Business 101: Principles of Management

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Regional integration is when a group of countries get together and develop a formal agreement regarding how they will conduct trade with each other. There are many different levels of involvement, and in this lesson, we will review the types and how a manager should understand and match them to his or her company's international needs.

Many Different Worlds

If the world of international trade was a soap opera or a reality show, it would be called 'Many Different Worlds.' There would be a diverse cast of characters, all with different loyalties and alliances. Just like in reality shows, sometimes those alliances would be to their benefit and sometimes not. Well, the same basic principle applies when we are dealing with exporting and importing and add in regional integration.

Basics of International Trade

In its most basic form, international trade deals with importing and exporting of goods and services between countries around the world. Companies in one country purchase and sell goods and services to companies in other countries, and that is international trade. It can and indeed does get a lot more complicated than that, but the goal here is just to give you an understanding of what international trade is.

The most asked question is: 'If I buy something from, say, Japan and ship it all the way over to the U.S. to use in my company, how can that be less expensive than finding someone to make it in the U.S.?' The answer is simple: In different countries around the world, labor can be less expensive. There might be raw materials that are abundant in one country that we cannot find here. Some countries may have more advanced manufacturing capabilities. Exchange rates might be in your favor when buying product from another country. All these reasons add up to making the world a truly competitive place.

One More Piece to the Puzzle

When companies buy and sell products to one another, there are a few other considerations that need to be understood:

• Exchange rate: The value of one currency for the purpose of conversion to another. For example, one U.S. dollar buys .76 Euros. Thus, the exchange rate from dollars to Euros is .76.
• Tariffs: Tariffs are the taxes paid on a product when it enters a market. For example, if the tariff on tires entering Saudi Arabia is 10%, then the purchase cost of the tires plus 10% would be what the buyer pays. It is similar to the tax you pay when you buy something at the store.
• Transportation: As one would expect, this is the charge for transporting the item from one country to another. If a company needs the product quickly, they will ship it by airplane. If not, they will ship it by ocean. Ocean takes longer, but it's much less expensive.

All these factors need to be taken into consideration when a company decides to purchase products from another company in another country. Of all of them, exchange rate is the one that most companies look at first. In our example of the euro and dollar, basically, 76 cents in euros buys one U.S. dollar's worth of goods. This is a 25% savings if someone in Europe buys a product from the U.S. So, let's look at this from a cost point of view:

A German company wants to purchase bolts. They can find them in Germany (from a German supplier) for 1000 euros per pound. They can find them from a U.S. manufacturer for $1000 per pound. If the exchange rate is .75 euros for one U.S. dollar, they could purchase the bolts from the U.S. supplier for 750 euros (or 1000 * .75 = 750). We need to add tariffs to the purchase, so let's add another 8%. We need to also add transportation costs to the purchase, so we can add another 5%.

Thus the breakdown looks like this:

German Supplier	1000 euros
U.S. Supplier	750 euros
	+ 60 euros (which is 8% of 750 for the tariffs they're going to pay)
	+ 37.50 euros (5% of 750 euros for transportation)
	= 847.50 euros

As you can see, it is cheaper for the German company to purchase the products from the U.S. supplier.

Regional Integration

Now that I have explained all this, I am about to un-explain it (if that's even a word). You see, countries got wise to the fact that developing trade alliances using regional integration helps strengthen their trade and, as a group, makes them stronger. Regional integration is a process in which countries enter into a regional agreement in order to enhance regional cooperation through regional structure and rules. The most well know of these are: NAFTA (the North American Free Trade Agreement), which is with the U.S., Mexico and Canada, and The EU (or the European Union), which has 27 member countries in Europe.

Types of Regional Integration

There are several types of integration that are present on the international market:

• Economic integration is the process where the economic barriers between two or more countries are eliminated. It involves specific policy decisions by governments designed to reduce or remove barriers to mutual exchange of goods, services, capital and people.
• Free trade agreement means that the members of the free trade agreement charge each other lower tariffs (taxes when goods are sold from one country to another) than those applicable to non-members; however, there is no free movement of goods within the area.
• A customs union goes further than a Free Trade Agreement and requires its members to implement a common external tariff (or taxes) on imports from outside the union. The aim is to facilitate goods to move freely throughout the union.
• The creation of a common market has a goal of free movement of labor, capital, services and persons. Now, not just products, but people, money and services can move between the member countries freely.
• Finally, we have the establishment of an economic union, which entails a common currency and/or the unification of monetary, fiscal and social policies.

How Managers Use Integration

Depending on the type of integration present, managers can adapt their business operations to make the best use of regional integration. It is important to understand that the regional integrations are setup or formed by the member countries (much like NAFTA was formed by the U.S., Mexico and Canada). It is the manager's goal to understand his or her needs for international sales and match that to the regional integration that is present.

For example, if the product or service has political aspects to it (maybe it's governed by laws that impact how it is produced), a manager would want to work with countries that are part of an economic union, because there are laws in place that are common throughout this type of integration. Thus, as he or she works with all the member countries that are part of that integration, the laws will be the same moving from country to country.

If a manager is only worried about people and products, a common market would be potentially the best type of integration to work with. They want people and equipment to move freely throughout a region and laws are not a concern for them.

Finally, if a manager just wants to sell products overseas and does not have to worry about people moving from one country to another or the social aspect of international trade, then a free trade union or customs union might be the best choice. Though please understand, if all the manager is doing is shipping tin cans around the world, they can work within any of the integration structures as well because all accommodate products more easily then laws and people.

Lesson Summary

How managers work with different types of regional integration depends on the type of business they need to do. What they are selling to a country and what is involved in that sale will determine the best regional integration structure for them to target. Their decision is based on moving people and product and dealing with the legal aspects present. Once they understand what they will need to sell their products overseas (people, laws, product or some combination of these three aspects), they can select the best form of regional integration and work with countries that are members of that regional integration type.