Student Name : Sebastien Cubbon
Student Number : 11852097 Programme : MSc. Political Economy
Supervisor : Dr Sebastian Krapohl Second Reader: Dr Sanchez Salgado Title : The ‘New Regionalism’ as a Rent-Seeking Platform for TNCs: Evidence from
European, North American and South American Automotive Sectors
Word Count: 19, 901 Submission Date : 22/06/2018
TABLE OF CONTENTS
Acknowledgements….……… .3
List of Figures and Tables ……….. .4
Abbreviations ….……….…… 5
Abstract ……….……….……….………6
Introduction ………6
Section I: Literature Review………….……….9
Section II: Theoretical Framework ……….……13
II.i. Modelling a Firm’s Incentives.……….………13
II.ii. Hypotheses……….18
Section III: Research Design ……….………20
III.i. Design and Structure……….20
III.ii. Case Selection……….……… .20
III.iii. Data Analysis………….………….………….………22
III.iv. Availability of Data……….……… 23
III.v. Potential Limitations………….………….……….……… 24
Section IV: Europe ………. 26
IV.i. The Role of TNCs and Preferential Clauses………26
IV.ii. Firm-Level Gains from Regional Integration ……….28
IV.iii. Rent-Seeking Behaviour………33
Section V: North America: ..………..………. 36
V.i. The Role of TNCs and Preferential Clauses……….….36
V.ii. Firm-Level Gains from Regional Integration ……….42
V.iii. Rent-Seeking Behaviour……….47
Section VI: South America:……….……. .51
VI.i. The Role of TNCs and Preferential Clauses……….…..51
VI.ii. Firm-Level Gains from Regional Integration ………54
VI.iii. Rent-Seeking Behaviour………59
Conclusion ……….……….61
References ………. 63
ACKNOWLEDGEMENTS
I will be eternally grateful for Dr Sebastian Krapohl’s invaluable guidance and mentoring during the entirety of this academic year, as well as my research project colleagues’ great help and support.
FIGURES
1.1. National versus Global Gains. 1.2. Global versus Regional Gains.
3.1. Example of a EC Price Report Sheet, 1994.
4.1. Spain Small Vehicles to Other Vehicles Production Ratio. 4.2. Spain Exports as Percentage of Production.
4.3. Absolute Change in Vehicle Production Per Year 1990 - 2000. 4.4. EU Motor Vehicle Sales.
4.5. Recommended Retail Price of Two Basic Small-Sized Models. 5.1. Canadian Automotive Production and Sales Post Auto Pact. 5.2. U.S. Low-Skilled to High-Skilled Automotive Employment Ratio. 5.3. Post-NAFTA Average Compensation Cost per Hour for Autoworkers. 5.4. Auto Production and Sales in North America 1994-2000.
5.5. RRP of a 2-Door Sedan with Comparable Standard Equipment in the U.S. and Canada. 5.6. RRP of a 4-Door Sedan with Comparable Standard Equipment in the U.S. and Canada. 5.7. Big Three Share of Total Mexican Automotive Production: Average over 1983-1994. 5.8. Big Three Share of Total Mexican Automotive Production: Average over 1995-2000. 5.9. U.S. Consumer Price Index for New Vehicles 1993-1997.
6.1. Major Automotive Plants and R&D Centers in Brazil.
6.2. Number of Models Produced by a Sample of Major TNCs in Argentina, 1991-1994. 6.3. Auto Production and Sales in Brazil and Argentina 1991-2007.
TABLES
1.1. Regional Oligopoly Pay-off Matrix. 1.2. TNCs Operations Environments.
ABBREVIATIONS
CET: Common External Tariff CPI: Consumer Price Index
CUFTA: Canadian-U.S. Free Trade Agreement DCR: Domestic Content Requirement
EC: European Commission
ERT: European Roundtable of Industrialists ESM: European Single Market
FTA: Free Trade Agreement
GATT: General Agreement on Tariffs and Trade IDB: Inter-American Development Bank
MERCOSUR: Mercado Común del Sur (Southern Common Market) NAFTA: North American Free Trade Agreement
NTB: Non-Tariff Barrier PPI: Producer Price Index
RCR: Regional Content Requirements RoO: Rules of Origin
RRP: Recommended Retail Price RTA: Regional Trade Agreement SEA: Single European Act TNC: Transnational Corporation
TRIM: Trade-Related Investment Measure UN: United Nations
UNCTAD: United Nations Conference on Trade and Development WTO: World Trade Organisation
The ‘New Regionalism’ as a Rent-Seeking Platform for
TNCs: Evidence from European, North American and
South American Automotive Industries
ABSTRACT
Ever since the move towards the ‘new regionalism’ began to gather momentum, scholars have attempted to account for this intriguing dynamic by examining the possible rationales behind it. In doing so, much of their analysis has revolved around the political and economic incentives for policy makers to favour participation in an RTA as opposed to the motivations of private actors, such as TNCs to support such endeavours. Thus, this paper aims to account theoretically and systematically for the motivations behind TNCs’ support for these new regionalists arrangements. To this end, we pose the following research question: why have TNCs recently tended to favour regional, as opposed to global trade liberalisation? Using evidence from the automotive industry following the deepening of European, North American and South American integration in the early to mid 1990s, this paper presents evidence to suggest that RTAs offer TNCs the ability to make gains otherwise unattainable within national and global trading settings. Following regional economic liberalisation, TNCs are able exploit economies of scale and specialisation whilst preserving price-setting power. By contrast, multilateral liberalisation and national markets can only offer one of these advantages respectively. Ultimately, this paper will argue that TNCs have used this price-setting power in order to derive rents, which would of otherwise been eroded by through competition-inducing non-preferential multilateral trade agreement.
INTRODUCTION
Since the end of the previous millennium, the dynamics of international trading relations have been fundamentally altered. The tide of multilateral liberalisation has ebbed as the move towards the formation of ‘deep’ regional trading agreements has gathered tremendous momentum. In spite of the incredible scale and breath of the second wave of international trade liberalisation that brought about an unprecedented global reduction in tariff and non-tariff barriers, economic and political actors seem to have redirected much their resources away from the traditional multilateral platform offered by the WTO, towards smaller, regional frameworks. The evidence that numerous studies have collected in order to capture this somewhat paradoxical development is remarkable. Today, there are more than one hundred RTAs of various kinds. By contrast, in the period prior to 1990, this number remained below the double digit mark (Baldwin, 2016, 107). The significance of the explosion in the number of alternative trading arrangements has been underlined by increasing amount of international trade
measured to be covered by regional legislative frameworks. This amount, as a proportion of total global trade, has almost doubled in forty years, skyrocketing from 30% in 1971 to 50% in 2010 (Baldwin and Kay, 1975, 99; Baldwin, 2011, 22). Naturally, the growing significance of this phenomenon has received a commensurate amount of scholarly attention in recent decades. Indeed, the proliferation of regional integration processes has grown to emerge as a key area of interest to almost all disciplines within the realm of social sciences. Much of the literature which has focused on the demand-side fuelling the “craze” of regionalism has taken a ‘top-down’ approach, emphasising the motivations of the political class to form such deep regional trading arrangement. In another light, economically orientated analyses of the demand side of regionalism highlight the economic benefits of such arrangements, arguing that the inevitable trade creation effects, as well as efficiency gains accruing from the development of economies of scale and specialisation of free trade agreements render the formation of RTAs a political ‘no-brainer’ (Ethier, 1998). Finally, functional accounts undermine the importance of the demand side altogether, arguing that the formation of RTAs is an inevitable process as it constitutes the next logical alternative to multilateralism, which at present constitutes an unviable option due to a multitude of structural failings of the WTO (Mansfield & Reinhardt, 2003). The importance of the demand is further undermined by variant models that identify exogenous forces, such as competitive liberalisation pressures and domino effects as the main driving force behind the new wave of regionalism (Baldwin, 1993, Bergsten, 1996; Mansfield, 1998).
As such, many of these perspectives have tended to neglect the importance of TNCs in the demand side of regionalism. This tendency has been particularly surprising given the selective liberalisation clauses that have pervaded RTAs as well as the deep provisions addressing non-traditional aspects of trade which have come to define this new wave of regionalism. In the most comprehensive RTAs, these have ranged from the implementation trade related investment measures to the erection of investor-state dispute settlement systems. In turn, their presence seem to indicate the significance of the role of interests in the construction of modern RTAs. Thus some scholarly attention has been extended to role of TNCs in the new wave of regionalism (Jovanović, 2015; Ruigrok & Van Tulder, 1995). This has led some to suggest that the nature of modern RTAs have served as a tool to accommodate the needs and demands of MNEs seeking to expand their operations (Milner & Yoffie, 1989; Cerny, 2000; Hillman & Ursprung, 1993; Mattli, 1999). Thus, whilst some scholarly attention has been paid to the effect of TNCs on the formation and substance of moderns RTAs, albeit fairly scarce relative to its significance, they have failed to account theoretically and systemically for the motivations behind TNCs’ recent inclinations towards regional frameworks as well as their effects on broader interests groups of workers and consumers. In an attempt to bridge this gap in understanding, this paper will aim to explain and conceptualise the motivations and role of TNCs in international trade policy, accounting for the redirection of their political and financial capital from global frameworks towards regional ones. To this end, this paper will use a multitude of political economy insights to argue that regional settings feature a set of characteristics which have incentivised TNCs to become a crucial
driving force behind the ‘new’ regionalism. More specifically, regional environments offer the scope for the development of economies of scale and specialisation combined crucially, with the presence of deep provisions and selective liberalisation clauses which provide de facto protection from global competition for TNCs. This protective apparatus results in a regional oligopolistic market structure that provides TNCs with price-setting power. By contrast, national and global platforms only offer one of these advantages respectively. Therefore, I will contend that TNCs, and most particularly within the complex manufacturing industry, stand to gain the most from regional as opposed to national and global operations. Ultimately, this paper will argue that the price setting power RTAs provide TNCs with, enables them to make gains superior to those available at the global level. Co-incidentally, these additional gains should be considered as rents since they originate from superficial political protection as opposed to increases in competitiveness. These rents are paid for by consumers in the form of increased real and nominal prices which suggests that deep RTAs induce signifiant distributive effects. This paper will proceed by first, providing a critical review of the relevant literature in order to build on existing insights. Secondly, the argument presented above will be developed theoretically, which will produce the hypotheses to be tested. These hypotheses will then be tested empirically using cross-regional case studies of developments automotive industry following cross-regional economic integration. These will include, in order the Europe, North and South America. The final section will offer concluding remarks and discuss the potential implications of the empirical evidence collected.
Section I. Literature Review
In this section, we review the literature relevant to the understanding of the rationale behind the proliferation of deep regional economic integration processes. Given the sheer number of diverging accounts offered by almost every faction within the broad scope of social sciences, we will aim to categorise these accounts based on their implicit or explicit assumptions on the nature and preferences of policy markers (the supply side of regional integration), and private actors (typically dichotomised as export promoting and import competing). Finally, we review the literature regarding the specific trade policy preferences of corporations in order to build on existing insights and delineate which shortcomings we will attempt to bridge. This review will deliberately circumvent general theories of regional integration such as neofunctionalism and liberal intergovernmentalism as they dissect the rationale behind wider, political integration projects and subsequent transfers of political authority whilst we are solely interested in economic integration (Haas, 1970; Moravcsik, 1993).
The most popular set of regionalist accounts emphasise the political motivations to form regional trade agreements. However, in these reports, political motivations are not based on interest groups or voters but rather on endogenous political initiative. In this light, Fernandez & Portes argue that RTAs are used by political elites in order to generate bargaining power when negotiating on the multilateral stage: a country may have less to loose from exiting multilateral negotiations if a relatively greater share of its trading interests are covered by alternative agreements such as RTAs (1998). In a similar vein, Mansfield argues that RTAs are used as a de facto insurance policy, in order to ensure that in the event of stress on the multilateral trading system (such as the decline of a stabilising hegemon or an external shock such as a global recession), a country’s trading stakes are still protected by RTAs that are less likely to succumb to external pressure (1998). Moreover, Ethier borrows insights from economic voter theory to expound that governments wish to construct RTAs as they believe the latter will bring about higher levels of economic growth, in turn appealing to economically responsive voters and enhancing re-election prospects (1998). Whilst these account are all logically sound, they imply that states possess a high degree of entrepreneurship and to the largest extent in the case of Ethier, possess a considerable amount of information on the future effects of their initiatives. However, as has been extensively documented, governments tend to be inherently reactionary, leading them to respond to stakeholders preferences as opposed to formulating their own preferences (Grossman & Helpman, 2002). Thus, despite being helpful in observing why the political ‘supply side’ of integration may be particularly willing to oblige to pro-RTA stakeholder preferences, these accounts scarcely capture the rationale behind the initial impetus for RTAs that stems for private stakeholders. Furthermore, these accounts tend to overestimate the amount of information and projection capacity available to governments. As such, governments are constricted by bounded rationality. This is particularly relevant in the case of
RTAs as their default preferential nature undermines the accuracy of general welfare effects forecasts. To this day, the welfare effects of RTAs remain hotly contested, even with the availability of post-implementation statistics (Krugman, 1991; Bhagwati & Panagariya, 1996).
On the other hand, accounts which imply that governments tend to form preferential RTAs as a reactionary mechanism emphasise external forces as the catalyst to government reactions as opposed to internal, private actor led demand forces. Mansfield & Reinhardt contend that the structural failings of the GATT (and the WTO in the post-1994 era), which include the degree of membership, the negotiation schedule and the outcomes of dispute settlements, have led governments to explore alternative means to liberalise trade, with RTAs being the most feasible option (2003). Bergsten presents the view that in a world of virtually unrestricted capital mobility, governments all compete for a common pool of international investment funds. Since investments are prone to favouring liberalised markets, governments must use RTAs as a tool to attract FDI. The greater the number of RTA, the lesser the likelihood of an economy attracting FDI if it is not a member of an RTA (1996). Lastly, by way of his ‘domino’ theory, Baldwin argues that the trade diverting effects of RTAs deepen the losses for non-members. This incentivises non-members to form their own RTA. As more RTAs are constructed, non-members are now excluded from even larger markets. This brings about an even faster proliferation of RTAs. Thus, according to Baldwin, governments are merely reacting to the economic costs of non-membership (1993). Mansfield & Reinhardt highlight the effect of structural factors whose existence and importance cannot be denied. Yet, they do not seek to explore why RTAs, as opposed to unilateral or bilateral liberalisation strategies, become the most politically viable course of action. Bergsten’s analysis tends to apply to a greater extent to developing countries who, unlike developed countries, do not have high levels of domestic investment. Finally, Baldwin explanation is more suited to contribute to our understanding of the accelerated pace of the proliferation of RTAs as opposed to the initial manifestations of RTAs which are the subject of our case study analysis. Baldwin briefly tackles this issue by suggesting that a realisation by governments that RTAs are welfare improving triggered such a strategy (Baier et al, 2007, 15). However, as has been established by widely accepted literature, policy areas that are less vulnerable to public scrutiny, such as trade and foreign policy, tend to concentrate benefits and disperse costs. Thus, Baldwin, as well as many other accounts that stress the considerations of governments for the effects of RTAs on the median voter are arguably slightly misguided. Furthermore, all these accounts seem to overemphasise the role of external forces at the expense of internal demand forces. As Mattli and Grossman & Helpman illustrate, political elites’ decision making power rests on the support for their action and positions. This support is provided by internal stakeholders, of which concentrated business interests tend to have a more than proportional influence due the nature of trade policy as discussed above (1999; 1995). As such, governments may be willing to include protective clauses in order to cater to corporate interest group demands. But analyses such as those of Mattli and to a greater extent Grossman & Helpman, which revolve around the
interaction of the demand and supply side of integration break down the demand side as import competing versus export competing. For example, Grossman & Helpman state that “The second [condition under which an RTA is viable] arises when the agreement would create profit gains for… exporters in excess of the losses that would be suffered by import-competing industries, plus the political cost of any welfare harm that might be inflicted on the average voter” (1995, 687). Thus, in addition to an overestimation of governments’ information of the effects on the average voter, the authors imply that RTAs are merely free trade agreements that do not raise barriers to the outside world and that do not contain ‘deep’ clauses which protect investments. Therefore, any RTA inevitably harms import competing, uncompetitive producers and favour export promoting, competitive producers. However, modern RTAs all include preferential clauses which undermine the ability of foreign producers from benefiting from liberalised markets. Therefore, import competing producers do not necessarily loose out as competitive pressures which traditional arise from free trade agreements do not translate identically into RTAs. Thus, the way in which these accounts dichotomise the internal demand for RTAs is ill-suited to the unique nature of RTAs. Instead, the demand for RTA should be dichotomised based on the size of the producer as opposed to the productivity of the producer: due to the tendency of trade policy makers to concentrate benefits and dispersed costs (higher industry-specific employment and income versus general reduction in prices), RTAs feature protective clauses that coerce foreign producers into sourcing a high amount of content and/or added value that originates from inside the integrated region in their goods, in order for their goods to benefit from tariff reductions and other liberalising measures (RoO and CETs). As a result, to benefit from an RTA, producers must be large enough so as to be able to afford the sunk costs of developing production plants in the given region, and source the majority of their components from more expensive regional suppliers as opposed to their usual, cheaper international suppliers. In this sense, large producers, whether domestic or foreign, will be more likely to support protective RTAs whilst small producers and to an even greater extent small foreign producers, will tend to favour unilateral and multilateral trade liberalisation policies.
Similarly, studies which have solely focused on the trade policy preferences of transnational companies have failed to differentiate the implications that RTAs and FTAs have on these entities. For instance, Stoyanov states that “the presence of an organized lobbying group in an FTA partner country tends to raise trade barriers while an organized lobbying group of exporters from outside of the FTA is associated with less protection” (2009, 37). The author does not consider the possibility that larger foreign producers may wish to promote a higher degree of protection in an FTA as this would entail the elimination of small foreign producers, whilst potentially opening the door for large scale investments in the members FTA that can only be afforded by similarly large TNCs. Plouffe equally dismisses the potential for RTAs to not necessarily attract the competitive pressures traditionally associated with trade liberalisation as he puts forward the view that the level of productivity of a firm is
positively correlated with the degree of liberalisation preferred (2017). Indeed, large domestic producers may prefer a protective FTA even if they are highly productive as this could limit the amount of new competition in the region. In a more nuanced article, Milner & Yoffie attempt to explain the counter-intuitive variations in recent TNC trade policy stances (1989). They assert that TNCs do in fact articulate strategic, as opposed to simply liberalising or protective demands. Due to the scope for economies of scale and the importance of vertical integration, corporations, they argue, will formulate reciprocal liberalisation demands. That is, they will lobby for more liberalisation of their domestic markets but only if the markets in which their competitors are based follow suit. Thus, the authors do appreciate firms’ awareness of the trading situation of their competitors, as well as increasing returns from trade in the form of economies of scale. Nevertheless, they do not appreciate the fact that RTAs do not necessarily induce competition increases and therefore overlook the possibility for the interests of foreign and domestic producers to align provided they are both large producers. By contrast, in their seminal work entitled ‘Multinational Firms, Political Competition, and International Trade Policy’, Hilman & Ursprung do take into account the size of a firm in the determination of its trade policy stances (1993). They positively correlate the number of multinationals involved with the level of liberalisation preferred as they explicitly capture the potential for economies of scale and specialisation. In spite of this, the authors ignore the possibility that regional trade liberalisation may be superior to general, multilateral liberalisation as it can potentially generate these economies whilst simultaneously detracting further competition. The fact that these accounts omit the effect of protective clauses in RTA on firms’ trade policy stances is particularly puzzling given the fact that the effects of these provisions on competition levels have been extensively documented (Cooper, 1993). In the following section, we will present a view of firms’ trade policy preferences which, crucially, takes into account the potential effects of complex preferential clauses inserted in RTAs on competition and thus the price setting power of firms. Furthermore, we assume that firm can choose either national, regional or global trading frameworks in order to capture the unique incentives which each setting offer to TNCs, as opposed to assuming firms face a binary choice that consists of either more or less liberalisation.
Section II. Theoretical Framework
In order to comprehend and illustrate the motivations behind many TNC’s strategy to invest in promoting and influencing regional economic integration processes, this section will model the various paths enterprises can follow in order to expand their operations. Using a simple duo of graphs derived from Krugman’s graphical representation of a monopolist under free trade, we will develop a theoretical framework that represents the gains an enterprise can make as a result of the key characteristics of each respective operational setting: national, regional and global. By demonstrating the effect of the relevant characteristics of each setting on the price setting ability and cost of production of firms, this framework theorises that the gains from regional frameworks for certain firms may be greatest.
II.i. Modelling a Firm’s Incentives
Initially, an enterprise develops within its home state. Here we assume it is a profit maximising monopolist. The firm progressively develops the ability to lobby at the national level as it recognises the importance of non-market as well as market, strategies (Baron, 1995). Here, given the absence of import competition, the firm will produce at the point where the marginal cost (MCnat) is equal to marginal revenue (MR). At this point, the firm produces Qnat amount of goods or services, and commands price Pnat, as illustrated in Figure 1.1 below. As a result, the amount of profits the firm generates is area [Pnat; B; C; Cnat], highlighted below. Seeking efficiency gains, greater market size and resources, the firm aims to expand its activities (Ghauri, 2004, 17). At this point, the firm can invest in the development of either regional or global production and distribution networks. If the firm opts to invest in global production and distribution networks, it will operate under the non-preferential WTO framework based on the Most Favoured Nation principle (Fig 1.1). As a result of operating across bigger international markets, the firm can derive very significant gains from economies of scale and economies of specialisation due to the size of the markets (higher levels of production and sales) and 1 productivity increases (through division of labour processes enhanced by factor differentials) respectively. This drives the company’s marginal cost curve down from MCnat to MC global, and consequently the average cost curve, from ATCnat to ATC global, increasing its production level from Qnat to Qdom. On the other hand, it inevitably faces an elevated level of competition: due to the most favoured nation principle of the WTO, international competitors benefit from the same level of market
This is particularly significant for firms in complex manufacturing industries, as their production processes feature a greater
1
access as the firm. If the firm generates supernormal profits, competitors will be incentivised to enter the market to capture a share of these gains. This heightened level of competition erodes the monopoly and in turn, price setting power of the firm. As a result, the firm cannot command its previous national price level as it has to take the lower global price (Pglobal) in order to avoid elimination from the marketplace (Krugman, 2012, 125). Therefore, the firm will produce at the point where its marginal cost curve intersects the global price level (Pglobal). In this light, the enterprise will operating at point E, producing Qdom amount of goods and generating profits highlighted by the area [Pglobal; E; D; Cglobal]. In an attempt to regain market share and derive supernormal profits, TNCs seek assurances and protection for their global investments (in the form of Trade-Related Investment Measures and Trade Related Intellectual Property Rights), as well as the harmonisation of standards in order to facilitate intra-firm, cross-border transactions and render small-scale exports more expensive (through administrative and compliance costs) (Chase, 2004). Within the WTO framework however, these proposals are met with strong opposition from several states who possess veto power in the consensus based WTO legislative platform. Due to the diverging profiles of the various economies, interests are rarely aligned between all member states. Furthermore, the transition to common industry
standards and legal frameworks to cover TRIMs and TRIPs is too expensive for many developing nations that do not have local producers who would benefit from these measures. This has led states, and to the greatest extent developing nations who do not have significant manufacturing or service industries, to resist the implementation of such deep, non-tariff barriers (NTB) clauses (Brooks et al, 2 3 2003, 16).
Alternatively, the firm can opt to invest in the development of regional operations (Fig 1.2). In this framework, the company can benefit from significant economies of scale and economies of specialisation as economically integration regions typically opens up two to five additional new national markets. Whilst these economies are not as significant as in global operations due to the lesser size of available markets (the firm’s marginal cost curve is slightly higher - MCglobal < MCreg, and ATCglobal < ATCreg), they remain far superior to those in the national setting (MCreg < MCnat and ATCreg < ATCnat). Crucially, the firm may be able to benefit from pice setting power within regional frameworks. This is because regional settings often feature a greater alignment of interests between policy makers as neighbouring economies are inherently more interdependent and interlinked (Chaney, 2013). Equally, political elites are aware that voters tend to be more responsive to enhanced employment opportunities and higher incomes as opposed to small general reductions in prices. Therefore, governments tend to offer greater protection for large investments in regional settings. As a result, ‘deep’ provisions which guarantee the treatment and investment of large producers have come to predominate preferential RTAs. In addition to this, governments who tend to concentrate benefits and disperse costs are willing to provide firms with protection from global competition through common and individual external tariffs, rules of origin as well as other protective clauses in line with the article XXIV of the GATT, which allows for exceptions to the most favoured nation principle. In order words, goods may have to contain a minimum level of domestic content, typically around 60%, to qualify for tariff free access to markets inside an economically integrated region. These mean foreign firms wishing to benefit from preferential tariff free access to regional markets have to invest in developing extensive production networks within the region so their traded goods can be considered of ‘regional origin’. The tremendous sunk costs such operations entail significantly restrict the number of potential participants in regional markets. These costs are further compounded by administrative and technical compliance expenses rules of origin and domestic content requirements naturally induce. Given the fact that only large TNCs can afford these costs and thus operate within these regions, RTAs tend to be conducive to
Several major transnational automotive firms attempted to produce a ‘world car’ whose production and sale would be truly
2
global. However, the heterogeneity of markets combined with the sum of individual regulatory compliance costs compromised the economic viability of these operations, forcing their unwinding (Freyssenet & Lung, 2000, 72). In addition to this, automobile specific trade complaints represented more than 10% of all trade related complaints processed by the Dispute Settlement Mechanism of the WTO (Carrillo et al, 2004, 24). Given the fact that 65% of these complaints were issued by developed countries to developing countries, these legal battle provide an insight into the difficulties TNCs face when operating at the global level.
the consolidation of oligopolistic market structures in which firms are able to exert price setting power. In other words, the firm can now produce at the profit maximising position of MCreg=MR. This more than compensates for the incremental increase in costs of production.
The oligopolistic market structure that the preferential nature of RTAs forges signifies that firms have a great incentive to collude to concurrently maintain or raise prices as this can guarantee long-term supernormal profits. By contrast if a company decides to lower prices, it will experience short term supernormal profits as it will attract greater demand. However, these profits will be eroded as the competition will follow suit in lowering prices. This incentive structure is represented in the table 1.1 pay-off matrix.
Consequently, the producer can now accrue gains level represented by area [Preg; E; F; Creg] (Fig 1.2) which is greater than global operating profits under area [Pglobal; G; H; Cglobal]. To conclude, the positive difference between these areas is the ‘excess’ gains TNCs can make through regional as opposed to multilateral trade agreements. As demonstrated graphically, these gains are the result of TNCs’ exercise of their price-setting power that is afforded to them by the superficial political protection from global competition included in preferential regional agreements. In other words, TNCs are able to charge higher prices for the same goods due to their exclusive control of the production of these goods within the regional market, as opposed to the technological and quality-based superiority of these producers. Given the fact that these gains are derived from the reduction in supply of existing wealth as opposed to the generation of new wealth, we argue that these are to be considered as rents. These rents are paid by consumers in the form of relatively and absolute higher prices (regional price differentials and rises in the price index respectively). Incidentally, governments may be willing to afford such protection in order to concentrate benefits and disperse costs. Consumers, similar to other broad interest groups, are unlikely to challenge this rent-seeking behaviour. Indeed, price differences and increases may be proportionately small, particularly relative to inflation. Therefore, consumers may not appreciate them, and if they do, it may be particularly challenging to attribute them to specific clauses within trading arrangements. Furthermore, the technical complexity involved in plurilateral trade agreements may further undermine such linkages. In addition to these issue-specific factors, consumers face traditional dispersed interest group obstacles such as collective action problems, further undermining their effectiveness in challenging such rent seeking behaviour (Olson, 1965).
The characteristics of the respective environments which may influence TNCs’ market and non market strategies are summarised in the table below.
Table 1.2. TNCs Production and Investment Strategies
Finally, the characteristics of regional integration processes whose implications have been developed theoretically above, must now be substantiated empirically. To this end, we formulate the following hypotheses to test the validity of our theoretical argument. These hypotheses will be investigated using case studies of the automotive industry during and following the deepening of European, North American and South American integration in the early to mid 1990s.
II.ii. Hypotheses
1) Given that a regional oligopoly may be superior to a national monopoly ([Preg; E; F; Creg] > [Pnat; B; C; Cnat]),
large producers will concentrate to invest lobbying resources towards the promotion of regional as opposed to national or global arrangements, and will demand the inclusion of specific preferential clauses in these agreements which effectively eliminate smaller (and foreign) producers from the regional market.
These may include rules of origin such as domestic and regional content and value added requirements combined with individual and common external tariffs, in addition to comprehensive trade related investment measures and other industry-specific clauses.
2) TNCs have made economic gains in the shape of economies of scale and specialisation as a result of the opening of regional markets which have lowered their marginal and average costs of production (MCreg and ATCreg < MCnat and ATCnat respectively.).
These can be evidenced by the development of both technical economies of scale through increases in production and sales (Qreg>Qnat), productivity gains through specialisation processes, external
Number of
Participating States Economies of Scale and Specialisation CompetitionDegree of Price-Setting Power
National 1 Limited Very Low Very High
Regional 2-5 Significant Low High
economies of scale through the concentration of production in regional industrial ‘clusters’ as well as the exploitation of factor differentials such as lower wages or higher capital stocks in different member states (MCreg<MCnat and ATCreg<ATCnat).
3) MNCs have exerted their oligopolistic price setting power to derive ‘rents’, otherwise unavailable in global frameworks.
These are reflected through increases in or maintenance of prices and price discrimination strategies evidenced by price differentials between the member states within economically integrated regions (Preg>Pglobal).
Section III. Research Design
This section details the research methods that will be employed in order to test the three hypotheses outlined in the theoretical framework section above.
III.i. Design and Structure
As mentioned in the previous section, this paper will use a trio of case study in order to test the empirical validity of our set of hypotheses. The analysis of these case studies will be structured as follows: each case study is assigned an individual section. The three individual sections will all contain three sub-sections that will each investigate one of the three hypotheses in order. As such, our the first sub-section of each individual section will explore whether firms actively supported the regional integration project as well as detail the sector-specific (automotive industry) preferential clauses which may have an impact on the level of competition within the region. The second sub-section will analyse whether firms have made gains from regional economic integration which could not have been realised at the national level. These include economies of scale through greater production levels and economic clusters and economies of specialisation through vertical and horizontal division of labour processes that exploit factor differentials between regionally integration economies. The third and final sub-section will test whether firms have made gains within these regional markets which could not have been realised through global trade liberalisation. Therefore, this sub-section will examine the extent to which TNCs have used their oligopolistic price-setting power in order to charge superficially high or regionally differentiated prices, in contrast to global frameworks where such strategies would be ineffective in the face of greater competition that would offer similar products at lower prices to capture market share. In sum, the third sub-section will reveal whether TNCs were in fact able to derive rents from regionally integrated markets. The trio of case studies will form a Most Different Systems Design (Landman, 2008) that is delineated in the sub-section III.ii. below.
III.ii. Case Selection
Our three case studies have been selected in order to demonstrate that even within regions that feature extremely diverging political and economic characteristics, TNCs are still able derive rents as a result of similarly protective clauses that limit the degree of intra-regional competition As such, our key explanatory factor is the lobbying influence of TNCs and subsequent ‘deep’ preferential and protective clauses which have come to define these ‘new’ regional trading arrangements. Our outcome to be explained is the rent-seeking ability of TNCs in these regional frameworks. Moreover, the key features which differentiate our case studies and can therefore not account for the outcome observed are the depth of integration, the relative economic weight of automotive TNCs within the region and lastly,
the level of development of the regional auto industry. The relative weight of automotive TNCs could theoretically account for the pervasiveness of TNCs demands as the more economic leverage TNCs possess within a given region, the more influence they are likely to have within trade policy-making circles. However in South America, even though domestic producers did not have significant economic leverage, the Brazil-Argentina bilateral automotive agreements still contained some of the most protective clauses. The depth of integration should, in principal, affect the extent to which TNCs are able to charge different prices in different member economies as the greater the harmonisation of standards, competition and regulation policy and supranational power, the lesser the economic rational for the presence of price differentials. In spite of this, price differentials were the greatest following the implementation of the ESM in 1993 which constitutes the deepest integration project out of our three case studies. Finally, the level of the respective auto industry’ development may influence the extent to which it is to be protected by sector-specific clauses in the RTAs. The higher the level of development, the lower the protective barriers as the industry would be competitive enough to fend off foreign rivals. Nevertheless in North America, where the level of industry development was the highest, the rules of origin were the strictest whilst external tariffs were the highest. These relevant characteristics are summarised in table 1.3. below.
Table 3.1. Individual Case Studies’ Most Different Characteristics
With regards to case selection, the automotive industry was chosen principally based on two key elements. The first is the relative significance of the automobile sector in the global economy and for global trade. It is the world’s largest industrial sector: “total employment…comes at around 20 million…Of the world’s 50 largest manufacturing companies, 13 are automobile firms” (Viveros et al, 2000, 117) as automotive exports represent almost 10% of the total global trade in goods (WTO, 2017, 30). This significance is important to the aim of this paper as the intention is to demonstrate that the rents TNCs are able to exploit greatly affect wider stakeholders such as consumers and workers. As such, these rents not merely paid by a small section of the economy, they are paid by the majority of economic actors in a given country and should therefore receive commensurate attention and challenges. Furthermore, this significance has led to RTAs contained clauses auto-industry specific
Depth of Integration Economic Weight of
Domestic Producers Level of Industry Development
Europe Very Deep High High
North America Deep Very High Very High
clauses, and in the case of North America and South America, RTAs have been designed solely for the industry. This specificity enables us to trace the impact of RTAs and its detailed clauses on the industry more definitively.
Secondly, the auto industry was selected in order to be applicable to our theoretical argument. Due to capital intensive nature, there is a scope for the development of economies of scale. Secondly, being a complex manufactured good, automobile’s production processes are multi-staged: design and conception, parts manufacturing, bodies and trailers and finally assembly. Not only does this multiplicity result in the scope for economies of specialisation, the fact that each of these stages have differing factor intensities (for instance, assembly is relatively labour-intensive whilst parts manufacturing is relatively capital-intensive) means that there is a considerable scope for TNCs to exploit factor differentials between regionally-integrated economies. Other industries that are relevant to our theoretical argument include aircraft manufacturing, electronic goods such as computers etc…By contrast, goods such as agricultural commodities do not possess comparable scopes for economies of scale and specialisation.
Moreover, the cases of the deepening of European integration as well as North American and South American integration were selected for their significance to the world economy. The EU, NAFTA and Mercosur combined oversaw almost a third of world trade (31%) in 1994 (Bergsten, 1996, 2), and just under two thirds of global automotive products production in 2002 (Audet & van Tulder, 2004, 22). Again, the purpose is to highlight the extent to which the rents automotive TNCs derive from these regions affect global consumers. In addition to this, with the exception of the Auto Pact that is included due to its relevance to the automotive agreement in NAFTA, the ESM, NAFTA and Mercosur were the first ‘deep’ RTAs which initiated the wave of ‘new’ regionalist arrangements (Lejárraga, 2014, 9). Thus, our research can control for the policy diffusion and emulation processes which may have affected the construct of future RTAs relevant to the dynamics of the auto industry. Furthermore, these RTAs coincide with the failure of TNCs to include the implementation of extensive TRIMs at the Uruguay Round of WTO negotiations in 1994 (Toye, 2003, 86) further highlighting the comparative features of regional and global trading platforms.
III.iii. Data Analysis
Our first hypotheses will be substantiated by examining lobbying groups and strategies and ultimately, the specific clauses within the RTAs which directly affect the industry, and most particularly the level of of competition within the regional market. This will be actioned with the help of qualitative evidence primarily collected from secondary sources such as scholarly articles and books as well as primary sources of the full official legal trade agreement texts.
Our second hypotheses will use a mixture of both qualitative and quantitative evidence. Qualitative evidence from similar secondary sources will shed light on the specific nature of the specialisation processes that emerged following the implementation of the RTAs in question as well as the type and scale of the investments made by TNCs. Quantitative evidence from primary sources such as official statistical reports from official government departments as well as regional and international organisations such as the EC, the IDB, the WTO and the UNCTAD as well as industry associations such as the ADEFA of Argentina will be used to quantify scale and specialisation gains. Luckily, I already possessed the Weintraub & Sands book for data relevant to this hypotheses for the North American case study as I had previously used it for my undergraduate dissertation, which incidentally provided me with the initial inspiration behind this thesis project (1998; Cubbon, 2017).
Our third and final hypothesis will be tested exclusively quantitatively with the help of inflation reports, and when available, industry specific price reports. These are found in official government reports (such as the Economic Report to the U.S. President), EC archives and in the case of South America, a multitude of secondary studies.
III.iv. Availability of Data
Evidence for the first hypothesis, and to an even greater extent for the second hypothesis was generally readily available through numerous primary and secondary studies. In stark contrast, research for official data on prices was extremely challenging, with the Auto Pact being an exception to the rule. Data on specific models was not readily available for the post-NAFTA period. The most detailed data found was the new car consumer price index and producer price index. This appeared in official executive reports directly to the President, which are scarcely used in secondary books and articles. Data on the evolution of vehicle prices in Europe and price differentials between European countries was found in a discontinued archive of price reports in the European Commission publications online archives. Its virtual absence in relevant secondary sources’ referencing coupled with its archiving in 2011 rendered its discovery significantly more challenging than initially anticipated (Fig 3.1). Lastly, data on Brazilian and Argentinian prices was the most scarce. Every mention of widely recognised uncompetitive pricing strategies in the South American auto market led to a study by Chudnovsky et al. in 1998 solely available as part of a wider series on Latin American manufacturing, itself only accessible in paperback (Lord, 1998). When obtained, the study in fact only revealed qualitative evidence on the matter. Nonetheless, in addition to a multitude a various secondary accounts confirming an identical pricing pattern in Argentina, relevant Brazilian price and inflation indicators were provided in a study by Fiuza (2002).
III.v. Potential Limitations
One of the more evident limitations of this paper is the scope of the study. Despite covering one of the most significant global manufacturing industries, this paper would have benefited from the inclusion of more diverse industry case studies such as the commercial aircraft industry, computer manufacturing amongst others. However, the sheer scale of research required for such a project far outstrips the boundaries of this module. Another potential limitation of this project is the failure to include other regions, particularly Asian regions where important Japanese producers operate. Indeed, as Carrillo et al. point, Japanese producers have tended to adopt ‘go-it-alone’ strategies which tend to rely less on regional integration processes (2004). A closer examination of the motivations behind such strategies would have contributed to our wider understanding of firms’ trade policy preferences. In addition to this, our data analysis would have benefited from more extended time series as this would have enabled us to track the evolution of TNCs’ rent seeking behaviour more comprehensively. Unfortunately, such data was simply unavailable. Finally, an elaboration of the supply side mechanisms which allow for such protective clauses to prevail within RTAs could of contributed to our
understanding of why governments seem to accommodate to TNCs’ preferences to a greater extent in regional rather than global settings. However, such a question seems better suited to a separate study altogether.
Section IV. Europe
The European integration project is in many ways the first of its kind and certainly the deepest, most comprehensive to this day. Its breadth and scale is such that until recently, the vast majority of academic work on regional integration theory revolved around the European experience. Despite receiving strong criticism over an overly ‘Euro-centric’ focus, the principal, overarching theories still centre around the region. However, these approaches have struggled to account for the timing and nature of the successive agreements that have gradually integrated Europe, culminating in the union of today (Cowles, 1995). This may be largely attributable to an overemphasis of the political nature of the demand side for European integration. By examining the role of the private sector demand, embodied by the major European automotive producers, in the inception of the Single European Act in 1986 and the subsequent implementation of the European Single Market in 1993, this chapter will shed light on intents and motivations behind private actors’ pronounced demand for the re-invigoration of the integration project. Through a study of these actors’ role in the lobbying process, their subsequent regional investments and operational strategies and finally price discriminating tactics, we reveal that several TNCs were able to derived rents from the deepening of European integration that would of otherwise been unattainable through traditional national and global platforms.
IV.i. The Role of TNCs and Preferential Clauses
Prior to the European Single Act and the implementation of a truly ‘single’ market, most major European automotive producers already operated across different nations within the continent. This was true particularly from a distributional, as opposed to an operational standpoint. The European Economic Community was able to trade finished goods across nations free of any tariffs or quotas, the existence of diverging rules, regulations and standards between individual member states rendered the expansion of production operations to a regional scale extremely costly. More specifically, varying regulations on “axle weights, truck safety, vehicle exhaust emissions, and hours permitted behind the wheel” as well as many other technical specifications, in addition to individual tax regimes and national subsidisations policies hampered the development of regional production networks (Mattli, 1999, 72). Naturally, large businesses who had the capacity and desire to expand such operations wished to eliminate these technical differences. However, given the necessity to elicit the co-operation of several member states as well some form of supranational oversight, European TNCs would have to concentrate their resources in order to realise such a feat. And in 1983, that is precisely what they were able to do. The now infamous European Roundtable of Industrialists, comprising of the largest businesses across electronics, pharmaceutical and of course, transportation equipment industries, formed to lobby European policy makers with a view to construct a ‘truly single’ market, free of
regulatory disparities. Whilst there is little debate over the motivations and influential power this group possess to this day, much of the scholarly attention the group provoked has failed to account for the timing of its formation (Caporaso & Keeler, 1995). Here, Sandholtz and Zysman provide a compelling explanation which elucidates the protective, as well as the internally liberalising, dimension of the ESM project. They argue that it is the increase in effective competition from Japan, in addition to that of the United States, which ultimately triggered the agglomeration of European forces. Interviews of leading industrialists confirm that global competition considerations drove the rational for integration demand: “A senior executive of Fiat recently declared, "The final goal of the European 'dream' is to transform Europe into an integrated economic continent with its specific role, weight and responsibility on the international scenario vis-a-vis the U.S. and Japan” (1989, 95). These considerations were clearly justified. Whilst the American ‘Big Three’ naturally benefited a greater domestic market size in addition to free access to the Canadian market, Japanese conglomerates such as Toyota and Honda were now developing the most advanced fuel efficient technology. As such, European carmakers, as well as other leading industrial sectors, saw the harmonisation of the European market as the key to achieving the production and rationalisation capacity and technological spillover gains required to successfully compete with other global actors (Mattli, 1999, 72).
Incidentally, it was the head of Swedish automobile producer Volvo, Mr. Gyllenhammar, who initiated the formation of the ERT, reflecting the significance of the role automotive TNCs in the push for deeper European integration. Automobile producers represented one fifth of the sixteen original ERT members, further testifying to the importance of the industry in the lobbying process (Cowles, 1995, 511). In retrospect, it is unsurprising that automotive producers provided the initial impetus for industrial concentration after having successfully formed the ‘Comité des Constructeurs du Marché Commun’, in 1972. This automotive producers’ lobbying association was then enlarged and consolidated in 1991 under the banner of The European Automobile Manufacturers Association and contained every one of the few large transnational carmakers. The success of the ERT in shaping the integration agenda can be traced back to two key features of their involvement. The first is the uniform and coherent articulation of a specific set of clear demands which are applicable to all industries represented. The most relevant demands were the facilitation and protection of transnational capital investment, the reduction of barriers to mergers and intra-firm transactions and the harmonisations of industry regulations, standards and taxation structures. The second was the crucial continuation of ERT activities during the implementation process following the signature of the SEA. Indeed, the SEA was but a mere written commitment to implement a harmonised regional European market. Concerned by the underwhelming pace of several member states’ transitions, the ERT succinctly expanded its membership and designed small progress monitoring groups before the turn of the nineties decade. Their follow-up activities culminated in a press release in 1987 urging the acceleration of the harmonisation process by effectively bribing member states: “If progress towards the implementation
of the European market is as slow as at present, it is unavoidable that European industry might have to reconsider…their strategies…with the possibility of redirecting industrial investments to other parts… outside Europe” (Cowles, 1995, 519). The threat of a capital exodus conveys the confidence TNCs had in their importance to the European political economy, underlining the acute balance of power between private and public circles. This threat mirrored the last communication the ERT had with European political elites prior to the signature of the SEA, in which a similarly ominous tone prevailed (Cowles, 1995, 518).
The influence of the ERT, and more specifically automotive producers, was not only vividly apparent during the ratification of the SEA and subsequent timely implementation of the ESM project by 1993, but also in the more detailed, protective clauses featured in the agreements. In addition to measures facilitate corporate mergers, fully liberalising capital and investment flows and the harmonisation of industry standards such as “safety standards and mutual recognition of certification of conformity procedures”, the European Union unexpectedly maintained a Common External Tariff of 10 per cent, underscoring the protective dimension to the integration process (Van Tulder & Audet, 2004, 38; United Nations, 1992, 39). As Van Tulder & Audet remark, this tariff was much higher than other major competing nations (2004, 37). Moreover, the EU refused to reduce its CET when pressured to do so during the last round of GATT negotiations, revealing its importance to preservation of the regional industry. In addition to this, a 60% regional content requirement was set in the European agreements of 2001 with Central and Eastern Europe, which meant Asian competitors could not realise their strategy of centralising most of their production in Central Europe to then export to Western Europe. Indeed, they were now forced to procure their parts from Western Europe and could only conduct assembly operations in Central Europe. As Humphrey & Memedovic point out, “this favoured those firms from the EU, which sourced components for Central European assembly” (2003, 11). Finally, in parallel to the SEA, the EU equally managed to sign a voluntary export restraint agreement with Japan, limited their exports to 15% of the European market.
IV.ii. Firm-Level Gains from Regional Integration
During the the transition to the ESM and in the next few years that followed, no significant increases in competition occurred. The Big Three American firms, and to the largest extent Ford, extended its investments in European production networks, building on its presence in southern Europe. In another light, Asian automotive producers unsurprisingly failed to further penetrate the European market. As Layan and Lung document, their European market share actually decreased, from 11.8% in 1992 to 10.9% in 2001 (2004, 75). In stark contrast, European conglomerates significantly expanded their operations throughout the continent. The Volkswagen group, as well several French manufacturers, took advantage of the simplified investment and merger regulations to acquire major brands.
Volkswagen strategy bought brands Skoda and most importantly, Spanish company SEAT. Such moves were characteristic of a wider trend as intra-EC mergers represented 22% of total national and international mergers. By 1990, this figure rose to 41% (United States International Trade Commission, 1991, 17). These mergers further offset the slight increase in regional competition provided by the aforementioned entrance of American competitors . 4
These acquisitions were key in the development of a regional division of labour which enabled European TNCs to make considerable gains from specialisation. Indeed, two major specialisation processes occurred following the implementation and consolidation of the European Single Market. Major European conglomerates such as Volkswagen Group and Fiat organised a horizontal and vertical division of labour: ‘Northern’ countries, such as Germany, Sweden and France produced high-end, technology intensive models whilst the newly integrated southern countries such as Portugal and to an even larger extent Spain, specialised in the production of small, basic car products. Furthermore, much of the skill and capital intensive stages of production such as design and high-end parts manufacturing remained in northern Europe whilst low-skill, labour intensive stages such as engine manufacturing and to an even larger extent, low-end assembly, were redirected towards Southern Europe and later Central and Eastern Europe following the European bilateral agreements. The strategic re-location of low-skill, labour intensive stages of production to Southern Europe was primarily driven by cost reduction strategies based on factor differentials. Whilst quantitative evidence on Spanish labour costs are remarkably scarce, analysts have noted that relative wages in Spain (and Portugal) were considerably lower than in the domestic context of the major automotive firms (Laylan and Lung 2004; Laylan, 2000, 132).
Spain, and more specifically the Iberian peninsula became a production cluster where an increasing number of firms, including Renault and Peugeot PSA built brand new plants to centralise their small car production and assembly operations (Laylan, 2000, 135). The significance of the process of horizontal division of labour can be demonstrated in the changes in the ratio of small vehicles to other (larger, more advanced) vehicles produced in Spain during this period, as shown in figure 4.1. below. By the end of the year 1996, 77% of Spain’s total vehicle production was dedicated to basic, low range small sized vehicle.
In addition to this, the significance of regional vertical division of labour processes can be evidenced by the rise in products exported as a percentage of total production in Spain. This tremendous increase displayed in fig 4.2. suggests that Spain has increasingly specialised in the assemblage stage of production, directly exported finished goods back to the firms domestic market and across Europe.
Similarly, the Fiat Auto group heavily invested in horizontal and vertical specialisation processes by drastically expanding their central European operations following the 1989 European agreements. More specifically, Fiat opened three new high-vehicle assembly plants in Poland during the 1990s decade (Humphrey & Memedovic, 2003, 7). Again, seeking to maximise gains by exploiting considerably lower labour costs, Fiat concentrated labour intensive assembly operations in Poland. Ballet and Enrietii estimate that Polish labour costs were as much as four times lower than in Italy, where Fiat’s operations were primarily based (1998, 217). Fiat Auto production in Poland almost tripled in 5 years, rising from 135,000 units produced in 1991, to 307,000 in 1996. In addition to pure costs gains, Fiat benefited from dramatic efficiency gains which in turn further lowered their marginal and average costs of production. Productivity levels of Fiat Auto operations in Poland increased five fold in the same period (Balcet & Enrietti, 1998, 214).
The specialisation gains and benefits from economies of scale large European automotive producers were able to seize following the deepening and expansion of European integration are even more eye-catching when inspecting ‘macro’ figures for the region. The Gruber Lloyd Index of intra-industry trade reveals that automobile intra-industry trade drastically increased for every European country from 1980 to 2000, with the excepting of the United Kingdom and Italy, further highlighting the significance of the European industry specialisation processes. Newly integrated countries such as Spain and Portugal experienced increases of 30 and 40 percent respectively (Laylan & Lung, 2004, 90). When examining absolute changes in yearly production across European nations, two patterns immediately stand out (fig 4.3). First, the incredible increases in yearly production in almost every nations, measured by the hundreds of thousands, indicates not only the impact of the deepening of European integration on the regional automotive sector, but also the drastic reduction in marginal costs TNCs have been able to yield as a result of the increases in production. Secondly, the two countries whose production levels decrease, namely France and Italy, are host to firms (such as Fiat, Renault and Peugeot PSA) who have been accredited with the relocation of many production operations, further showcasing the exploitation of factor differentials (in the form of lower wages) and specialisation gains. In sum, the European Union as a whole produced almost two million more cars in 2000 than it did in 1990 (Layan & Lung, 2004, 95). The only other regions to exhibiting similar growth rates in the same period are North and South America, which constitute the remaining two case studies of this paper (Humphrey & Memedovic, 2003, 3).
In addition to this, TNCs were able to fully exploit the opening of new markets, as their sales skyrocketed in countries such as Portugal, Greece and most notably Spain (fig 4.4).
