Introduction to Global Business Chapter 3 Regional Economic Integration © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. After studying this chapter, you should be able to: 1. Explain regional economic integration, its evolution, and its benefits and costs. 2. Identify how economic geography helps explain, promote, and segment regional integration blocs. 3. Identify the primary reasons why countries are now seeking to pursue regional integration at the expense of multilateral trade liberalization. 4. Explain why the European Union is seen as the most advanced regional integration bloc. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. After studying this chapter, you should be able to: 5. Describe how NAFTA has affected U.S.–Mexico bilateral trade in goods and services. 6. Explain the importance of ASEAN and indicate why Asia may become the most important free trade region for this century. 7. Explain why regional integration in Latin America is challenging and why there is potential for a grouping like MERCOSUR to become more predominant. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. What Is Regional Economic Integration? • Regional integration – Implementation of a multitude of economic and/or political steps by member states to increase their global competitiveness, including preferential trade access • Spatial transformations – The process of allowing efficient geographic distribution of business activities within and among countries © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.1 TRANS-PACIFIC PARTERNSHIP AGREEMENT The Trans-Pacific Partnership (TPP) was the centerpiece of President Barack Obama’s strategic pivot to Asia. Before President Donald J. Trump withdrew the United States in 2017, the TPP was set to become the world’s largest free trade deal, covering 40 percent of the global economy. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stages of Regional Integration Freetrade area Customs union Common (or single) market Economic and monetary union © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Political union Stages of Regional Integration 1. Free Trade Area – an area in which two or more countries agree to eliminate all barriers to trade, such as tariffs, quotas and nontariff barriers like border restrictions, while at the same time keeping their own external tariffs against non members. Accounts for almost 90 percent of regional agreements European Free Trade Association (EFTA) between Norway, Iceland, Liechtenstein, and Switzerland began in 1960 Other free trade areas include N A F T A, now replaced by the United States Mexico–Canada Agreement (U S M C A). © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stages of Regional Integration 2. Custom Union – a group of free-trade member countries that have adopted a common external tariff with non member countries Most countries that enter a customs union desire further integration in the future Andean Community established free trade between Bolivia, Columbia, Ecuador, and Peru. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stages of Regional Integration 3. Common Market or Single Market – a market formed when member countries of a customs union remove all barriers to allow the movement of capital and labor within the customs union. Requires significant harmony among members in fiscal, monetary, and employment policies 4. Economic and Monetary Union- a union formed when members of a common market agree to implement common social programs and coordinated macroeconomic policies that would lead to the creation of a single regional currency and a regional apex central bank. Involves sacrificing a significant amount of national sovereignty © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stages of Regional Integration 5. Political Union – created when member countries of an economic and monetary union work closely with one another to arrive at common defense and foreign policies and behave as a single country. The EU is headed toward at least partial political union © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.2 FORM AND STAGES OF REGIONAL INTEGRATION Stage of Integration Harmonization Abolition of Common and Unification Tariffs and External Tariff Abolition of of Economic Quotas Among and Quota Restrictions on Policies Members System Factor Movements and Institutions Free-trade area Yes No No No Customs union Yes Yes No No Common market Yes Yes Yes No Economic union Yes Yes Yes Yes © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pros and Cons of Regional Integration Regional Integration Benefits © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Costs Benefits of Regional Integration • Creating a larger pool of consumers with growing incomes and similar culture, tastes, and social values • Encouraging economies of scale in production, increasing the region’s level of global competitiveness, and enhancing economic growth through investment flows • Freeing the flow of capital, labor, and technology to the most productive areas in the region • Increasing cooperation, peace, and security among countries in the region • Encouraging member states to enhance their social welfare to match that of the most progressive states • Since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cons of Regional Integration • Undermining the most-favored-nation status rule, an essential principle of the WTO • Imposing uniform laws and regulations that at times do not take into account national economic, cultural, and social differences • Eliminating jobs and increasing unemployment in protected industries • Losing sovereignty, national independence, and identity • Reducing the powers of the national government • Increasing the problems of illegal drugs and terrorism due to the ease of cross-border labor movement • This was the major concern of Great Britain, leading to a referendum on membership in the EU, and its subsequent withdrawal. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Most Favored Nation Status • Principle of “Most Favored Nations” states that countries cannot normally discriminate between their trading partners, i.e. If a country grants advantages to one of its trading partner, the same advantages have to be offered to all WTO members. • So, if a country reduces tariffs for one country, it has to be reduced for all the members of WTO. So, MFN status leads to reduction in trade barrier between countries © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Case for Regional Integration – By linking countries together, making them more dependent on each other, and forming a structure where they regularly interact, the likelihood of violent conflict and war will decrease. – By linking countries together, they have greater clout and are politically much stronger in dealing with other nations. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Map 3.1 Member States of the European Union in 2020 • Access the text alternative for slide images. • Source: European Union, 1995–2020. Regional Economic Integration in Europe 11 • British Exit from the European Union (Brexit) Voted to leave on June 23, 2016; officially left January 31, 2020. • Great Britain was uncomfortable with loss of national sovereignty; immigration also became a key issue. Britain was EU’s second largest economy and seen as a counterweight to Germany. Most experts predict Great Britain will see significant short- to medium-term costs based on exit. • Anthony Collins/Alamy Stock Photo The Economic Geography of Regional Integration • Economic geography – The study of principles that govern the efficient spatial allocation of economic resources and the resulting consequences (i.e. market size, location, openness to trade) Steps to Regional Integration 1 Start small 2 Think global 3 Compensate the least fortunate © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Economic Geography of Regional Integration Start Small. Regional integration should have clear goals and initially address a narrow, well-defined area of cooperation in which the costs and benefits are easily defined. Think Global. Regional integration should not create unconnected or isolated countries. Instead, it should help countries gain access to world markets. Compensate the Least Fortunate. Regional integration will lead to a concentration of economic activity in fewer places with increased efficiency and competitiveness. It also means that some regions will gain more than others. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.3 REGIONS CLOSE TO WORLD MARKETS Market access is essential for economic growth, and proximity to world markets is an asset for just-in-time production, exports of perishable goods, and tradable services © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.4 REGIONS WITH LARGE LOCAL MARKETS BUT LOCATED FAR FROM WORLD MARKETS Sizeable countries that are far from large world markets can benefit by attracting industrial activities because of their large local market. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.5 REGIONS WITH SMALL LOCAL MARKETS LOCATED FAR FROM WORLD MARKETS International integration is most difficult for countries in regions that are divided, far from world markets, and lack the economic size of a large local economy. Regional integration is paramount for their growth © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Does Regional Integration Confound Global Trade? European Union (EU) North American Free Trade Agreement (NAFTA) Association of South East Asian Nations (ASEAN) Regional Integration in Latin America © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Economists are concerned that as a result of these negotiations, the prospects of creating a truly open global economic system that benefits all countries may recede. The European Union (EU) • EU is most highly evolved regional integration: – EU grew out of European Coal and Steel Community (ECSC). – The Treaty of Rome in 1957 established the European Economic Community (EEC). – The Maastricht Treaty in 1992 created the EU as a full economic union with free movement of labor among its member countries. – The euro was adopted as a common currency in 1992. – Economic coordination and fiscal stability is challenged by the sovereign debt crisis of some members. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.8 NORTH AMERICAN FREETRADE AGREEMENT NAFTA is a comprehensive free-trade agreement among Canada, the United States, and Mexico. It addresses issues ranging from protection of workers’ rights and the environment to phased reduction of tariff and non-tariff barriers. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The North American Free-Trade Agreement (NAFTA) • Canada, United States, and Mexico reached a comprehensive trade agreement in 1994. • Major NAFTA objectives: – Trade expansion through the phased elimination of all trade barriers – Protection of intellectual property rights – Creation of institutions to address unfair trade practices, trade disputes, environmental protection, worker’s rights, competition policies, and implementation of NAFTA rules and regulations © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Association of South East Asian Nations (ASEAN) The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. • ASEAN’s objectives: – To accelerate economic growth, social progress, and cultural development in the region – To promote peace and stability through the rule of law in relationships among countries in the region • Bases for ASEAN: – ASEAN Security Community (ASC) – ASEAN Economic Community – ASEAN Sociocultural Community © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Map 3.3 ASEAN Countries © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Association of South East Asian Nations (ASEAN) Bases for ASEAN: ASEAN Security Community (ASC). ASC’s objective is to ensure that countries in the region live in peace with one another. Since ASEAN’s establishment, tension has never escalated into armed confrontation among ASEAN members. ASEAN Economic Community. The ASEAN Economic Community calls for the establishment of a single market, but it does not call for the free movement of labor across member countries. ASEAN Sociocultural Community. The goal is to ensure that the ASEAN workforce is well prepared to benefit from the economic integration. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Regional Integration in Latin America • The Treaty of Montevideo in 1960 created the Latin American Free Trade Association (LAFTA). • Bolivia, Chile, Colombia, Ecuador, and Peru created the Andean Group in 1969. • Treaty of Asunción in 1991 among Argentina, Brazil, Paraguay, and Uruguay, created the Southern Cone Common Market, or MERCOSUR (Mercado Común del Sur). • DR-CAFTA (Dominican Republic and Central American Free Trade Agreement) became effective in 2005. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXHIBIT 3.12 REGIONAL INTEGRATION IN LATIN AMERICA Mercosur (in Spanish), or Mercosul (in Portuguese), officially Southern Common Market,[6] is a South American trade bloc established by the Treaty of Asunción in 1991 and Protocol of Ouro Preto in 1994. Its full members are Argentina, Brazil, Paraguay and Uruguay. Venezuela is a full member but has been suspended since December 1, 2016. Associate countries are Bolivia, Chile, Colombia, Ecuador, Guyana, Peru and Suriname.[7] Observer countries are New Zealand and Mexico. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
