Regional Economic Integration
Regional Economic Integration
 Levels
of economic integration among nations
 Economic and political arguments for/against
 History/scope, scope and future prospects for:
–
–
–
–
EU
NAFTA
MERCOSUR, and
APEC
 Implications
for business
Regional Economic Integration
 Agreements among
geographically proximate
countries to reduce/remove
tariff and non-tariff barriers to free flow of:
– Goods
– Services
– Factors of production
Levels of Economic Integration

Free Trade Area (FTA):
– removes tariffs among members
– members retain own trade policies toward others

Customs Union (CU): FTA+
– common trade policy toward others

Common Market (CM): CU+
– eliminates intra-market factor of production movements

Economic Union (EU): CM+
– full integration of member economies (common policy)

Political Union: EU+
– political and economic integration
Reasons for Regional Integration
Economic
enhancement of the member states
– Free trade
– Fee FDI
Political
Reasons
– Linkages of economies create interdependencies that
reduce the potential for violent conflict
– Grouping gives countries more political clout world-wide
Impediments
– Painful adjustments in certain segments of economy
– Threat to national sovereignty
European Union

25 member countries; 450mm people; GDP >
US
 1951 6 members of coal and steel community
– France, Germany (W.), Italy, Belgium,
Netherlands, Luxembourg

1957 Treaty of Rome: European Community
–
–
–
–

Common market
Elimination of internal trade barriers
Common external tariff
Free movement of factors of production
1973 1st enlargement: Britain, Ireland,
Denmark
European Union



1981 2nd enlargement: Greece
1983 3rd enlargement: Portugal, Spain
1992 single European act









Remove all frontier controls
Principle of mutual recognition to product standards
Open public procurement to non-national suppliers
Lift barriers of competition to banks and insurance
Remove restrictions on foreign exchange transactions
Abolish restriction on cabotage (trucking)
1994 Maastricht treaty: European Union
1996 4th enlargement: Austria, Finland, Sweden
2003 5th enlargement: Poland, Hungary, Czech Republic,
Lithuania, Estonia, Latvia, Slovenia, Cyprus, Malta,
Slovakia
The Euro (€)
 Maastricht treaty:
–
–
–
–
€
European common currency adopted 1/1/99
Common foreign and defense policy
Common citizenship
EU parliament with “teeth”
now used by 12 countries (since 1/1/02)
– Sweden, Denmark, Britain opted out
– 10 new countries have to qualify
Benefits of the Euro (€)





Lower transaction costs for individuals /
business
Prices comparable across the continent;
increased competition
Rationalization of production across Europe to
reduce cost
Pan-European capital market
Increase range of investment options available
to both individuals and institutions
Costs of the Euro (€)
ECB
has monetary policy control not nations
Sets interest rates, monetary policy (Frankfurt, Ger.)
 Is independent; instructs national central banks

EU
is not an optimal currency area
Few similarities in structure of economic activity
(e.g., Finland vs Portugal)
 Interest rates too high in depressed regions or too low
for economically booming regions
 May need fiscal transfers from prosperous to
depressed regions

Economic
and political issues may conflict
Early Experience of the Euro (€)

Volatile trading history
– 1999 -- €1 = US$1.17
– 10/2000 -- €1 = US$0.83
– 10/2004 -- €1 = US$1.24

EU enlargement will complicate Euro adoption;
new members with weaker economies

Major members ignoring monetary union rules to
retain control over their fiscal and monetary
policies
Enlargement of the EU
More
member disparity, more difficult
governance
Norway opted out of the EU (1994)
Membership applications pending: Turkey,
Bulgaria, Rumania, Croatia
– Turkish application controversial (economic
development, religion, labor movement problems)
Other non-European
countries will seek
membership
US and Asian countries fear that EU will
become protectionist (“fortress Europe”)
The Americas
 North American
Free Trade Agreement
(NAFTA): USA, Mexico, Canada
 The Andean Pact: Bolivia, Chile, Ecuador,
Colombia, Peru
 MERCOSUR (FTA): Brazil, Argentina,
Paraguay, Uruguay
 Central American Free Trade Agreement
(CAFTA): Costa Rica, Dominican Republic,
El Salvador, Guatemala, Honduras,
Nicaragua
The Americas
Elsewhere
 Association of
Southeast Asian Nations
(ASEAN)
– Brunei, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore,
Thailand, Vietnam
 Asia
Pacific Economic Cooperation
– USA, Japan, China + 15 Pacific nations
NAFTA
 USA,
Canada, Mexico (FTA-1988)
– USA-Canada is world’s largest trading
relationship
– USA is Mexico’s largest trading partner
– Mexico, USA’s third largest trading partner
 Trade
opening process through tariff
elimination
NAFTA - Key provisions

General (effective 1/1/94)
– Tariffs of all sectors reduced by 99% over 10 yrs
– FDI unrestricted (x-oil and railways in Mexico,
Culture in Canada, airlines-communications US)
– No free movement of labor (x-white collar
easement)
– Protection of intellectual property rights
– Cross-border flow of services unrestricted
– Application of environmental standards
– Two commissions have the right to impose
penalties on issues of health/safety, child labor,
minimum wages
Implications for Business
Opportunities
– Less protectionism; higher economic growth
– Lower cost of doing business (fewer borders)
Threats
– Cultural differences persist
– Increased price competition within blocks
– Across-trading-block rivalry can increase
barriers
– Improvement of competitiveness of many
local firm within the blocks