Some Notes on the Dynamics of International Economic Integration

Abstract

In order to understand what happens when a number of countries join together in a customs union or a free trade area, one must start with the buying and selling decisions of the individual business firms. The average buyer may be assumed to be interested in a change of supply when $-\Delta D_{i}>\Delta I_{i}+\Delta C$ where Di is the direct purchase costs, Ii the indirect purchase costs which can be directly allocated to the product under consideration, and C other costs, which although they are not necessarily directly allocatable to the product in question, can be influenced by a change from one supplier to another. The sum of the last two items is called the costs of change. Similarly, the average selling firm may be interested in a new market alternative (j) when the expected increase in the total net-sales receipts (Σ i=1nSij) is greater than the costs of change, which in this case is equal to the sum of the increase of the total indirect marketing costs (Σ i=1nMij) and the other costs (Σ i=1nCi) $\Delta \sum_{i=1}^{n}S_{ij}>\Delta \sum_{i=1}^{n}M_{ij}+\Delta \sum_{i=1}^{n}C_{i}$ In both cases the costs of change will be different whether we consider (1) a change of product, but the new product is bought from or sold to a partner with whom the firm already has business connections, (2) a change of partner, but this partner is located in a country in which the firm is already doing business, or (3) a change to a new partner in a country where the firm has never done business before. The establishment of a customs union or a free trade area will affect not only the direct purchase costs or the total net-sales receipts, but also the costs of change. The effects may vary over time, and as between different kinds of products, different countries and different types of firms. They may also lead to different kinds of integration patterns. A statistical study of the Swedish import of engineering products after the creation of the EFTA illustrates that the kind of concepts and relationships developed may be of use for the formulation of specific problems for further research. May be also for a general understanding of the dynamics of the integration process itself.