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With reference to international trade and investment theory, briefly outline the main purpose of the European Union and the significance of the Single European Market for an EU-based business.
International trade is the exchange of goods and services between countries. International trade is distinguished from domestic trade since it takes place entirely within a single country. International trade is sometimes called as ‘world trade’ or ‘foreign trade’ (International Trade).
While studying about the investment theory we need to analyze why nation’s trade and gain a competitive advantage, why and how firms internationalize and how do they sustain competitive advantage in the international arena. When we talk about a country Comparative advantage, they are the Superior features of a country which provide it with unique benefits in global competition derived weather from national endowments or deliberate national policies. It is concept that helps answers the question all nations can gain and sustain national economic superiority. Competitive Advantage of a country’s firm is distinctive assets or competencies of a company derived from its size, assets, innovation strengths which are difficult for its competitors to duplicate or imitate. In other words the concepts tells us how a firm can gain and sustain distinctive competence vis a vis competitors. (Theories of International Trade and Investment, 2008) Single Market – European Union
The European Union is a group of Western European nations working to unite the economic resources into a single economy. It is a group of 27 member states which have been united to create a political and economic community throughout Europe. The European Union imports and exports more than any one country in the world. The community’s chief trade partner is the United States. The community have special trade agreements with many other countries (European community).
The main purpose behind European Union is to provide better economy to the poorer countries in Europe. It also means that trade between these countries is cheaper. Apart from this the European Union aims to promote economic and social progress and a high level of employment opportunities, thus maintaining sustainable development and a better standard of living and Gross Domestic Product of the economy. Through the establishment of economic and monetary union, they create an area without internal frontiers, which includes a single currency and it makes trade much easier. One of the reasons behind the formation of European Union was to provide a common defence phenomenon. In this way all the members will be secure in terms of defence. Through the introduction of the citizenship of Union, the rights and interests of the nationals are strengthened and protected (Folketinget).
Internally the European Union has abolished trade barriers, experiencing a common currency and is constantly striving towards the convergence of improved living standards. The European Union faces a lot of difficulty in devising and enforcing common policies because of the differences in the per capita income among member states. Between 2004 and 2007, 12 countries were added to the European Union which are generally less advanced than the remaining 15 countries. Being a large Union, it has a couple of transnational issues. The European Union itself has no border disputes with the neighbouring countries. But technically Estonia has no land agreements with Russia; on the other hand Slovenia disputes its land and maritime boundaries with Croatia. Similarly Spain has territorial and maritime issues with Morocco and with the UK over Gibraltar (Central Intelligence Agency).
A single market is basically a trading bloc which is composed of a free trading area, which has common policies and it there is freedom of movement for the factors of production namely land, labour, capital and enterprise. The main objective is that these factors of production are mobile. All the trade barriers, whether it be in the form of taxes which are fiscal, physical such as the borders and technical barriers are removed so that trading policy becomes easier. In this way the countries can form a common economic policy. The formulation of a single market leads to the freedom of movement of all the factors of production because of which the factors become economically efficient further increasing productivity. A single market economy can prove to be competitive as it makes the existence of monopolies very difficult. This means that those companies who are producing inefficiently have to close down and as a result will suffer loss of market share.
To achieve the single market phenomenon has been a gradual and steady process The 1957 Treaty establishing the European Economic Community made it possible to abolish customs barriers within the Community and establish a common customs tariff to be applied to goods from non-EEC countries. This objective was achieved on 1 July 1968. However, customs duties are only one aspect of protectionist barriers to cross-border trade. In the 1970s, other trade barriers hampered the complete achievement of the common market. Technical norms, health and safety standards, national regulations on the right to practice certain professions and exchange controls all restricted the free movement of people, goods and capital.
Single market within the European Union was established under the Single European Act, it was the core of the process of European economic integration, involving the removal of obstacles to the free movement of goods, services, people, and capital between member states of the EU. It covers, among other benefits, the elimination of customs barriers, the liberalization of capital movements, the opening of public procurement markets, and the mutual recognition of professional qualifications. It came into effect on 1 January 1993 (Single European Markeyt).
The European Union commission has authority over a range of areas of economic policy which helps them to regulate the single market. Its regulations are adopted into national law only when it is passed down to the national governments via directives. However, we cannot describe the European Union as a true single market because it does not have a unified taxation or welfare system. The single currency is not practiced by all members of the European Union. It is not even successful because some members such as the Schengan Convention have opted out of the economic policies (EU facts, 2010). Despite of the fact the countries like Italy and France has signed a treaty with the EU, it still is a protectionist and is not implementing in full new single market rules. This is an offending act. Yet Italy has to abolish a set of technical rules, which restricts how trailers might be attached to tractors. Similarly there are threats of possible cultural differences too. For instance if Muslim states join may be they won’t be able to put up with the adjustments to the approach of women to meet the standards of the European Union. Then there could be destabilising effects if the criminal elements exploit the single market by not adhering to the economic policy.
Significance of the Single European Market for an EU-based business is that single market is no doubt the greatest achievement of the European Union, although single market is not yet turned into a single economic area some sectors i.e. the public services still are subjected to national laws these countries are also have the responsibilities of taxations and social welfare.EU has put in place many policies to make sure market liberalization caters to all the markets and the consumers of the EU member countries. However, a wider market is available for both the consumers and the producers. Consumer protection has increased due to the standard policies implemented by the European Union in order to protect the consumers from being exploited. Regular checks are made regarding the protection of the standards. Common standards are placed on goods and services, which means that goods don’t have to be retested once they reach other member states. This increases the knowledge of both the consumers and the producers and eventually leads to creating greater competition among firms. Workers are given a lot of preference and protection. They are mobile and they can work with the same rights in any of the member states. This eventually leads to less disparity in wages among member states, and it is much more convenient for the labours to locate for jobs (bizled).
With reference to such EU-based companies, outline:
The impact of emerging countries such as China, India, Russia or Brazi
BRICs to be widely known as, these include countries such as Brazil, Russia, India, China and the South Africa. China formally invited South Africa in 2010, and it is one of the first African countries to join the BRICs. These are all countries which are deemed to be all at a similar stage of economic development. They all belong to the third world countries. These countries have attracted the most investor attention, providing a lot of opportunities for the investors to invest in these countries (Bloomberg Business Week, 2005). These countries hold 40% of the world population and account for 20% of the Gross domestic product.
The emerging of these markets reflects self-confidence. The largest world markets are working to recover fast and they and they have started to think that the recession may mark as another milestone in the worldwide shift of economic power away from the West. When there was a recession in most parts of the world, India and China accounted for no less than half the worlds increase in wireless technology. In Brazil although the GDP fell slightly in the first quarter, but still it fell is a smaller ratio in Brazil than in Latin America (The Economist).
It has been predicted that the agricultural output will grow three times as fast in the BRIC countries than in the other major developed countries. For world agricultural production, developing countries will provide the main source of growth. It has been expected that due to the rising incomes, there will be a shift away from the staple food towards meat and processed foods that will favour livestock and dairy products. The projected growth of all exports and imports is expected to increase. It also illustrates how, despite their divergent economic bases, the economic indicators are remarkably similar in global rankings between the different economies. It also suggests that, while economic arguments can be made for linking Mexico into the BRIC thesis, the case for including South Korea looks considerably weaker. A Goldman Sachs paper published later in December 2005 explained why Mexico was not included in the original BRICs (BRIC).
Strategies in which UK and EU companies may benefit from the rise of these countries
The European Union is the world’s biggest trader, accounting for 20% of global imports and exports. Open trade among its members underpinned the launch of the EU nearly 50 years ago and has brought growing prosperity to all its member states. The Union therefore takes a lead in efforts to open up world trade for the benefit of rich and poor countries alike.
Increased trade is likely to boost world growth to everybody’s advantage. It brings consumers a wider range of products to choose from. Competition between imports and local products lowers prices and raises quality. The EU believes that globalisation can bring economic benefits to all, including the developing countries, provided appropriate rules are adopted at the multilateral level and efforts are made to integrate developing countries in world trade.
That is why the European Union is negotiating with its partners to open up trade in both goods and services. The EU seeks to help developing countries by giving them better access to its market in the short term, while allowing them more time to open their own markets to European products. At the same time, the EU is reforming its agricultural policy – and this too will benefit developing countries (htt1).
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