Chapter 9 - Regional Economic Integration

Regional Economic Integration

WTO must be notified

economists believe free trade agreements produce gains from trade for all members countries

GATT and WTO seek to reduce trade barriers but has been less successful

EU has been the most ambitious move toward regional economic integration

5 Levels of Economic Region

free trade area

customs union

common market

economic union

political union

level of integration lowest at free trade area

Free Trade Area

eliminates all barriers to the trade of goods and services

each country is allowed to determine its own trade policies with regards to nonmembers

European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, Switzerland

North American Free Trade Agreement (NAFTA) - U.S., Canada, Mexico

Customs Union

eliminates trade barriers between countries and adopts a common external trade policy

the EU began as a customs union

Andean Community (formally the Andean Pact) - Bolivia, Colombia, Ecuador, Peru)

Common Market

no restrictions on immigration, emigration, or cross-border flows of capital among members countries

requires harmony and cooperation on fiscal, monetary, and employment policies

Mercosur (Argentina, Brazil, Paraguay, Uruguay) is hoping to establish a common market

• Venezuela accepted for membership but awaiting ratification by Paraguay

Economic Union

requires a high degree of integration, a coordinating bureaucracy and the sacrifice of national sovereignty to the bureaucracy

European Union (EU)

Political Union

EU headed toward at least partial political union, and the U.S. is an even closer example of political union

The Economic Case for Integration

all countries gain from free trade and investment

assumes an absence of barriers

motivated by desire to exploit gains from free trade and investment

The Political Case for Integration

linking countries together, making them more dependent on each other, promotes political cooperation

reduces the likelihood of violent conflict

gives countries greater political clout when dealing with other nations

EU - after WWII, no longer large

NAFTA - promoting democracy and economic growth in Mexico

Impediments to Integration

while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose

• e.g., textile industry in US and China

it implies a loss of national sovereignty

• control over monetary, fiscal, and trade policy

• Great Britain - GBP, immigration policy

Trade Creation Trade Diversion

>

Europe has two trade blocs

European Union - 27 members

• Britain exited in 2020

European Free Trade Area (EFTA) - 4 members

Evolution of the European Union

product of two political factors

1. the devastation of western Europe during two world wars and the desire for a lasting peace

2. ‘The European nations’ desire to hold their own on the world’s political and economic stage

Treaty of Rome

• provided for the creation of the common market

Political Structure of the EU

European Commission

European Council

European Parliament

Court of Justice

The Single European Act of 1987

European Commission

run by commissioners appointed by member countries approved by the European parliament

European Council

the ultimate controlling authority within the EU

one representative from the government of each member state

European Parliament

751 members elected by the member states

debates legislation proposed by the commission and forwarded it to by the council

treaty of Lisbon increased power of parliament

The Single European Act of 1987

remove all frontier controls EC countries

apply the principle of “mutual recognition” to product standards

institute open public procurement to nonnational suppliers

lift barriers to competition in the retail banking and insurance businesses

remove all restrictions on foreign exchange transactions between member countries by the end of 1992

abolish restrictions on cabotage by the end of 1992

Maastricht Treaty

committed to the EU to adopt a single currency (euro)

used by 19 of 28 member states (the euro zone)

second most widely-traded currency after dollar

Great Britain, Denmark, Sweden don’t use euro

Benefits of the euro

savings from having to handle one currency, rather than many

makes it easier to compare prices across Europe

producers forced to look for ways to reduce production costs

boosts development of highly liquid pan-European capital market

will open investment options

Costs of the euro

loss of control over national monetary policy

EU is not an optimal currency area

The Euro Experience

volatile trading history since establishment in 1999

euro has weakened since 2008

slow economic growth and large budget deficits among EU member states

bailout package to rescue Greece in 2010

some nations have put plans to adopt euro on hold

Enlargement of the European Union

expansion into eastern Europe

13 countries applied by end of the 1990s

• had to establish state democratic governments

• show respect for human rights

new members had to wait to adopt euro

eastern European countries only account 5 percent of the GDP of current EU members

Turkey has been denied entry because of human rights concerns

British Exit from the European Union (Brexit)

British electorate voted in 2016

• based on loss of national sovereignty, immigration issues

Treaty of Lisbon - British has two years

Britain’s exit is a concern; seen as a counterweight to economic power of Germany

left the EU on Jan 31, 2020

North American Free Trade Agreement (NAFTA)

abolished tariffs on 99% of the goods traded between members

removed barriers on the cross-border flow of services

protects intellectual property rights

removes most restrictions on FDI between members

allows each country to apply environmental standards

established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored

Mexico would benefit from

increased jobs as low-cost production moves south and will see more rapid economic growth as a result

U.S. and Canada would benefit from

access to a large and increasingly prosperous market

the lower prices for consumers from goods produced in Mexico

low-cost labor and ability to be competitive in world markets

increased imports by Mexico

The Case Against NAFTA

jobs would be loosen and wage levels would decline in the U.S. and Canada

pollution would increase due to Mexico’s more lax standards

Mexico would lose its sovereignty

The Andean Community

formed in 1969 using the EU model

had more or less failed by mid-1980s

was re-launched in 1990, and now operates as a customs union

renamed in 1997

signed an agreement in 2003 with Mercosur to restart negotiations towards the creation of a free trade area

Mercosur

originated in 1988 as a free trade pact between Brazil and Argentina

expanded in 1990 to include Paraguay and Uruguay and in 2005 with the addition of Venezuela

may be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis

efforts stalled on reducing trade barriers between member states

Various efforts at integration have been attempted in Asia, Africa, and elsewhere

association of Southeast Asian Nations (ASEAN) is most significant

TPP, TTIP

Association of Southeast Asian Nations (ASEAN)

formed in 1967

currently includes Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia

foster free trade between members countries and to achieve cooperation in their industrial policies

Regional Trade Blocs in Africa

17 on the African continent

since many countries support the use of trade barriers to protect their economies foreign competition, meaningful progress is slow

Other Trade Agreements

renewed emphasis on bilateral and multilateral trade agreements since collapse of Doha Round talks

• Trans Pacific Partnership (TPP)

• Transatlantic Trade and Investment Partnership (TTIP)

Opportunities for Managerial Implications

opens new markets

allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills optimal

Threats for Managerial Implications

business environment becomes competitive

there is a risk of being shut out of the single market by the creation of a “trade fortress”

growing opposition to free trade areas