Introduction
A trading bloc refers to an agreement between different countries that reduces barriers among member states. They can be in the form of stand-alone treaties amongst some nations or part of a regional organization. These institutions result in trade liberalization and creation between states as they are treated favorably compared to those who are not members. Two significant trade blocs globally include the European Union and the Pacific Alliance 2013. The EU is an economic and political organization of twenty-seven states located mainly in Europe. It covers a population of around four hundred million people.
The existence of the European Union has enabled the creation of a single internal market through a set of laws that are applicable in every member country. The Pacific Alliance is a trade bloc established by four nations that border the Pacific Ocean, including Peru, Chile, Mexico, and Colombia. It was created to enhance regional incorporation and aim toward full freedom in moving goods, capital, people, and services between the concerned states. The essay studies the implications of the two trade blocs, their impact on a firm’s investment decisions, and opportunities available to international business in both organizations.
Implications of the European Union and the Pacific Alliance 2013 for International Business
European Union
The EU trade bloc has proven to be helpful as it has positively impacted international business, especially after introducing the Euro currency. It offers various benefits for businesses and economies of nations that utilize it. For instance, it ensures price stability and economic growth and allows an easier, safer, and cheaper way of buying and selling within the euro region and trading with the whole world. The currency has eliminated expenses incurred when exchange rate fluctuations are experienced within Europe (Asteriou & Spanos, 2019). The lack of costs during currency rate changes, guarantees that businesses and consumers in these places are protected from costly shifts in foreign exchange markets which undermine confidence before discouraging investment and bringing instability.
Currency markets consist of various markets since trade between different currencies constitutes a market. Fluctuations in currency naturally occur due to floating exchange rates which is normal for most great economies. Several factors impact the rates, for example, the economic performance of a nation, capital flows, and interest rate differentials. It is important to understand that the international monetary system enables the international buying and selling of products. It consists of fiscal institutions, investors, and multinational corporations, who determine how to conduct trade despite the possibility of having different currencies. A weaker domestic currency is the cause of the high prices of foreign items, while a stronger one leads to reduced prices.
The Pacific Alliance 2013
The Pacific Alliance is a helpful trade bloc for the people and businesses within the covered region, that is, the four countries. It has helped in conducting international business by reducing trade barriers between member countries. Based on the comparative advantage, one of the theories of trade and economic development, the barriers damage the global economy and decrease general economic efficiency (Kuik et al., 2019). The majority of them have origin in a similar ideology whereby imposing a cost on business raises the availability or price of traded goods (Nelson, 2022). If multiple states utilize these hindrances repeatedly on one another, it results in a trade war. An example of a barrier is tariffs which affect imports.
According to theory, free trade eliminates every barrier except that which is viewed as needed for national security or health. However, practically even nations promoting this type of business greatly subsidize some sectors, for example, steel and agriculture. When barriers are available, prior to importing or exporting to other nations, one has to understand the restrictions that the government enforces (Nelson, 2022). It is necessary as well to ensure that they do not violate any policies or regulations by confirming which apply to duty or tax. Lastly, a license is required to smooth import or export business and decrease the danger of penalties. The Pacific Alliance has eliminated all these issues that existed in trade between member states before its formation.
Their Impact on a Firm’s Investment Decisions
Regarding investment decisions, individuals desire to work or start businesses in places that allow them to prosper. For instance, trade barriers discourage most investors from certain areas or regions. The stability of an economy can determine whether people will choose to expand their businesses into specific states. The European Union and the Pacific Alliance are two trading blocs that have ensured free trade amongst member states and improved the stability of their economies. Through this, it is possible for citizens of member states to move freely with goods from one nation to another without restrictions that existed before the creation of the organizations. One of the aims of entrepreneurship is earning profits (Asteriou & Spanos, 2019). Thus, the situation mentioned above suggests that costs incurred in the past are non-existent and hence, more earnings for the investor.
Agreements reached to allow free trade contribute to better economic activity and the creation of employment opportunities in member states. They offer various chances of growth for all types of businesses in terms of investment. Apart from reducing and eliminating tariffs, they aid in addressing barriers that would hinder the flow of goods and services, thereby encouraging investors (Nelson, 2022). Regulations on e-commerce, intellectual property, and government procurement improve due to the formation of trade blocs, for example, the EU in Europe and the Pacific Alliance for countries bordering the Pacific. An investor needs to know that their investment is protected as there are established laws to accomplish that. The majority of investors fear establishing businesses in harsher areas toward foreign entrepreneurs.
The economic stability established by the two trade blocs in discussion allows other macro-economic goals to be accomplished, for example, stable and sustainable growth. Additionally, it creates the ideal surroundings for creating employment opportunities (Asteriou & Spanos, 2019). This is attributed to the confidence and certainty created by stability. The result is that all these encourage investors concerning human capital and technology.
Opportunities Available to International Business in the EU and Pacific Alliance
Similar to other trade blocs, the European Union and the Pacific Alliance offer various opportunities to international business, for example, importing and exporting, licensing and franchising, and contract manufacturing and outsourcing. Importing and exporting are among the most prevalent types of international business (Kalman et al., 2019). For most companies, buying goods from another country is the main connection to the international market. Some corporations enter the global field by recognizing an international market for their services and products and choosing to export.
Another opportunity available to international businesses in the trade blocs is licensing and franchising. An organization that desires to enter into a global market fast, taking limited legal and fiscal risks, can make licensing arrangements with businesses outside of their countries. This enables the selling of the producer’s products or using its intellectual property in place of royalty fees (Kalman et al., 2019). For example, someone owns an organization in Peru that sells coffee-flavored popcorn, and they are certain that their product will be greatly accepted in Chile (Kalman et al., 2019). The problem is that they do not have adequate resources to establish a factory in Chile, and choosing to prepare, and transport would prove difficult as the goods would be stale. Instead of quitting and not being able to take advantage of the opportunity, the owner enters into contract terms with a company in Chile. This corporation will utilize the original process of producing the goods, selling them under the Peru organization’s brand name, and paying royalty fees.
Apart from licensing, another opportunity available is expanding internationally to sell franchises. According to an international franchise contract, an organization gives a foreign corporation the right to utilize its brand name and sell its services or products (Kalman et al., 2019). All operations belong to the franchisee, however, he has to conduct business based on the approach developed by the franchiser. The latter is responsible for training, new-item assistance, and advertising. This form of trade is natural for those who plan to expand into international territories.
The third opportunity available to international business in the trade blocs is contract manufacturing and outsourcing. Due to the high costs of domestic labor, many organizations produce their goods in nations where the expenses are lower (Kalman et al., 2019). A company in Germany will reach an agreement with another in Greece to manufacture its products. However, the German owner still retains control of product design and development and labels with the brand name on finished goods. This is greatly witnessed in apparel companies, for example, ZARA.
Conclusion
The essay has looked at the implications of the EU and the Pacific Alliance, their impact on a firm’s investment decisions, and opportunities available to international business in both organizations. On the one hand, the paper shows that the European Union is both an economic and political organization consisting of more than twenty states found in Europe. Its existence is believed to have created one market for member states through a defined set of laws applicable to all of them. On the other hand, the Pacific Alliance refers to a trade bloc that connects four countries bordering the Pacific Ocean: Peru, Chile, Mexico, and Colombia.
Both trade blocs have enabled the establishment of better relations between countries. Additionally, by removing trade barriers and enhancing stability, they have encouraged investors to choose regions covered by them for new projects. The paper has shown that people desire to have businesses in surroundings that guarantee them prosperity when it comes to investment. Hindrances such as tariffs on imports and exports discourage most investors from some places. Lastly, the existence of the European Union and the Pacific Alliance has ensured that there are opportunities available to international business, including import and export, licensing and franchising. Companies can as well outsource labor from countries where the costs are lower.
References
Asteriou, D., & Spanos, K. (2019). The relationship between financial development and economic growth during the recent crisis: Evidence from the EU. Finance Research Letters, 28, 238-245.
Kalman, R., Hedenqvist, P., & Vlissingen, J. M. F. V. (2019). Response to Iatridou et al., “Mapping the teaching of laboratory animal science and medicine in the European Union and European Free Trade Area.” Journal of Veterinary Medical Education, 46(1), 1-2. 10.3138/jvme.0818-092
Kuik, O., Branger, F., & Quirion, P. (2019). Competitive advantage in the renewable energy industry: Evidence from a gravity model. Renewable energy, 131, 472-481.
Nelson, M. (2022). The Pacific Alliance: regional integration as a neoliberal discipline. Globalizations, 19(4), 571-586.
Appendix
Comparative advantage theory dictates that someone has the edge over another if they can produce an item while incurring lower costs.