Regional Integration: Definition, Influence & Purpose

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  • 0:07 Many Different Worlds
  • 0:31 International Trade
  • 4:02 Regional Integration
  • 4:38 Regional Integration Types
  • 5:55 Using Integration
  • 7:27 Lesson Summary
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Lesson Transcript
Instructor: Rob Wengrzyn
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

Exchange rate, taxes and transportation need to be considered when purchasing goods internationally.
Considerations of regional integration

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 known 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:

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