Because learning changes everything. ® Regional Economic Integration Chapter 9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Learning Objectives 9-1 Describe the different levels of regional economic integration. 9-2 Understand the economic and political arguments for regional economic integration. 9-3 Understand the economic and political arguments against regional economic integration. 9-4 Explain the history, current scope, and future prospects of the world’s most important regional economic agreements. 9-5 Understand the implications for management practice that are inherent in regional economic integration agreements. © McGraw Hill, LLC 2 Introduction Regional trade blocs promote regional economic integration. • WTO must be notified. • Economists believe free trade agreements produce gains from trade for all member countries. • GATT and WTO seek to reduce trade barriers but reaching agreements is difficult. • EU has been the most ambitious move toward regional economic integration. • NAFTA, USMCA, Mercosur, RCEP. © McGraw Hill, LLC 3 Levels of Economic Integration 1 Several levels of economic integration are possible in theory. From least to most integrated: • Free trade area. • Customs union. • Common market. • Economic union. • Political union. © McGraw Hill, LLC 4 Levels of Economic Integration 2 Free Trade Area Eliminates all barriers to the trade of goods and services among member countries. Each country allowed to determine its own trade policies regarding nonmembers. • Rules of origin. Most enduring is European Free Trade Association (EFTA) between Norway, Iceland, Liechtenstein, and Switzerland. NAFTA and USMCA. © McGraw Hill, LLC 5 Levels of Economic Integration 3 Customs Union • Eliminates trade barriers between member countries and adopts a common external trade policy. • The EU began as a customs union. • Andean Community (formerly the Andean Pact) includes Bolivia, Colombia, Ecuador, and Peru. © McGraw Hill, LLC 6 Levels of Economic Integration 4 Common Market No restrictions on immigration, emigration, or cross-border flows of capital among member countries. Requires harmony and cooperation on fiscal, monetary, and employment policies. • Has proved very difficult. Mercosur (Argentina, Brazil, Paraguay, Uruguay) is hoping to establish a common market. • Venezuela accepted for membership but was suspended due to undemocratic policies. © McGraw Hill, LLC 7 Levels of Economic Integration 5 Economic Union • Free flow of products and factors of production among member countries and the adoption of a common external trade policy. • Requires a high degree of integration, a coordinating bureaucracy, and the sacrifice of national sovereignty to the bureaucracy. • European Union (EU). © McGraw Hill, LLC 8 Levels of Economic Integration 6 Political Union • Central political apparatus coordinates economic, social, and foreign policy of member states. • EU headed toward at least partial political union, and the U.S. is an even closer example of political union. © McGraw Hill, LLC 9 Figure 9.1 Levels of Economic Integration © McGraw Hill, LLC 10 The Case for Regional Integration 1 The Economic Case for Integration • All countries gain from free trade and investment—a positive-sum game. • Assumes an absence of barriers. • Motivated by desire to exploit gains from free trade and investment. © McGraw Hill, LLC 11 The Case for Regional Integration 2 The Political Case for Integration • Linking countries together and making them more dependent on each other promotes political cooperation. • Reduces the likelihood of violent conflict. • Gives countries greater political clout when dealing with other nations. © McGraw Hill, LLC 12 The Case for Regional Integration 3 Impediments to Integration Two reasons it has not been easy to achieve integration: 1. While a nation as a whole may benefit from a regional free trade agreement, certain groups will lose. 2. It implies a loss of national sovereignty. © McGraw Hill, LLC 13 The Case against Regional Integration Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts. Trade creation. Trade diversion. • WTO rules should ensure that a free trade agreement does not result in trade diversion. • However, GATT and WTO do not cover some nontariff barriers. © McGraw Hill, LLC 14 Regional Economic Integration in Europe 1 Europe has two trade blocs: 1. European Union (EU): • 27 members. • Britain left in 2020. 2. European Free Trade Association (EFTA): • 4 members. © McGraw Hill, LLC 15 Regional Economic Integration in Europe 2 Evolution of the European Union Product of two political factors: 1. The devastation of western Europe during two world wars and the desire for a lasting peace. 2. European nations’ desire to hold their own on the world’s political and economic stage. Treaty of Rome established the European Community (EC). • Provided for the creation of a common market. • Later became the European Union (EU). © McGraw Hill, LLC 16 Map 9.1 Member States of the European Union in 2020 Access the text alternative for slide images. © McGraw Hill, LLC 17 Regional Economic Integration in Europe 3 Political Structure of the European Union European Commission: • Proposes EU legislation, implements it, and monitors compliance. • Run by commissioners appointed by member countries and approved by the European Parliament. • Role in competition policy has become increasingly important in business. European Council: • Ultimate controlling authority within the EU. • One representative from the government of each member state. © McGraw Hill, LLC 18 Regional Economic Integration in Europe 4 Political Structure of the European Union continued European Parliament: • 705 members elected by member states. • Debates legislation proposed by the commission and forwarded to it by the council. • Treaty of Lisbon increased power of the parliament. Court of Justice: • One judge from each country. • Supreme appeals court for EU law. © McGraw Hill, LLC 19 Regional Economic Integration in Europe 5 The Single European Act The objectives of the Act: • Remove all frontier controls among EC countries. • Apply the principle of “mutual recognition” to product standards. • Institute open public procurement to nonnational suppliers. • Lift barriers to competition in the retail banking and insurance businesses. • Remove all restrictions on foreign exchange transactions between member countries by the end of 1992. • Abolish restrictions on cabotage by the end of 1992. © McGraw Hill, LLC 20 Regional Economic Integration in Europe 6 The Single European Act continued Impact: • Impetus for restructuring substantial sections of industry. • Fostered faster economic growth. • Established legal, cultural, and language differences creates uneven implementation. © McGraw Hill, LLC 21 Regional Economic Integration in Europe 7 The Establishment of the Euro Maastricht Treaty: Committed the EU to adopt a single currency (euro). • Used by 19 of member states (the eurozone). • Second most widely traded currency after U.S. dollar. • Great Britain, Denmark, and Sweden chose not to use the euro. © McGraw Hill, LLC 22 Regional Economic Integration in Europe 8 The Establishment of the Euro continued Benefits of the euro: • Savings from handling a single currency. • Lower foreign exchange and hedging costs. Makes it easier to compare prices across Europe, increasing competition. Producers forced to look for ways to reduce production costs. Boosts development of highly liquid pan-European capital market. Increases investment options. © McGraw Hill, LLC 23 Regional Economic Integration in Europe 9 The Establishment of the Euro continued Costs of the euro: • Loss of control over national monetary policy. • European Central Bank (ECB). • EU is not an optimal currency area. • Many European economies are dissimilar. © McGraw Hill, LLC 24 Regional Economic Integration in Europe 10 The Establishment of the Euro continued The euro experience: • Volatile trading history since establishment in 1999. • Euro has weakened since 2008. • Slow economic growth and large budget deficits among several states. • Bailout package to rescue Greece in 2010. • Some newer nations holding off adoption of the euro. © McGraw Hill, LLC 25 Regional Economic Integration in Europe 11 Enlargement of the European Union Expansion into eastern Europe: • 13 additional countries applied by end of the 1990s. • Applicants had to privatize state assets, deregulate markets, tame inflation, establish stable democratic governments, and respect human rights. • New members had to wait to adopt the euro. • Eastern European countries only account for 5 percent of the GDP of current EU members. • Turkey denied entry because of human rights concerns. © McGraw Hill, LLC 26 Regional Economic Integration in Europe 12 British Exit from the European Union (Brexit) British electorate voted to leave in 2016; formally left in 2020. • Based on loss of national sovereignty, immigration issues. EU–UK Trade and Cooperation Agreement established a “zero tariff zero quota” trade regime between EU and UK. Britain’s exit is a concern for EU; seen as a counterweight to economic power of Germany. For Britain to benefit, it must be able to negotiate trade deals with the EU. © McGraw Hill, LLC 27 Regional Economic Integration in the Americas 1 There is a move toward greater regional economic integration in the Americas. • The biggest effort is the North American Free Trade Agreement (NAFTA), currently superseded by the USMCA. • Other efforts include the Andean Community and Mercosur. © McGraw Hill, LLC 28 Map 9.2 Economic Integration in the Americas Access the text alternative for slide images. © McGraw Hill, LLC 29 Regional Economic Integration in the Americas 2 The North American Free Trade Agreement (NAFTA) • Free trade area among Canada, Mexico, and the U.S. • Abolished tariffs on 99 percent of goods traded between members. • Removed barriers on the cross-border flow of services. • Protects intellectual property rights. • Removes most restrictions on FDI between members. • Allows each country to apply environmental standards. • Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored. © McGraw Hill, LLC 30 Regional Economic Integration in the Americas 3 The Case for NAFTA Mexico would benefit from: • Increased jobs as low cost production moves south and more rapid economic growth as a result. U.S. and Canada would benefit from: • Access to a large and increasingly prosperous market. • Lower prices for consumers from goods produced in Mexico. • Low cost labor and ability to be competitive in world markets. • Increased imports by Mexico. © McGraw Hill, LLC 31 Regional Economic Integration in the Americas 4 The Case against NAFTA • Jobs would be lost and wage levels would decline in the U.S. and Canada. • Pollution would increase due to Mexico's more lax standards. • Mexico would lose its sovereignty. © McGraw Hill, LLC 32 Regional Economic Integration in the Americas 5 NAFTA: The Results • NAFTA’s early impact was subtle, and both advocates and detractors may have been guilty of exaggeration. • Overall impact small, but positive. • Employment effects of NAFTA have been moderate to small. • Mexico and the United States saw small welfare gains. © McGraw Hill, LLC 33 Regional Economic Integration in the Americas 6 The United States–Mexico–Canada Agreement (USMCA) Politicians on both sides took aim at NAFTA saying it created job losses in the U.S. NAFTA renegotiated to the USMCA. • Automakers must produce 75 percent of content in North America. • By 2023, 40 percent of parts for tariff-free vehicles must come from a “high-wage” factory. • Open up the Canadian dairy market to U.S. producers. • To become law, must be ratified by legislators in all three countries. © McGraw Hill, LLC 34 Regional Economic Integration in the Americas 7 The Andean Community Formed in 1969 based on EU model. Had failed to achieve objectives by the mid-1980s. Was re-launched in 1990. • Goal to become a common market by 1995 not reached. Renamed the Andean Community in 1997. Signed an agreement in 2005 with Mercosur to restart negotiations towards the creation of a free trade area. © McGraw Hill, LLC 35 Regional Economic Integration in the Americas 8 Mercosur Originated in 1988 as a free trade pact between Brazil and Argentina. Expanded in 1990 to include Paraguay and Uruguay and in 2012 with the addition of Venezuela. • Venezuela suspended in 2016. May be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis. Efforts stalled on reducing trade barriers between member states. © McGraw Hill, LLC 36 Regional Economic Integration in the Americas 9 Central American Common Market, CAFTA, and CARICOM Central American Common Market, early 1960s. • Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. • Collapsed in 1969 due to war. Central America Free Trade Agreement (CAFTA), 2004. • U.S. and Central American Common Market. © McGraw Hill, LLC 37 Regional Economic Integration in the Americas 10 Central American Common Market, CAFTA, and CARICOM continued CARICOM, 1973. • English-speaking Caribbean countries. • Repeatedly failed to achieve economic integration. Caribbean Single Market and Economy (CSME), 2006. • Modeled on the EU’s single market. © McGraw Hill, LLC 38 Regional Economic Integration Elsewhere 1 Association of Southeast Asian Nations (ASEAN) Formed in 1967. Currently includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Foster freer trade between member countries and achieve cooperation in industrial policies. ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in 2003. • ASEAN and AFTA moving towards establishing a free trade zone. © McGraw Hill, LLC 39 Map 9.3 ASEAN Countries Access the text alternative for slide images. © McGraw Hill, LLC 40 Regional Economic Integration Elsewhere 2 Regional Trade Blocs in Africa 19 trade blocs on the African continent. Since many countries support the use of trade barriers to protect their economies from foreign competition, meaningful progress is slow. The East African Community (EAC) re-launched in 2001. • Kenya, Uganda, and Tanzania. • Established a common market in 2010 and is moving toward goal of monetary union. Tripartite Free Trade Area (TFTA) in 2015 and the Continental Free Trade Area (CAFTA) in 2018. © McGraw Hill, LLC 41 Regional Economic Integration Elsewhere 3 Other Trade Agreements Renewed emphasis on bilateral and multilateral trade agreements since collapse of Doha Round talks. Trans-Pacific Partnership (TPP). • U.S. exited agreement under Trump. • Renamed the Comprehensive and Progressive TransPacific Partnership (CPTPP). Transatlantic Trade and Investment Partnership (TTIP). • Negotiations on hold. Comprehensive Economic Partnership (RCEP). © McGraw Hill, LLC 42 360° View: Managerial Implications 1 Regional Economic Integration Opportunities Opens new markets. Allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal. • Enduring cultural differences and competitive practices might limit ability to realize cost economies. © McGraw Hill, LLC 43 360° View: Managerial Implications 2 Regional Economic Integration Threats Business environment becomes competitive. Competitors might become more efficient. Risk of being shut out of the single market by the creation of a “trade fortress.” Growing opposition to free trade areas. • Renegotiation of NAFTA, U.S. removed from TPP, Brexit. © McGraw Hill, LLC 44 Because learning changes everything. ® www.mheducation.com © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
