Chapter 08 - Regional Economic Integration
Regional Economic Integration
Learning objectives


Be able to explain the different
levels of regional economic
integration.
Understand the economic and
political arguments for regional
economic integration.

Understand the economic and
political arguments against
regional economic integration.

Be familiar with the history,
current scope, and future
prospects of the world’s most
important regional economic
agreements.

Understand the implications for
business that are inherent in
regional economic integrations
agreements.
8
8
This chapter discusses regional economic integration,
agreements among countries within a geographic region to
achieve economic gains from the free flow of trade and
investment among themselves.
There are five levels of economic integration. In order of
increasing integration, they include free trade area,
customs union, common market, economic union, and full
political union.
Integration is not easily achieved or sustained. Although
integration brings benefits to the majority, it is never
without costs for the minority. Concerns over sovereignty
often slow or stop integration attempts.
The creation of single markets in the EU and North
America means that many markets that were formerly
protected from foreign competition are now more open.
This creates major investment and export opportunities for
firms within and outside these regions.
The free movement of goods across borders, the
harmonization of product standards, and the simplification
of tax regimes make it possible for firms based in a free
trade area to realize potentially enormous cost economies
by centralizing production in those locations within the
area where the mix of factor costs and skills is optimal.
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Chapter 08 - Regional Economic Integration
OUTLINE OF CHAPTER 8: REGIONAL ECONOMIC INTEGRATION
Opening Case: The European Energy Market
Introduction
Levels of Economic Integration
The Case for Regional Integration
The Economic Case for Integration
The Political Case for Integration
Impediments to Integration
The Case Against Regional Integration.
Regional Economic Integration in Europe
Evolution of the European Union
Political Structure of the European Union
The Single European Act
The Establishment of the Euro
Enlargement of the European Union
Management Focus: The European Commission and Media Industry Mergers
Country Focus: Creating a Single European Market in Financial Services
Regional Economic Integration of the Americas
The North American Free Trade Agreement
The Andean Community
MERCOSUR
Central American Common Market, CAFTA and CARICOM
Free Trade Area of the Americas
Regional Economic Integration Elsewhere
Association of Southeast Asian Nations
Asia Pacific Economic Cooperation
Regional Trade Blocks in Africa
Implications for Managers
Opportunities
Threats
Chapter Summary
Closing Case: NAFTA and the U.S. Textile Industry
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CLASSROOM DISCUSSION POINT
Choose either the European Union or the North American Free Trade Area, and then ask
students to think about what economic integration means for companies inside the bloc.
Then, ask students to consider economic integration from the perspective of a firm
outside the bloc.
Next, ask students to consider economic integration from the perspective of a consumer.
Try to organize student responses in a positive/negative chart on the board, and then at
the end of the discussion, ask students whether they would support economic integration
or not.
OPENING CASE: The European Energy Market
The opening case explores the effort by the European Union to create a single continentwide market for electricity and gas. The goal is to increase competition and lower prices
for consumers, however, so far, political opposition and the existing industry structure
have made this goal difficult to attain. Discussion of the case can revolve around the
following questions:
1. Why is the European Union eager to create a single continent-wide market for energy
and gas? What does the European Union hope to gain? How would such a market affect
producers? Would consumers benefit?
2. Discuss how the existing industry structure in the European electricity and gas market
is making it more challenging to move toward a single continent-wide market. What
changes need to occur for the European Union to achieve its goal?
3. Some politicians have slowed efforts to create a single continent-wide electricity and
gas market. Why are the politicians concerned? Are the issues they raise valid?
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view”, then on “notes”. The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
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Slide 8-3 Introduction
Regional economic integration refers to agreements between countries in a geographic
region to reduce tariff and nontariff barriers to the free flow of goods, services, and
factors of production between each other.
Despite the rapid spread of regional trade agreements designed to promote free trade,
there are those who fear that the world is moving toward a situation in which a number of
regional trade blocks compete against each other. In this scenario of the future, free trade
will exist within each bloc, but each bloc will protect its market from outside competition
with high tariffs.
Slides 8-4-8-7 Levels of Economic Integration
The five levels of economic integration are: free trade area, customs union, common
market, economic union, and political union.
The most enduring free trade area in the world is the European Free Trade Association. EFTA
currently joins four countries-Norway, Iceland, Liechtenstein, and Switzerland. Other free trade
areas include the North American Free Trade Agreement (NAFTA).
Another Perspective: A site with information and additional links on NAFTA is available
at: {http://www.fas.usda.gov/itp/Policy/NAFTA/nafta.asp}. The site includes
downloadable power point presentations on the benefits of NAFTA
Another Perspective: To find out more about EFTA, go to {http://www.efta.int/}, and
click on “EFTA AELE”. From here you can click on several icons to get quick facts,
more in- depth reports, information on the European Economic Area, and many other
issues related to EFTA.
Customs unions around the world include the current version of the Andean Pact
(between Bolivia, Columbia, Ecuador and Peru).
Currently, MERCOSUR, the South America grouping that includes Brazil, Argentina,
Paraguay, and Uruguay, is aiming to eventually establish itself as a common market.
The European Union (EU) is an economic union, although an imperfect one since not all
members of the EU have adopted the euro, the currency of the EU, and differences in tax
rates across countries still remain.
Slide 8-10 The Economic Case for Integration
Regional economic integration can be seen as an attempt to achieve additional gains from
the free flow of trade and investment between countries beyond those attainable under
international agreements such as the WTO.
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Slide 8-11 The Political Case for Integration
The political case for integration has two main points: 1) by linking countries together,
making them more dependent on each other, and forming a structure where they regularly
have to interact, the likelihood of violent conflict and war will decrease, and 2) by linking
countries together, they have greater clout and are politically much stronger in dealing
with other nations.
Slide 8-12 Impediments to Integration
There are two main impediments to integration:
 although a nation as a whole may benefit significantly from a regional free trade
agreement, certain groups may lose
 concerns over national sovereignty
Slide 8-13 The Case Against Regional Economic Integration
Whether regional integration is in the economic interests of the participants depends upon
the extent of trade creation as opposed to trade diversion. Trade creation occurs when
low cost producers within the free trade area replace high cost domestic producers. Trade
diversion occurs when higher cost suppliers within the free trade area replace lower cost
external suppliers. A regional free trade agreement will only make the world better off if
the amount of trade it creates exceeds the amount it diverts.
Slides 8-15-8-16 Regional Economic Integration in Europe
There are two trade blocks in Europe:
 the European Union (EU)
 the European Free Trade Association
The EU is by far the more significant, not just in terms of membership, but also in terms
of economic and political influence in the world economy.
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Slide 8-17 Evolution of the European Union
The EU is the product of two political factors:
 the devastation of two world wars on Western Europe and the desire for a lasting
peace
 the European nations’ desire to hold their own on the world’s political and
economic stage.
The forerunner of the EU was the European Coal and Steel Community, which had the
goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951.
The EEC was formed in 1957 at the Treaty of Rome. While the original goal was for a
common market, progress was generally very slow.
Another Perspective: The EU web site is {http://europa.eu.int/index-en.htm}. The site
contains a broad array of information about the historical role and current activities of the
EU in the global economy.
Slide 8-18 Political Structure of the European Union
The five main institutions of the EU are:
 the European Council (resolves major policy issues and sets policy directions)
 the European Commission (responsible for implementing aspects of EU law and
monitoring member states to ensure they are complying with EU laws)
 the Council of the European Parliament, (the ultimate controlling authority
within the EU)
 the European Parliament, (debates legislation proposed by the commission and
forwarded to it by the council)
 the Court of Justice, (the supreme appeals court for EU law).
Slide 8-19 The Single European Act
The Single European Act called for the removal of border controls, mutual recognition
of standards, open public procurement, a barrier free financial services industry, no
currency exchange controls, free and open freight transport, and freer and more open
competition.
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Slides 8-22-8-24 The Establishment of the Euro
The Treaty of Maastricht, signed in 1991, committed the EU to adopt a single currency,
the euro, by January 1, 1999. The euro is used by 12 of the 27 member states. By
adopting the euro, the EU has created the second largest currency zone in the world after
that of the U.S. dollar.
Since its establishment January 1, 1999, the euro has had a volatile trading history with
the U.S. dollar. Initially, the currency fell in value relative to the dollar, but has since
strengthened.
Another Perspective: The European Union has a web page devoted to the euro
{http://ec.europa.eu/economy_finance/euro/our_currency_en.htm}. Students can explore
the site and click on the pages to see pictures of the coins and notes, the advantages of
participating in the euro zone, and frequently asked questions about the euro.
Another Perspective: The European Central Bank maintains a web site with current
information on the euro. The site is available at {http://www.euro.ecb.int/}.
Slide 8-26 Enlargement of the European Union
Several countries, particularly from Eastern Europe, have applied for membership in the
EU. In December of 2002, the EU formally agreed to accept the applications of 10
countries, and they joined on May 1, 2004. Today, membership is up to 27 countries.
Slide 8-27 Regional Economic Integration in the Americas
The North American Free Trade Agreement (NAFTA) is the most significant attempt at
economic integration in the Americas. Other efforts include the Andean group and
MERCOSUR. In addition, there are plans to establish a hemisphere wide Free Trade Area of
the Americas (FTAA.)
Slides 8-28-8-33 The North American Free Trade Agreement
The free trade agreement between the United States, Canada, and Mexico became law
January 1, 1994.
Another Perspective: The NAFTA Homepage can be accessed at
{http://www.mac.doc.gov/nafta/}.
Following approval of NAFTA by the U.S. Congress a number of other Latin American
countries indicated their desire to eventually join NAFTA. Currently the governments of
both Canada and the U.S. are adopting a wait and see attitude with regard to most
countries.
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Another Perspective: Many organizations are anxious to take advantage of the
opportunities offered by NAFTA. The NAFTA Register
{http://www.naftaregister.com/}is a directory of export management companies, export
service providers, and trading companies that want to profit from NAFTA by helping
buyers and selling take advantage of NAFTA related opportunities.
Another Perspective: An interesting analysis of NAFTA after 10 years is available at
{http://www.ustr.gov/assets/Trade_Agreements/Regional/NAFTA/asset_upload_file606_
3595.pdf}.
Slide 8-34 The Andean Community
The Andean Pact, originally formed in 1969, was based on the EU model, but was far less
successful in achieving its stated goals. In 1990, the Andean Pact was relaunched, and now
operates as a customs union.
Another Perspective: To see new developments with the Andean Community go to
{http://www.comunidadandina.org/endex.htm}.
Slide 8-35 MERCOSUR
In some industries MERCOSUR is trade diverting rather than trade creating, and local
firms are investing in industries that are not competitive on a worldwide basis.
Another Perspective: MERCOSUR's Homepage, which includes a broad array of useful
information, can be accessed at {http://www.sice.oas.org/trade/mrcsr/mrcsrtoc.asp}.
Another Perspective: Information of the EU’s relations with MERCOSUR can be found
at {http://europa.eu.int/comm/external_relations/mercosur/intro/}.
Slide 8-36 Central American Common Market and CARICOM
There are two other trade pacts in the America, the Central American Trade Market and
CARICOM, although neither has made much progress as yet.
Slide 8-37 Free Trade of the Americas
If the FTAA is established, it will have major implications for cross-border trade and
investment flows within the hemisphere. The FTAA would create a free trade area of
nearly 800 million people.
Another Perspective: Additional information on the Free Trade of the Americas can be
found at
{http://www.ftaa-alca.org/alca_e.asp}.
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Slide 8-38 Regional Economic Integration Elsewhere
Several efforts have been made to integrate in Asia and Africa
One of the most successful is the Association of Southeast Asian Nations (ASEAN)
Slides 8-39-8-40 Association of Southeast Asian Nations
Formed in 1967, ASEAN currently includes Brunei, Indonesia, Malaysia, the Philippines,
Singapore, Thailand, and, most recently, Vietnam, Myanmar, Laos, and Cambodia. The
basic objectives of ASEAN are to foster freer trade between member countries and to
achieve some cooperation in their industrial policies.
Slides 8-41-8-42 Asia Pacific Cooperation
APEC currently has 21 members including such economic powerhouses as the United
States, Japan, and China. The stated aim of APEC is to increase multilateral cooperation
in view of the economic rise of the pacific nations and the growing interdependence
within the region.
Another Perspective: For more on APEC, go to its web site at
{http://www.apecsec.org.sg/}.
Slide 8-43 Regional Trade Blocks in Africa
There are nine trade blocs on the African continent, however progress toward the
establishment of meaningful trade blocs has been slow.
Slide 8-44 Implications for Managers
The EU and NAFTA currently have the most immediate implications for business.
Slide 8-45 Opportunities
The greatest implication for MNEs is that the free movement of goods across borders, the
harmonization of product standards, and the simplification of tax regimes, makes it possible for
them to realize potentially enormous cost economies by centralizing production in those locations
where the mix of factor costs and skills is optimal. By specialization and shipping of goods
between locations, a much more efficient web of operations can be created.
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Chapter 08 - Regional Economic Integration
Slide 8-46 Threats
Just as the emergence of single markets in the EU and North America creates
opportunities for business, so it also presents a number of threats.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: NAFTA has produced significant benefits for the Canadian, Mexican and
US economy. Discuss.
ANSWER 1: NAFTA’s proponents argue that the agreement should be viewed as an
opportunity to create an enlarged and a more productive base for the U.S., Canada, and
Mexico. As low-income jobs move from Canada and the United States to Mexico, the
Mexican economy should be strengthened giving Mexico the ability to purchase highercost American and Canadian products. The net effect of the lower income jobs moving
to Mexico and Mexico increasing its imports of high quality American and Canadian
goods should be positive for the American and Canadian economies. In addition, the
international competitiveness of United States and Canadian firms that move production
to Mexico to take advantage of lower labor costs will be enhanced, enabling them to
better compete with Asian and European rivals.
QUESTION 2: What are the economic and political arguments for regional economic
integration? Given these arguments, why don't we see more integration in the world
economy?
ANSWER 2: The economic case for regional integration is straightforward. As we saw in
Chapter 5, unrestricted free trade allows countries to specialize in the production of goods
and services that they can produce most efficiently. If this happens as the result of
economic integration within a geographic region, the net effect is greater prosperity for
the nations of the region. From a more philosophical perspective, regional economic
integration can be seen as an attempt to achieve additional gains from the free flow of
trade and investment between countries beyond those attainable under international
agreements such as the WTO. The political case for integration is also compelling.
Linking neighboring economies and making them increasingly dependent on each other
creates incentives for political cooperation between neighboring states. Also, the
potential for violent conflict between the states is reduced. In addition, by grouping their
economies together, the countries can enhance their political weight in the world.
Despite the strong economic and political arguments for integration, it has never been
easy to achieve (on a meaningful level). There are two main reasons for this. First,
although economic integration benefits the majority, it has its costs. While a set of
nations as a whole may benefit significantly from a regional free trade agreement, certain
groups may loose. The second impediment to integration arises from concerns over
national sovereignty.
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QUESTION 3: What effect is the creation of a single market and a single currency
within the EU likely to have on the competition within the EU? Why?
ANSWER 3: By creating a single market and currency, member countries can expect
significant gains from the free flow of trade and investment. This will result from the
ability of the countries within the EU to specialize in the production of the product that
they manufacture the most efficiently, and the freedom to trade those products with other
EU countries without being encumbered by tariffs and other trade barriers. In terms of
competition, the competition between European firms will increase. Some of the most
inefficient firms may go out of business because they will no longer be protected from
other European companies by high tariffs, quotas, or administrative trade barriers.
Companies from those countries that have not adopted the euro may find that their costs
are higher as they deal with currency exchanges. In addition, because it will be easier to
compare prices across markets, firms in the euro zone will be pushed to lower prices and
become more efficient.
QUESTION 4: Do you think it is correct for the European Commission to restrict
mergers between American companies that do business in Europe? (For example, the
European Commission vetoed the proposed merger between WorldCom and Sprint, both
U.S. companies, and it carefully reviewed the merger between AOL and Time Warner,
again both U.S. companies).
ANSWER 4: Many students will probably suggest that the European Commission has a
right to regulate the European market, even if the regulation involves American
companies. Students taking this perspective will probably suggest that such restrictions
should be made independently of other considerations, even when the parent
governments of the companies have approved the mergers. Other students however, may
argue that the European Commission does not have the right to restrict a merger that has
been approved by parent governments. In doing so, the European Commission is in
effect protecting domestic companies from foreign competition, and violating the spirit of
the WTO.
QUESTION 5: How should a US firm that currently exports to only ASEAN countries
respond to the creation of a single market in this regional grouping?
ANSWER 5: A US business firm that is currently exporting to only ASEAN countries
should seriously consider opening a facility somewhere in this grouping, as the
economics of a common market suggest that outsiders can be at a disadvantage to
insiders. The opening of borders within ASEAN also has the potential to increase the
size of the market for the firm. Of course it is possible, after careful consideration, that
exporting may still be the most appropriate means of serving the market.
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QUESTION 6: How should a firm with self-sufficient production facilities in several
ASEAN countries respond to the creation of a single market? What are the constraints on
its ability to respond in a manner that minimizes production costs?
ANSWER 6: The creation of the single market means that it may no longer be efficient
to operate separate duplicative production facilities in each country. Instead, the facilities
could either be linked so that each specializes in the production of only certain items or
several sites should be closed down and production consolidated at the most efficient
locations. Existing differences between countries as well as the need to be located near
important customers may limit a firm’s ability to fully consolidate or relocate production
facilities for production cost reasons. Minimizing production costs is only one of many
objectives. For example, location of production near R&D facilities can be critical for
new product development. The location decision needs to examine long run economic
success, not just cost minimization.
QUESTION 7: After a promising start, MERCOSUR, the major Latin American trade
agreement, has faltered and made little progress since 2000. What problems are hurting
MERCOSUR? What can be done to solve these problems?
ANSWER 7: MERCOSUR originated in 1988 as a free trade pact between Brazil and
Argentina. The pact was expanded in 1990 to include Paraguay and Uruguay with goal
of becoming a full free trade area by 1994, and a common market sometime after. While
initially considered a success, critics began to question whether the trade diversion effects
of MERCOSUR outweighed it trade creation effects. Then, in 1998 member states
slipped into a recession and in 1999, Brazil’s financial crisis led to a significant
devaluation of its currency creating further turmoil. Finally, in 2001, Argentina beset by
economic stresses asked that the customs union be temporarily suspended, effectively
ending MERCOSUR’s quest to become a fully functioning customs union. However, in
2003, Brazil’s new president announced his support for a revitalized and expanded
MERCOSUR that would be modeled after the EU.
Another Perspective: Students can check the current status of the agreement online
{http://www.sice.oas.org/trade/mrcsr/mrcsrtoc.asp}.
To solve the problems of MERCOSUR, the countries should reduce or eliminate high
tariffs on products that can be produced more efficiently in other parts of the world. It
should strive to develop industries in which it has a comparative advantage and direct its
financial resources to those industries. Finally, it should begin to develop an economy
that fosters the free flow of trade and goods throughout the region.
QUESTION 8: Would the establishment of a Free Trade Area of the America’s (FTAA)
in 2005 be good for the two most advanced economies in the hemisphere, the United
States and Canada? How might the establishment of FTAA impact the strategy on North
American firms?
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ANSWER 8: In 1994, a Free Trade of the Americas (FTAA) was proposed. If the
agreement comes about, it would effectively create a free trade area of nearly 800 million
people responsible for more than $12 trillion in GDP in 2003. However, the U.S., while
initially a strong advocate of the agreement, has lessened its support for the FTAA
recently. The question of whether the agreement is good for the U.S. and Canada will
likely produce a lively debate among students.
QUESTION 9: Reread the Management Focus case on the European Commission and
Media Industry Mergers, then answer the following questions:
a) Given that both AOL and Time Warner were U.S. based companies, do you think the
European Commission had a right to review and regulate their planned merger?
b) Were the concessions extracted by the European Commission from AOL and Time
Warner reasonable? Whose interests was the Commission trying to protect?
c) What precedent do the actions of the European Commission in this case set? What are
the implications for managers of foreign enterprises with substantial operations in
Europe?
ANSWER 9: a) This question deals with the delicate issue of just how far a country can
extend the reach of its law, and should set the stage for a good debate. While some
students will argue that the European Commission is overstepping its boundaries by
restricting mergers between American companies doing business in Europe, other
students will recognize that the U.S. might act in a similar fashion if American firms
were being threatened by foreign companies seeking to merge and operate in the U.S.
market.
b) Time Warner and EMI, bowing to pressure from the European Commission, agreed to
drop their joint venture plans after the European Commission raised concerns about the
size of a jointly owned company, which would have been three times that of the next
largest competitor. According to the European Commission, the joint venture would
have too much market power. The European Commission’s goal was to preserve a
competitive market for consumers. A similar situation existed with the Time Warner
AOL deal, which if approved would dominate the emerging market for downloading
music over the Internet. The companies involved had little choice in the matter, if they
wanted to operate in the European market, they had to follow the rules.
c) Some students will argue that the European Commission had no right to become
involved in the business decisions of the companies, especially the ones from the United
States. Others however, will probably note that one of the roles of the European
Commission is to preserve a fair market system that protects consumers. In this
particular case, that meant that the deals had to be blocked.
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CLOSING CASE: NAFTA and the U.S. Textile Industry
The closing case explores the effect of NAFTA on the U.S. textile industry. Prior to the
signing of the NAFTA agreement, many concerns were raised regarding the potential for
a significant loss of jobs in the American textile industry. Indeed, between 1994 and
2004, employment in the U.S. textile industry fell from about 858,000 to 296,000.
However, at the same time, U.S. consumers have enjoyed lower clothing prices and U.S.
fabric and yarn makers have seen a boost in their exports to Mexico. Discussion of the
case can revolve around the following questions
QUESTION 1: Why did many textile jobs apparently migrate out of the United States in
the years after the establishment of NAFTA?
ANSWER 1: Between 1994 and 2004, despite strong and growing demand by American
consumers, U.S. apparel production fell by 40 percent and textile production fell by 20
percent. The cuts in production led to significant job losses, with employment in textile
mills falling from 478,000 to 239,000, and apparel employment dropping from 858,000
to just 296,000.
QUESTION 2: Who gained from the process of readjustment in the textile industry after
NAFTA? Who lost?
ANSWER TWO: Thanks to NAFTA and the cheaper labor available in Mexico, American
consumers have watched prices on clothing fall. Designer jeans, for example, fell from
about $55 in 1994 to about $48 today. For consumers, this means more money to spend
on other items. However, while many consumers may be happy about the shift in apparel
production from the United States to Mexico, some consumers may have been one of the
unlucky individuals who also saw their job move to Mexico. With any luck, those
individuals were able to find a new job as a yarn maker, and are now benefiting from the
increase in U.S. yarn exports. Companies that were able to take advantage of larger
markets and cheaper labor were also beneficiaries of this agreement. However, some
companies probably saw their profits drop as competition from companies producing in
Mexico increased. Certainly, gains were made by the newly employed Mexican textile
workers and the companies they worked for.
QUESTION 3: With hindsight, do you think it is better to protect vulnerable industries
such as textiles, or let them adjust to the painful winds of change that follow entering into
free trade agreements? What would the benefits of protection be? What would the costs
be?
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ANSWER 3: Trade theory suggests that free trade benefits all countries because it allows
countries to specialize in what they do best and trade for everything else. However, the
theory does not consider the painful adjustment that may need to occur before the
benefits of free trade can be fully realized. For displaced workers, NAFTA is probably
viewed quite negatively. However, workers who were able to increase their skill base
may not actually be better off than they were prior to NAFTA. Certainly, it would seem
that consumers are better off with free trade. Many students may come to the conclusion
that for countries to remain competitive today, economic integration is a necessary,
though sometimes painful, process.
Another Perspective: Students can access a wealth of information on NAFTA at
{http://www.ustr.gov/Trade_Agreements/Regional/NAFTA/Section_Index.html}. Students can
explore NAFTA in more depth by clicking on the various icons that provide information on
NAFTA after 5 years, and after 10 year. There is also a report on textiles that links directly to
this feature.
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: Revisiting Coverage of NAFTA
Abstract: This video explores the effect of NAFTA on a small town in Alabama.
Key Concepts: NAFTA, globalization, free trade, manufacturing, foreign direct
investment
Notes: In Autaugaville, Alabama life has changed since the passage of NAFTA. In 1993,
238 residents of the tiny town worked at Crystal Lake Manufacturing making brooms.
Today, that number has dwindled to just 100. Founded in the 1930s, Crystal Lake
Manufacturing initially provided jobs to tenant farmers who had been displaced by
mechanization. Sixty years later, many of the company’s employees were the
descendants of the sharecroppers. When Congress considered the passage of NAFTA,
residents spoke out against the agreement fearing that their jobs would be lost to Mexico.
Workers at the Alabama plant earned $9 per hour, while Mexican labor cost about a
dollar an hour. Today, two-thirds of the broom-making jobs have disappeared, and those
that remain have changed dramatically.
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Crystal Lake Manufacturing has shifted its production process from a more laborintensive method to one that involves very little skill. It is cheaper now for the company
to buy pre-assembled broom heads from China, and handles from Honduras, and then
assemble the product at the Crystal Lake Manufacturing facility. Interestingly, displaced
workers have been able to find new jobs. Thanks to NAFTA, Alabama, like Mexico, is
luring jobs from the northern part of the U.S. In addition, many large foreign automakers
have built plants in Alabama. The automakers are attracted to the region because of its
lower cost of doing business. In fact, Alabama has actually become more productive
since the passage of NAFTA. The state now exports peanuts to Canada and beef to
Mexico. The state even boasts an unemployment rate well below the national average.
Still, critics of the agreement remain. Some say that economic inequality in America has
grown as a result of the passage of NAFTA, that the rich have gotten richer and the poor
poorer. They argue that while unemployment in Alabama is only 3 percent, many
workers who might have continued working at Crystal Lake Manufacturing or other
companies like it, have simply dropped out of the workforce entirely and so contribute to
a misleading picture of the state’s true unemployment rate. Concerns arise too about the
magnitude of profits made in America that are now earned by foreign companies, and
what little share is left over for the local market.
Discussion Questions:
1. Discuss the controversy over the passage of NAFTA. Were the fears of those who
opposed the passage of the agreement real at the time? As a worker at the Crystal Lake
Manufacturing plant in the early 1990s would you have been opposed to NAFTA? Why
or why not?
2. Over a decade has passed since the ratification of NAFTA. Was there any merit in the
arguments against the passage of NAFTA? Has the agreement brought the benefits to
Americans that were promised?
3. Consider the irony of Alabama’s situation. While workers in the state were opposed to
seeing NAFTA pass because of the potential loss of jobs to Mexico, the state has now
lured manufacturing from northern states to Alabama creating the very same job loss in
the northern states that Mexico was expected to create in Alabama. Should workers in
northern states protest against the southern states or is the loss of jobs to the north
different because it all takes place within the country. Would a worker in the north agree
with your opinion? Why or why not?
4. Several large, foreign automakers have moved to Alabama providing attractive jobs to
residents. What are the dangers of relying on foreign companies to support a local
economy? Do the foreign companies have any responsibility toward the state of
Alabama?
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Chapter 08 - Regional Economic Integration
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following:
Title 8: U.S. Farmers Respond to CAFTA
Notes: According to American sugar farmers, the proposed Central American Free Trade
Agreement (CAFTA) which is intended to liberalize trade with five Central American
nations and the Dominican Republic, will be a disaster. Other farmers, such as corn and
dairy farmer Duane Alberts, are in full support of the proposed agreement and the larger
market of an additional 44 million consumers it promises. But, for sugar farmers such as
Marc Olson, CAFTA could spell the end to a way of life. Unlike most U.S. farmers,
sugar farmers are not directly subsidized by the government. Instead, sugar imports are
sharply limited, keeping prices higher in the domestic market. Passing the CAFTA
agreement would result in falling trade barriers, and increased sugar imports.
According to Olson, U.S. producers cannot compete with other countries where farmers
receive government subsidies. He notes that even though U.S. producers are among the
most efficient in the world, if CAFTA passes, foreign producers, thanks to the subsidies,
will be in a position to dump sugar on the U.S. market and eventually drive 140,000
Americans who depend on sugar out of their jobs. The Bush Administration argues that
the sugar producers are overstating their case, that the negative effect of CAFTA would
be much smaller. But some lawmakers remain unconvinced of the benefits of the
agreement. Republican Gil Gutknecht from Rochester for example, a self-proclaimed
free trader, believes the jury is still out on CAFTA, but that if NAFTA is anything to go
by, then the proposed agreement would certainly not help farmers. So, for now, farmers
will continue to plead their cases with lawmakers, hoping that their side of the debate
wins.
Discussion Guide:
1. Discuss how Adam Smith and/or David Ricardo might view CAFTA? Would Michael
Porter look at the agreement any differently?
2. According to farmers, some 140,000 people are employed by the sugar industry, would
eventually lose their livelihood if CAFTA, and other agreements went into effect. Yet,
CAFTA spells promise for pork and diary farmers. How can the needs of these two
related, yet very divided groups be met?
3. American sugar producers are among the most efficient in the world, yet would stand
to lose if CAFTA is passed. Reflect on this scenario. According to the basic theory of
comparative advantage, American farmers ought to be producing and exporting sugar.
Should the U.S. remove its import barriers to sugar, yet allow direct subsidies to sugar
producers in other countries remain? Should the U.S. subsidize American producers?
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Chapter 08 - Regional Economic Integration
4. Free trade advocates believe Americans are paying too much for sugar thanks to the
barriers limiting cheaper imports. If CAFTA passes, what will be the effect for American
consumers? Will they really see a substantial benefit from the agreement? Why or why
not?
globalEDGE™ Exercise Questions
Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following
exercises:
Exercise 1
Your company is considering an expansion by opening new customer representative and
sales offices in the European Union (EU). Nevertheless, the size of the investment is
significant and top management wishes to have a clearer picture of the current and
probable future status of the EU. A colleague who spent some time living in the EU
indicated that Eurostat might be a comprehensive source to assist in your project.
Prepare an executive summary describing the features you consider as crucial in making
such a decision.
Exercise 2
Trade agreements can impact the cultural interactions between countries. In fact, the
establishment of the Free Trade Area of the Americas (FTAA) can be considered a threat
as well as an opportunity for your company. Identify the countries participating in
negotiations for the FTAA. What are the main themes of the negotiation process?
Answers to Exercises
Exercise 1
A variety of reports and statistics can be accessed by searching the term “Eurostat” at
{http://globaledge.msu.edu/ResourceDesk/}. At the bottom of the linked Eurostat
webpage are a series of publications, tables, and data that are useful for completing this
exercise. Be sure to check the “Resource Desk only” checkbox of the search function on
the globalEDGE website.
Search Phrase: “Eurostat”
Resource Name: EUROPE: Eurostat
Website:
{http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1090,30070682,1090_33076576&
_dad=portal&_schema=PORTAL}
globalEDGE™ Category: “Research: Statistical Data Sources”
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Chapter 08 - Regional Economic Integration
Exercise 2
The Free Trade Area of Americas website can be accessed by searching the term
“FTAA” at {http://globaledge.msu.edu/ResourceDesk/}. This resource is found under
the globalEDGE category “Research: Organizations”. Be sure to check the “Resource
Desk only” checkbox of the search function on the globalEDGE website.
Search Phrase: “FTAA”
Resource Name: AMERICA: Free Trade Area of the Americas
Website: {http://www.ftaa-alca.org}
globalEDGE™ Category: “IB Topics: Regional Trade Agreements” or “Trade: Trade
Portals”
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