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Regional Economic Integration - Chapter Summary

Regional Economic Integration - Chapter Summary

Learning Objectives

  • 9-1: Describe the different levels of regional economic integration.

  • 9-2: Understand the economic and political arguments for regional economic integration.

  • 9-3: Understand the economic and political arguments against regional economic integration.

  • 9-4: Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.

  • 9-5: Understand the implications for management practice inherent in regional economic integration agreements.

Opening Case: The World’s Largest Trade Deal

  • Regional Comprehensive Economic Partnership (RCEP) is poised to become the world’s largest trade deal.

    • Involves 10 ASEAN countries plus Australia, China, Japan, New Zealand, and South Korea.

    • Represents one-third of the global population and GDP.

    • Aims to reduce tariffs among member nations and facilitate the sale of the same goods within this bloc.

    • China is identified as the leading economy in RCEP.

Introduction to Regional Economic Integration

  • Over the past two decades, numerous regional trade blocs have emerged to reduce or eliminate tariff and non-tariff barriers regarding goods, services, and factors of production.

  • As of 2020, there are 303 regional trade agreements in force globally.

  • Key movements toward integration:

    • European Union (EU): The most ambitious integration effort.

    • United States–Mexico–Canada Agreement (USMCA): Replaces NAFTA.

    • Integration efforts in South America and Africa.

    • RCEP is nearing finalization involving 15 nations.

Levels of Economic Integration

  • Levels of Integration defined in Figure 9.1:

  1. Political Union: Countries unite under a single government.

  2. Economic Union: Countries allow free flow of products and factors of production, adopt a common currency, harmonize tax rates, and pursue a common external trade policy. Example: European Union.

  3. Common Market: No trade barriers among member countries, a common external trade policy, and free movement of factors of production. Requires fiscal, monetary, and employment policy harmonization. Example: Mercosur.

  4. Customs Union: Eliminates trade barriers between member countries while adopting a common external trade policy. Example: Andean Community.

  5. Free Trade Area: Removes barriers to trade on goods and services among member countries but allows members to set their own trade policies with non-members. Example: EFTA and USMCA (formerly NAFTA).

The Case for Regional Integration

  • 1. Economic Case for Integration: Enhances trade and investment opportunities better than broader international agreements, like the WTO. Regional agreements are easier to negotiate with fewer nations.

  • 2. Political Case for Integration: Links countries can reduce the likelihood of conflicts and enhance political influence on the global stage through cooperation.

  • 3. Impediments to Integration:

    • Cost implications, where certain groups may benefit while others may suffer.

    • Loss of national sovereignty, a concern highlighted by Great Britain's EU referendum.

The Case Against Regional Integration

  • Regional Economic Integration is justified only if the trade created exceeds trade diversion.

    • Trade Creation: Low-cost producers within the area replace higher-cost domestic producers.

    • Trade Diversion: Higher-cost suppliers in the area replace more efficient lower-cost suppliers outside it.

Regional Economic Integration in Europe

  • 1. European Union Overview:

    • Comprises 27 members; Britain has exited.

    • Expected to become a superpower on par with the U.S.

  • 2. Evolution of the European Union:

    • Resulted from the desire for lasting peace post-two world wars and to maintain a strong global position for Europe.

    • Forerunner: European Coal and Steel Community (1951); transformed into the European Economic Community (Treaty of Rome, 1957); rebranded to EU in 1993.

  • 3. Political Structure of the EU:

    • European Commission: Proposes legislation and oversees compliance.

    • European Council: Ultimate controlling authority.

    • European Parliament: Debates legislation.

    • Court of Justice: Supreme appeals court.

  • 4. The Single European Act (SEA): Committed EU members toward establishing a single market by 1992.

    • Key objectives included removing frontier controls, mutual recognition of product standards, open procurement for nonnational suppliers, and lifting restrictions on foreign exchange transactions.

    • Economic impacts included restructured industries and a GDP increase by 2-5% in the first 15 years.

  • 5. Establishment of the Euro (1992 Maastricht Treaty):

    • Euro is adopted by 19 member states within the euro zone, covering 330 million citizens.

    • Control over individual monetary policies has been relinquished, with notable exceptions of Britain, Denmark, and Sweden opting-out.

  • 6. Benefits and Costs of the Euro:

    • Benefits include simplification through one currency, price comparison across Europe, efficient competition, and enhanced investment options.

    • Costs include loss of monetary policy control and issues with economic differences among member countries.

  • 7. Euro Experience:

    • Initially valued at $1.17, fluctuated over time but peaked at $1.54 in March 2008; as of early 2020, standing at €1 = $1.12.

  • 8. Enlargement of the European Union:

    • Ten eastern European countries joined in 2004; further expansions occurred in 2007 (Bulgaria and Romania) and 2013 (Croatia) totaling 28 members. Turkey's potential membership remains unclear.

  • 9. Brexit:

    • Britain voted to leave the EU on June 23, 2016, officially exiting on January 31, 2020.

    • Main concerns revolved around national sovereignty and immigration, viewing the loss of Britain's status as a counterbalance to Germany as a significant issue.

Regional Economic Integration in the Americas

  • 1. North American Free Trade Agreement (NAFTA) Overview:

    • Eliminated tariffs on 99% of goods among the U.S., Canada, and Mexico.

    • Protects intellectual property rights and sets national environmental standards.

  • 2. Case for NAFTA:

    • Mexico benefits through job creation and growth from U.S. and Canadian access to a more prosperous market; easier production sites increase global competitiveness.

  • 3. NAFTA Results:

    • Canada and Mexico now rank among the top three U.S. trading partners.

    • Productivity in member nations has increased; employment effects deemed moderate.

  • 4. United States–Mexico–Canada Agreement (USMCA):

    • Revised NAFTA under Trump Administration; focuses on changes in automobile trade, dairy, and intellectual property.

    • Critiques suggest it results in trade diversion rather than trade creation, potentially raising costs for North American producers.

  • 5. The Andean Community:

    • Initially based on the EU model, it failed in the mid-1980s but revived successfully in the 1990s as the Andean Community.

    • Operates as a partial customs union, signed agreements with Mercosur.

  • 6. Mercosur:

    • Originated as a free trade pact between Brazil and Argentina in 1990, later expanded.

    • Seen as successful in reducing trade barriers, but concerns persist about trade diversion and competitiveness.

  • 7. CAFTA & CARICOM:

    • CAFTA established between the U.S. and Central America, while CARICOM aims for integration among Caribbean nations.

Regional Economic Integration Elsewhere

  • 1. Regional Attempts:

    • Numerous attempts at economic integration in Asia and Africa, often limited in success.

  • 2. ASEAN:

    • Comprises 10 member nations, fostering freer trade and cooperation in industrial policy; AFTA reduces import tariffs.

  • 3. Regional Trade Blocs in Africa:

    • 19 trade blocs; struggles exist due to protectionism against foreign competition.

    • The East African Community (EAC), Tripartite Free Trade Area (TFTA), and Continental Free Trade Area (CAFTA) established.

  • 4. Recent Agreements:

    • Under President Obama, the U.S. pursued TPP and TTIP; under Trump, TPP was abandoned, and renegotiations of the new CPTPP continue without China.

Managerial Implications of Regional Economic Integration

  • Opportunities:

    • Markets becoming increasingly accessible; potential cost economies due to harmonization of standards and tax regimes.

  • Threats:

    • Economic competition increases within blocs, and firms outside risk exclusion from single markets.

Summary of Key Learnings

  • The chapter provides a comprehensive overview of regional economic integration, detailing its levels, the cases supporting and opposing it, historical contexts, and effects on future management practices. The essential implications of these integrations on businesses are also discussed.