Essay Sample on International Business: Regional Economic Integration

Introduction

Today, many countries are entering into agreements with others to upgrade the level of cooperation through common rules and institutions. Regional economic integration has become a key strategic framework for fostering economic growth through access to major markets. When a country enters in regional economic integration, there are benefits and impacts on how firms operate in international business. To illustrate this point, this paper shall examine Italy's participation in the European Union (an Economic Union) and the North American Free Trade Agreement (NAFTA), and how these economic integrations influence the participant countries.

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Italy's Background

Italy has been a member of the European Union (EU) since the years immediately after the Second World War. In fact, it is one of the six founder member states. Through the years, Italy has maintained a commitment to the goal of European integration. The country has adapted to the requirements of the integration including taxing demands and fulfilling treaty obligations.

Government Policy

The government of Italy has implemented significant economic policies in a bid to aid economic recovery. The government has extended expansionary measures from previous years while continuing to add new incentives meant to promote innovative industrial investments. The government policy has aided in reducing the cost of employing young people and eliminating poverty. Also, reforms have enhanced market flexibility with increased incentives to offer long-term contracts. In regard to tax rates, the government policy has particularly maintained low tax credits for low-income earner to diminish inequality. In regard to EU, there has been a broad pro-European consensus among Italian politicians which has also been endorsed by the public.

Economic System

The large part of the Italian economy is driven by the manufacture of high-quality consumer goods. These products are produced by small and medium-sized enterprises that are family owned. The entire economy of Italy is dominated by small and medium-sized business enterprises (SMEs). In fact, 99% of Italian businesses are SMEs producing 68% of Italy's Gross Domestic Product (GDP) (Export.gov, 2018). The SMEs contribute about half of the total employment and one-third of value to the economy. These SMEs constitute the larger market economy of Italy.

GDP

Italy is ranked as the 8th world's largest economy. It had a GDP of $1.9 trillion as of 20117. Although the country was emerging from recession in 2015, its GDP remained 5 percentage points below its pre-crisis peak. In 2017, the country's GDP experienced a growth of 1.6%, and it was projected to grow at a rate of 1.5% in 2018 (Export.gov, 2018).

Political Regime

The government of Italy is organized as a parliamentary republican. The sitting government was formed in the spring of 2018 after the League parties and Five Star Movement came together to form Western Europe's first populist government bringing to an end the three-month political deadlock that had ensued following inconclusive elections (Export.gov, 2018). The populist government has set its agenda aimed at boosting welfare spending, cutting taxes, and overhaul EU rules on budget and immigration (BBC News, 2012).

Foreign Trade Policies

Italy exports most of its products to EU and non-EU countries including the United States, and as such has maintained positive foreign trade policies. Italy adopts a common trade policy like the rest of the EU members where imports from non-EU nations attract a common tariff levy. In addition, Italy has a liberal import regime where import licensing is less common. The government requires certain products such as machinery, telecommunication terminal equipment, construction devices, and electrical equipment among others to meet specific quality standards.

Regional Economic Integrations

EU

Background. The EU traces its origin to the Second World War error when the six founding nations (France, Belgium, Italy, Germany, Netherlands, and Luxembourg) thought of a uniting block that would end the frequent and bloody wars among European countries. In 1957, the founding countries signed the Treaty of Rome which created the European Economic Community (EEC) to provide a common market. Between 1960 and 1969, European countries realized tremendous economic growth, and they decided not to charge customs duties when trading with each other. They also agreed on joint control over food production to ensure each country had sufficient food. In 1973, the United Kingdom, Ireland and Denmark joined the bloc. It was also during the 1970s that the EU introduced a regional policy to pump money for developing poor areas as well as the enactment of environmental laws. During the 1980s and following the fall of Berlin wall, EU expanded across Europe with trade tariffs almost abolished among members states who even adopted a common currency, the euro. Today, the EU has 28 members (European Union, n.d)Policies. The EU has enacted several policies (amounting to 287 in total) that are binding to the member states. The EU policies are divided into two: internal (common policies) and external policies. The internal policies directly impact on the citizens in member states as they cover issues such as food safety, agricultural policy, and environmental standards. External policies, on the other hand, focus majorly on political cooperation among member states, and they include policies on the enlargement of the EU, aid and humanitarian assistance, trade and external relations with countries outside the bloc, and promotion of peace, democracy and stability beyond EU borders. The policies are implemented through the Commission, EU parliament, and the Council which is the three main EU institutions (European Commission, 2019).

Functions and contributions. The EU mainly serves to create and implement laws and regulations for integrating members states in the economic union. The union promotes peace, freedom, and well-being of the citizens. It promotes human dignity, democracy, equality, adherence to the rule of law, and observation of human rights among member states. It has contributed to stability, unified currency, mobility and economic growth within the region. EU has also promoted transparency and trade in Europe (European Union, 2019).

Challenges. Integration in the EU poses some challenges. First, implementation of fiscal policies among the member states has experienced time lags making it difficult to successfully implement within a given time frame. This has resulted in considerable fiscal imbalances among the member states. Second, the EU experiences a significant challenge in implementing a key policy that ensures a robust and stable development of financial markets among the new member states. The challenge is establishing supervisory bodies to overlook the operations of the financial market players. Third, the EU experiences a challenge in trying to establish the right balance between individual incentives and social considerations that maximize economic welfare. It is difficult to adjust wages across the regions in a uniform manner to reflect a close sectoral and regional productivity difference given the varying economic development status of different member states (European Central Bank, 2019).

NAFTA

NAFTA is an economic integration that went into effect in January 1994 with the aim of eliminating trade tariffs among three countries: Canada, Mexico, and the United States. NAFTA opened up the Mexican market for Canada's and the United States exports. It also opened up increased imports from Mexico and Canada into the United States. The NAFTA agreement, besides trade agreements, also had provisions for labor and the environment.

NAFTA went into effect with various policies. One of the policies was the removal of trade barriers among member states. The union removed all tariffs and most non-tariff barriers on goods produced and traded within North America for 15 years since inception (Villareal & Fergusson, 2017). Another policy was tariff changes where the member states were expected to alter their tariffs on imports from the countries partnering in the integration bloc. For example, in 1993, imports from the United States into Mexico attracted on average 10% tariff charges but dropped to 2.07% in 1994 following the establishment of NAFTA (Villareal & Fergusson, 2017). Trade barrier removal ad tariff changes affected industries across the economies of the involved countries such as textile and apparel industries, automotive, and agriculture. NAFTA also allowed for trade liberalization, enhanced foreign investment, and dispute settlement procedures. It also comprised environmental protection provisions contributing to the mitigation of climate change.

Although NAFTA was significant in its comprehensive nature with groundbreaking provisions that promoted trade and job creation among members states, the integration bloc has experienced lethal challenges. The main challenge has been the United States President Trump's administration which has recently been threatening to withdraw altogether from the agreement (Villareal & Fergusson, 2017). Mexico has also reiterated its possibility of withdrawing from the agreement if the negotiations prove to be least beneficial (Villareal & Fergusson, 2017). NAFTA was challenged from the beginning as it involved a developing country and developed ones. The implication was that the developing country would benefit most because of the preference of the firms in the developed countries to operate their businesses from the developing partner where wages and overall production costs were low (Villareal & Fergusson, 2017). When that happened, the developed countries would lose employment due to worker displacement.

Influence of Economic Integrations on Participant Countries

Influence of the EU on Italy

Economic integration influences a participating country in different ways. As earlier highlighted, EU concerns with both internal and external policies as well as issues around peace, human well-being, economic growth, freedom, and adherence to the rule of law. Maintaining a wide spectrum of influence over member states, the EU has had a significant impact on overall matters both in political and economic dimensions. For example, from 1990 president Silvio Berlusconi drafted the popular "contract with the Italians" which has acted as a framework for the following governments in drafting policies. Berlusconi made five pledges to the electorate which included reducing unemployment, reducing crime (non-economic goal), increasing minimum pensions, reducing taxes, and to build large-scale infrastructures (Keynesian economic policy) (Quaglia & Radaelli, 2007). As the Italian government was implementing the policy on crime reduction, the EU interjected issuing arrest warrant procedures which the Italy government had to accept though reluctantly (Quaglia & Radaelli, 2007). Perhaps the EU wanted to ensure that whatever laws implemented by the Italian government regarding crime reduction were in tandem with rule of law and guaranteed freedom of the citizens as well as promoting dignity and protecting human rights.

Also, in the remaining four economic policy areas, the EU intervened as a direct constraint. The reduction on taxes, increase of minimum pensions, and construction of large infrastructures was constrained in aggregate terms (fiscal policy) by the Stability and Growth Pact (SGP), which established binding ceilings on the deficit to GDP ratio (Quaglia & Radaelli, 2007). However, the Italian government has tried to ignore the EU directives from time to time. For example, it has temporarily been exceeding the ceiling set by the Pact (Quag...