Question

SCENARIO BACKGROUND:
The controversy surrounding the European Union, as well as the recent increase in tension between the U.S. and Canada leaders, prompted many American analysts and politicians to weigh pros and cons and predict likely economic of closer integration in North America.

While most agree a US-Mexico union would have outweighing negative consequences for the US at this stage, primarily because of the great economic, political, societal and cultural differences between the countries, there is no consensus on the likely outcomes of a US-Canada union. Opinions range from “it would be a great economic success” to “it would ruin economies of both countries”.

The President and his administration do not see a US-Canada union as a likely scenario for the nearest future, but the government strategies have to consider and be prepared for any scenario, no matter how unlikely it may seem.

As a person knowledgeable in the area of the effects of government interventions in trade and regional integration, you are one of many experts invited by the Strategy Division of the Presidential Advisory Board to provide your visions on the likely consequences of a US-Canada Union. The scenario is planned for an economic union (common currency, taxes, laws and regulations, economic and foreign trade policies, unrestricted within-union trade and employment, central parliament, etc.) though a possibility of a political union is also considered.

The task is to predict the likely consequences of such a union, the two countries essentially becoming one, on public opinion, prices, internal and external trade, employment, investments, revenues and consumption. It is made very clear that your opinion must be rooted in existing economic theory covered in MGT 301. There are five questions (see template on the next page): If the US and Canada were to become one country, how would that likely affect the following domains of life?

Note: Please keep in mind that even though Canada and the U.S. are currently in a free-trade zone, there are many administrative, monetary, and political barriers to trade. For example, the traders must deal with the uncertainties and costs of currency exchange, the need to do separate certification in each territory, differences in taxes and other issues. So the trade between, for example, Montana and Alberta is still much harder than, for example, between North Carolina and Virginia.

The proposed scenario assumes a political union and removal of all trade barriers.

Note: The questions are about the changes in what today is the U.S. (will it affect the variety of products, prices, wages, unemployment and so far in the U.S. part of the new country).
However, the assumption is that the effect will be the same for both parts of the new country. If you believe that the effect will be different, you can explain it, though such differentiation is not required.

1. (10%, Quality)

What is the likely effect on the quality of products available to the consumers?

Group of answer choices

Increase

Remain the same

Decline

2. Please explain the mechanism that will improve/reduce the quality

3. (10%, Consumption)

Based on your answers to the earlier questions,

What is the likely effect on the consumption of products by consumers?
That is, will the consumers now be able to afford/consume more or fewer products and service?

4. Please explain the mechanism that will improve/reduce consumption

Group of answer choices

Consume/afford more

Remain the same

Consume/afford less

Answer 1

Below are the answers selected and the chain that explains why those answers were selected.

(1)

> Decline > Removal of all trade barriers > Lower cost of moving goods from country to country > Increased supply > Lower prices > Most affected industries, automotive and agricultural.

(2)

> Increase > Lower cost of moving products > higher profits > surplus capital for improving products and services > Higher quality products to customers.

(3)

> Consume/ afford more > lower prices > more disposable income > more products demanded > more consumption.

(4)

> Increase > lower cost of moving raw materials > reduced product prices > more demand by consumers > increased production.

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