country became more protectionist and local-oriented at all levels. New socio-political challenges such as the pandemic in 2019 and the war between Russia and Ukraine show difficult times to increase interest in integration.

Moreover, the positive relationship between the rise in international trade flows and GDP growth has been proven true in economies at different levels of development. Nonetheless, inequality reduction in those countries is still a pending task. There has always been a struggle between free trade and protectionist measures in the quest to reach a fair distribution of global commerce benefits among consumers, companies, and countries. It is not yet clear whether any of those policies are better. Still, their strong influence on a country’s development and relevance in defining its international relations is undeniable.

This dichotomous and ever-changing scenario poses a fundamental challenge for company owners who need to make business decisions. The message through these pages is that although it is almost impossible to predict the future, it is possible to learn from the past, minimize the adverse effects of internationalization, and maximize the opportunities that a globalized world offers. While countries and historical conditions may define trade relations, what we do with what we know is a personal decision. Thus, think of this chapter as an introductory nautical chart to navigate the exciting waters of international economic integration.

1.2 Historical background

The end of WWII resulted in a need for reconstruction in most European countries. Moreover, western economies claim the establishment of a new world order. Since then, international economic integration has been one of the ways to strengthen cooperation efforts. An example is the European Coal and Steel Community (ECSC) , an organization created in 1951 to regulate the industrial production of six countries under one centralized authority. It is the predecessor of the current European Union. Years before, in 1944, the Bretton Woods Conference , formally known as the United Nations Monetary and Financial Conference, looked to regulate the international monetary, financial, and trade order. The first two objectives were possible through the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).

However, the third goal, to regulate trade, was not achieved since the intended International Trade Organization (ITO) failed. Nevertheless, it was possible to rescue part of the agreements, and in 1947 the General Agreement on Trade and Tariffs (GATT) was established. Until the creation of the WTO in 1995, GATT governed international trade. It started with the liberalization of goods; then, more topics were included in different rounds. Since then, international trade has been a synonym for economic stability and growth. In the following paragraphs, we will use information from UNCTAD, the World Trade Organization (WTO), and local agencies and newspapers to present a summary of this topic’s most relevant historical facts.

Between 1950 and 1973, world trade grew at an average annual rate of almost 8% after countries’ partial recovery from WWII. The reason for this trend was a steady decline in trade costs due to improvements in transportation, higher levels of investment, and accelerated productivity growth. In the case of developed economies, there was an increase in intra- and inter-industry trade at a regional level. In contrast, in developing markets, the trade structure remained dominated by commodity exports to more prosperous economies, which accounted for an average of two-thirds of their total exports at the end of the period.

The 1973-1986 period was characterized by a series of internal and external shocks, which created comparable difficulties for both developing and advanced countries. On the one hand, some African and Latin American economies experienced the consequences of the so-called lost decade, which included general economic instability, high external debt, and a decrease in international trade. On the other hand, developed economies saw a general slowdown in their growth rates. The exceptions included the largest, newly industrialized economies (NIEs), whose market shares in manufacturing exports expanded, and oil exporters, who benefited from the terms of trade gains.

The years following 1986 witnessed many political and trade transformations. A large portion of the developing countries was still adjusting to the debt crisis, and their import substitution industrialization (ISI) strategies began to be replaced by more export-oriented policies. In addition, the year 1989 ushered the end of the Cold War and the East-West division, which meant the rise of a new world order dominated by the liberal ideology. Furthermore, the Uruguay Round, which was ended by the creation of the World Trade Organization in 1995, began to evolve at a more rapid pace.

During this period, the dynamic interactions between state-targeted industrial sectors, exports, and investment resulted in a powerful trade acceleration for East and South-East Asia. The same strategy, combined with a more substantial presence of state-owned enterprises (SOEs), allowed China to export more than 13 percent of the world’s goods in 2016. This growth in China (on top of the first tier of NIEs) was associated with a reduction in the developed countries’ gross merchandise exports from nearly three-quarters in 1986 to just over one-half in 2016. It is important to highlight that there were no similar success stories in other parts of the developing world. In fact, in the rest of the developing economies, trade under hyper globalization strengthened the economic weight of extractive industries, changing from almost nine percentage points of the aggregate domestic value-added exported in 1995 to 21.5 percent in 2011. Specifically, in Latin America, the 1990s were a period of structural change with technological upgrading, but this pattern was partly reversed during the commodity supercycle. As the commodity price boom receded, Latin America's trade structure returned to the position it held in the late 1990s. Figure 1.1 shows the export structure of a few selected developing regions by technological levels to help us better understand the evolution of the composition of trade.

Figure 1.1 Export structure by technological levels in selected developing regions, 1990-2016 (percentage and trillions of dollars). Source: UNCTAD (TDR 2018).

An essential characteristic of 21st-century international trade dynamics is that until 2019, and to an even more considerable extent than domestic markets, global exports were dominated by very large companies, most of them Transnational Corporations (TNCs). Thus, export distribution was highly skewed in favor of the largest firms, especially in the case of G20 emerging economies and developed countries. Furthermore, during the end of the 20th and the beginning of the 21st century, there were barriers to competition hidden at the heart of free trade treaties. However, since 2016 the world has witnessed a shift towards protectionist measures, fostered by governments that believe in local production as a means for economic growth. In addition, the COVID-19 pandemic has slowed down international good transactions to their lowest levels in decades.

Historically, and despite today’s exceptional circumstances, the need for in-deep integration and the specification of rules regarding tariff and non-tariff barriers, intellectual property rights, services, and other relevant topics between countries has resulted in the proliferation of Regional Trade Agreements (see Chapter 3). Because such RTAs imply different degrees of commitment and because many of them have already been signed and ratified, the next section will explain the various integration stages.

Learn yourself: The influence of history

Are there any other historical events that you think should be included to understand international economic integration dynamics? What about your own country’s influence on those dynamics? After this overview, what do you think could be learned from history to solve current international problems?

1.3 Stages of Economic Integration

Integration has a logical order of depth, depending on the degree of liberalization commitment between partner countries (see Figure 1.2). They, of course, must face the fact that there is a closeness between them, whether it is geographical or otherwise, since economic, administrative, and even cultural aspects can play a fundamental role in determining business relationships.

Figure 1.2 Stages of integration. Source: Authors' own elaboration.

In principle, proximity, neighborhood, and sharing a border increase the probability of having business relationships. A common language and shared traditions and customs (religious and/or ideological) also entail a propensity to increase trade. Additionally, a nation’s high income could attract the niche (not sophisticated) products of less developed countries. Finally, national regulations can facilitate/restrict the transit of goods or the provision of services between countries.

For the sake of theory application, a distinction must be made at this point between cooperation and integration. As a rule, economic cooperation relations (AID FOR AID) eventually lead to integration processes (TRADE FOR TRADE) (Tangermann, 2002). In this order of ideas, trade cooperation can be