International Business - Chapter 9

Regional Economic Integration

Countries agree to reduce barriers to trade, services and factors of production.

Economic Case for Integration

More trade and investment can create gains for member countries.

Political Case for Integration

Interdependence can encourage cooperation and reduce conflict.

Winners and Losers

Benefits to the whole economy do not mean every industry or worker gains.

Sovereignty

Members may surrender control over trade, fiscal or monetary policy.

Trade Creation

A lower-cost producer within the bloc replaces a higher-cost domestic supplier.

Trade Diversion

A higher-cost bloc producer replaces a lower-cost supplier outside the bloc.

Free Trade Area

Members remove barriers among themselves, but set their own external trade policies.

Customs Union

Members also adopt a common external trade policy, requiring joint administration.

Common Market

Adds free movement of labor and capital across member states.

Economic Union

Adds deeper coordination of economic policy; a common currency is a possible component.

Political Union

A central political body coordinates economic, social and foreign policy.

Rules of Origin — Why They Matter

Members remove barriers among themselves, but set their own external trade policies. Rules of origin matter.

European Union (EU) — Member States

27 member states after the United Kingdom's departure in 2020.

Treaty of Rome

Treaty of Rome established the European Community (EC).

European Commission

Proposes legislation, implements policy and monitors compliance.

Council Institutions

Represent member governments and participate in EU decision-making.

European Parliament

Directly elected body that debates and co-legislates.

Court of Justice

Interprets EU law and hears appeals. One judge from each country.

Single European Act — Remove Frontiers

Reduce border controls and restrictions on cross-border transactions among E.U. countries.

Single European Act — Mutual Recognition

Recognize product standards across member states.

Single European Act — Open Competition

Open procurement, banking, insurance and transport markets.

Maastricht Treaty

Committed the EU to adopt a single currency (euro).

Euro — Central Benefit and Cost

A shared currency reduces transaction frictions—but it also means a shared monetary policy.

Euro — Benefits

Lower exchange and hedging costs. Easier price comparison. More liquid capital markets. Greater competition. Reduced production costs. Increased investment options.

Euro — Costs

Countries give up independent monetary policy. EU is not an optimal currency area. Economies may respond differently to shocks.

Euro — Optimal Currency Area Concern

EU is not an optimal currency area. Many European economies are dissimilar. Economies may respond differently to shocks.

Brexit

The UK voted to leave in 2016 and formally exited in 2020

EU–UK Trade and Cooperation Agreement

EU–UK Trade and Cooperation Agreement established a “zero tariff zero quota” trade regime between EU and UK.

NAFTA — Market Access

Abolished tariffs on 99 percent of goods traded between members. Removed barriers on the cross-border flow of services.

NAFTA — Case for Mexico

Increased jobs as low-cost production moves south and more rapid economic growth as a result.

NAFTA — Case Against

Jobs would be lost and wage levels would decline in the United States and Canada. Pollution would increase due to Mexico's more lax standards. Mexico would lose its sovereignty.

NAFTA — 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.

USMCA — Predecessor

NAFTA renegotiated to the USMCA.

USMCA — North American Automobile Content

Automakers must produce 75 percent of content in North America.

USMCA — High-Wage Factory Requirement

By 2023, 40 percent of parts for tariff-free vehicles must come from a “high-wage” factory.

Mercosur

South American bloc centered on Argentina, Brazil, Paraguay and Uruguay.

CAFTA / Central America

Agreements designed to lower barriers with Central American markets.

CARICOM / CSME

Caribbean efforts toward a single market and greater policy coordination.

ASEAN — Purpose

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.

CPTPP

Pacific trade agreement that continued after US withdrawal from the original TPP.

RCEP

Regional partnership connecting ASEAN and major Asia-Pacific economies.

Trade Fortress

External firms may face disadvantages when blocs favor members.