Regional Economic Integration

What are the economic and political arguments for regional economic integration? Given these arguments, why don’t we see more substantial examples of integration in the world economy? Unrestricted free trade allows countries to specialize in the production of goods and services that they can produce most efficiently. If this happens as the result of economic integration within a geographic region, the net effect is greater prosperity for the nations of the region. From a more philosophical perspective, regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the World Trade Organization. The political case for integration is also compelling.

Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between neighboring states. The potential for violent conflict between the states is also reduced. In addition, by grouping their economies together, the countries can enhance their political weight in the world. Despite the strong economic and political arguments for integration, it has never been easy to achieve on a meaningful level. There are two main reasons for this. First, although economic integration benefits the majority, it has its costs. While a set of nations as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. The second impediment to integration arises from concerns over national sovereignty.

How should a firm that has self-sufficient production facilities to in several ASEAN countries respond to the creation of a single market? What are the constraints on its ability to respond in a manner that minimizes production costs?

The creation of the single market means that it may no longer be efficient to operate separate production facilities in each country. Instead, the facilities should either be linked so that each specializes in the production of only certain items, or several sites should be closed down and production consolidated into the most efficient locations. Existing differences between countries as well as the need to be located near important customers may limit a firm’s ability to fully consolidate or relocate production facilities for production cost reasons. Minimizing production costs are only one of many objectives of firms, as the location of production near R&D facilities can be critical for new product development and future economic success. Thus what is most important in location decisions is long-run economic success, not just cost minimization.

Case Study (Logitech)

In a world without trade, what would happen to the costs that American consumers would have to pay for Logitech’s products? In a world without trade, the costs that American consumers would have to pay would be very high. The product that the case study gives for example, Wanda, retails for $40, of which only $3 is the production cost from China. This $3 cost would rise immensely if production was in the United States because the American economy demands high wages.

Explain how trade lowers the costs of making computer peripherals such as mice and keyboards. If the United States were to build a product entirely domestically, the retail price would not be feasible to most consumers. With trading in place, it allows for economies of scale. The technology can be developed in one country, the production in another country, and the assembly in yet another country. The shipping costs are much less than it would be to perform these tasks in one country. This is called absolute advantage, where someone is great at one thing. With this in mind, you will get a product that has the best resources available at the lowest cost, which is a comparative advantage. Finally, specialization is where everyone is doing what they do best and pulling their resources together to make one incredible product.

Use the theory of comparative advantage to explain the way in which Logitech has configured its global operations. Why does the company manufacture in China and Taiwan, undertake basic R&D in California and Switzerland, design products in Ireland, and coordinate marketing and operations from California? Logitech is very brilliant when it comes to comparative advantage. It does basic R&D work in Switzerland with 200 employees, its headquarters are in Fremont, California with 450 employees as well as some R&D, the ergonomic designs are developed in Ireland, and the products are manufactured in Taiwan and China. The comparative advantage is that it is the most cost-effective to break up the business in many different countries that specialize in a certain job.

Who creates more value for Logitech, the 650 people it employs in Fremont and Switzerland, or the 4,000 employees at its Chinese factory? What are the implications of this observation for the argument that free trade is beneficial? The 650 employees in Fremont, California and Switzerland create more value for Logitech. It is where all of the R&D and designs are developed. The 4,000 employees of China add $3 to the Wanda product, which is almost nothing in comparison to the remaining $37. Free trade is beneficial because labor costs can be brought way down.

Why do you think the company decided to shift its corporate headquarters from Switzerland to Fremont? America specializes in R&D. The headquarters were moved because of the company’s global marketing, finance, and logistics operations. That is what Americans do best

To what extent can Porter’s diamond help explain the choice of Taiwan as a major manufacturing site for Logitech?

There are four parts to Porter’s diamond:

• the factor of endowments, which is a nation’s position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry
• demand conditions, which is the nature of home demand for the industry’s product or service
• relating and supporting industries, which is the presence or absence of supplier industries and related industries that are internationally competitive
• Firm strategy, structure, and rivalry, which are the conditions governing how companies are created, organized, and managed and the nature of the domestic rivalry.

Taiwan’s factor of endowments was that it had a science-based Industrial Park in Hsinchu. The demand conditions were that the Taiwanese were already trained to deal with technology. The relating and supporting industries were that Taiwan was the best as building technology at the lowest cost. The firm strategy, structure, and rivalry were that Taiwan had no domestic rivalry; they provided the lowest cost.

Why do you think China is now a favored location for so much high technology manufacturing activity? How will China’s increasing involvement in global trade help that country? How will it help the world’s developed economies? What potential problems are associated with moving work to China?

Chinese laborers are some of the cheapest in the world. Even though the workers are not treated very well, they are starting to rise up and demand more wages. The increase in foreign trade for China has helped to increase their economy. The world’s developed economies will benefit because of the globalization of production. The potential problems are that Americans are losing jobs to foreign markets.