CHAPTER 9
Regional Economic
Integration
8-2
Learning Objectives


McGraw-Hill/Irwin
What are the advantages &
disadvantages of creating a single
market for a business firm? Illustrate
with reference to EU or ASEAN?
Course overview and current events
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2
8-3
Chapter Focus

Examine the trend toward regional
economic integration.




McGraw-Hill/Irwin
By end 2001, all 136 WTO members reported
participation in at least one regional trade
agreement.
Explore the economic and political debate
surrounding integration.
Review the progress, worldwide, toward
integration.
Map the implications for business.
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3
8-4
Regional Trade Agreements Notified to
GATT and the WTO, 1948-1999
25
20
15
Active, Dec 99
10
Inactive, Dec 99
5
McGraw-Hill/Irwin
1993
1983
1963
1948
0
1973
Figure 8.1
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4
8-5
Level of Economic Integration
Political Union
Economic Union
Common Market
Customs Union
EU
1992
Free
Trade
Area
NAFTA
Figure 8.2
McGraw-Hill/Irwin
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8-6
Economic Integration
Free Trade Area
 All barriers to trade among members removed.
 Each country can determine own trade policies
toward nonmembers.

Customs Union
 Eliminates barriers among members and has a
common external trade policy.

Economic Union
 No barriers among members, common external
policy, common monetary and fiscal policy,
harmonized tax rates and common currency.

Political Union
 Has a coordinating bureaucracy accountable to all
citizens.
McGraw-Hill/Irwin
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
6
8-7
Case for Regional Integration

Economic
 Allow countries to
specialize in products
they produce efficiently.
 Easier to gain
agreement than
GATT/WTO.
 Role of FDI is enhanced.
 Exploit gains from free
flow of goods and
services and investment.
McGraw-Hill/Irwin

Political
 Creates incentive for
political cooperation.
 Reduces potential
for violent
confrontation.
 Enhanced clout to
deal with
‘superpowers’.
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7
8-8
Impediments to Integration



McGraw-Hill/Irwin
Although a nation may
benefit, groups within a
nation may be hurt.
Concerns about
national sovereignty.
Debate:
 Trade creation.
 Trade diversion.
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8
8-9
U.S. Mexican Trade in Textiles, 19932000
10000
8000
U.S. exports to
Mexico of yarns and
fabrics
6000
4000
Mexican garment
exports to U.S.
2000
0
Figure 8.3
1993
McGraw-Hill/Irwin
1995
1997
1999
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8-10
EU Evolution




Product of two political factors:
 Devastation of WWI and WWII and desire for
peace.
 Desire for European nations to hold their own,
politically and economically, on the world stage.
1951 - European Coal and Steel Community.
1957- Treaty of Rome establishes the European
Community.
1994 - Treaty of Maastricht changes name to the
European Union.
McGraw-Hill/Irwin
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10
8-11
European Union GDP
3.5
3
2.5
2
1.5
% Growth
1
0.5
0
-0.5
McGraw-Hill/Irwin
90
92
94
96
98
2000
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8-12
US Top European Trading Partners
$ Billions
3.5
3
2.5
2
Exports to
Imports from
1.5
1
0.5
0
Germany
McGraw-Hill/Irwin
France
Switzerland
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8-13
EU Governance
European Commission
European Council
Heads of State
and
Commission
President
Resolves policy
issues sets
policy direction.
20 Commissioners
appointed by
members for
4 year terms
Proposing,
implementing,
monitoring
legislation.
Council of Ministers
European Parliament
630 directly
elected members
McGraw-Hill/Irwin
1
representative
from each
member
Propose amendments to
legislation, veto power
over budget and singlemarket legislation,
appoint commissioners.
Ultimate controlling authority.
No EU laws w/o approval.
Court of Justice
1 judge from
each country
Hears
appeals of
EU Laws.
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The Single European Act
8-14
1987- EC agrees to work toward establishing a single
market by December 31, 1992.
Stimulus:
Disharmony among the EC
member countries:
Trade policy.
Technical standards.
Led to establishing the
Delors Commission in 1985.
Basis for Single
European Act.
Objectives:
Remove frontier controls.
“Mutual recognition” of product
standards.
Open public procurement to
nonnationals.
Lift barriers to banking and
insurance competition.
Remove restrictions on foreign
exchange transactions.
Abolish cabotage restrictions.
The Act can lead to gains in trade and investment and increased
competition when barriers are removed.
McGraw-Hill/Irwin
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8-15
The Euro
Benefits:
Treaty of Maastricht:
11 of 15 member
states.
Jan. 1, 1999 Exchange rates locked
in.
Jan. 1, 2002 - Euro
notes and coins issued.
National currencies
taken out of circulation.
McGraw-Hill/Irwin
Savings from using only one
currency.
Easy to compare prices,
resulting in lower prices.
Forces companies to be more
efficient and cut costs.
Creates liquid pan-Europe
capital market.
Increases range of
investments for individuals
and institutions.
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8-16
Costs of the Euro



Countries lose monetary policy control.
 European Central Bank controls policy for the
“Euro zone”.
EU is not an”optimal currency area”.
 Country economies are different.
Early experience has seen a slump (approximately
20% through 2001) against the dollar.
 Too early to judge whether the Euro is/is not a
success.
McGraw-Hill/Irwin
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8-17
EU Issues


Enlargement.
Fortress Europe?



McGraw-Hill/Irwin
Create European barriers to trade from the
outside?
EU promises to support GATT and the
WTO.
No guarantees, however.
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8-18
Jan. 1, 1994
NAFTA
Remove
Abolish cross-border
tariffs
flow of
Protect services
intellectual
property Remove FDI
restrictions
Apply
national
Two commissions
environmental
to enforce treaty
standards
McGraw-Hill/Irwin
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8-19
NAFTA: For/Against
Against
For
Enlarged and productive regional
base.
Labor-intensive industries move
to Mexico.
Mexico gets investment
and employment.
Increased Mexican income to
buy US/Canada goods.
Demand for goods increases
jobs.
Consumers get lower prices.
McGraw-Hill/Irwin
Loss of jobs to Mexico.
Mexican firms have to
compete against efficient
US/Canada firms.
Mexican firms become
more efficient.
Environmental degradation.
Loss of national sovereignty.
Impact of NAFTA
has been muted.
Small trade and jobs gain
for US.
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ASEAN
McGraw-Hill/Irwin
8-20
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8-21
Association of Southeast Asian Nations


Created in 1967.
Economic, political and social cooperation.


McGraw-Hill/Irwin
Little has been accomplished.
Brunei, Indonesia, Laos, Malaysia, the
Philippines, Myanmar, Singapore, Thailand
and Vietnam.
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8-22
Asian Trade Flows
Inter ASEAN
NAFTA
Europe
Japan
China
Destination of Exports
South Korea
Aust./N.Zealand
Source of Imports
Rest of World
0
%
McGraw-Hill/Irwin
5
10
15
20
25
8-30
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8-23
Asian Trade Flows
NAFTA
Japan
Destination of Exports
South Korea
Source of Imports
Rest of World
0
McGraw-Hill/Irwin
5
10
15
20
25
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8-24
McGraw-Hill/Irwin
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8-25
Asia Pacific Economic Cooperation


McGraw-Hill/Irwin
Founded in 1990 to ‘promote open trade
and practical economic cooperation’.
 ‘Promote a sense of community.’
 18 members.
 50% of world’s GNP.
 40% of global trade.
Brookings Institution: APEC “is in danger
of shrinking into irrelevance as a serious
forum.”
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25
8-26
Impact on Business

Positive:
 Protected
markets, now
open.
 Lower costs
doing business
in single
market.
McGraw-Hill/Irwin

Negative:
 Differences in culture and
competitive practices make
realizing economies of scale
difficult.
 Threats:
 More price competition.
 Firms become more
competitive.
 Outside firms shut out of
market.
 EU intervention in M and A
activity.
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