Global Business Environments and Trade Integration Levels

The Political, Economic, and Legal Environment

Political System Definitions

• Democracy: Characterized by freedom of opinion, regular elections, an independent court system, and a relatively non-political bureaucracy and defense infrastructure.
• Totalitarianism: Includes communism, theocratic totalitarianism, and secular totalitarianism.

Economic System Types

• Market-Driven Economy: Based on private ownership, where goods and services are allocated based on consumer demand.
• Centrally Planned Economy: Based on public ownership, where goods and services are allocated based on a plan formulated by a committee.
• Mixed Economies: Feature both privately-owned and government-owned commercial entities. The government usually owns utilities.

Economic Integration and Business Activity

Economic integration brings a shift in business activity through the establishment of transnational rules and regulations designed to enhance trade and cooperation among countries. This process can result in either trade creation or trade diversion.

Trade Creation vs. Trade Diversion

• Trade Creation: Focuses on goods and services for which members have a comparative advantage. Efficient, low-cost producers in member countries gain market share.
• Trade Diversion: Decreased trade with non-member countries in favor of trade with each other. This can lead to a shift of production and exports from more efficient non-member countries to less efficient member countries that are being protected by tariffs or other barriers to trade.

Benefits of Integration

• Specialization and increased competition among member countries often result in greater efficiency, lower prices, and increased exports to non-member countries.
• Internal and external economies of scale are achieved.

Drawbacks of Integration

• Outside countries are less competitive with group member countries.
• In the short run, member countries with greater efficiency may dominate certain industries inside the group.

Levels of Economic Integration

1. Free Trade Area: Barriers to trade are removed among members.
2. Customs Union: Tariffs are eliminated, and a common trade policy toward non-member countries is established.
3. Common Market: No barriers to trade, a common external trade policy, and mobility of factors of production among member countries.
4. Economic Union: Features a unified monetary and fiscal policy, as well as a single currency.
5. Political Union: Involves the introduction of a single government.