2. Management 2203, Ch 9

Chapter 9: Regional Economic Integration

Overview

• Regional economic integration: Agreements between countries in a specific geographic region aimed at reducing tariff and non-tariff barriers.

• Debate: Is regional economic integration beneficial? Concerns arise that competing regional trade blocs may undermine the advantages of such agreements.

Learning Objectives

• Understand different levels of regional economic integration.

• Explore economic and political arguments for and against regional economic integration.

• Analyze the history, current scope, and future prospects of significant regional economic agreements.

• Examine implications for management practices stemming from regional economic agreements.

Levels of Economic Integration

• Levels of Integration:

  • Political Union: Integration of independent states into one union; requires central political authority to coordinate economic, social, and foreign policy.

  • Economic Union: Includes free flow of products and factors of production, a common external trade policy, a common currency, and coordinated monetary and fiscal policies. Example: European Union (EU).

  • Common Market: Eliminates trade barriers and allows free movement of production factors. Example: MERCOSUR.

  • Customs Union: Removes trade barriers and adopts a common external trade policy. Example: Andean Pact.

  • Free Trade Area: Most common form; removes trade barriers among member nations. Example: USMCA (formerly NAFTA).

Economic and Political Arguments for Regional Integration

• Pros:

  • Aims for enhanced gains from trade and investment flow that exceed what is achievable through global agreements.

  • Politically, countries that are trade partners are less likely to engage in conflict, fostering stability and collective strength in global negotiations.

Economic and Political Arguments Against Regional Integration

• Cons:

  • Regional integration is only beneficial if the trade it creates is greater than what it diverts.

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

  • Trade Diversion: Higher-cost suppliers within the area replace lower-cost external suppliers, potentially leading to inefficiencies.

Examples of Regional Economic Integration

• North American Free Trade Agreement (NAFTA): Now USMCA, involved the U.S., Canada, and Mexico, involves changes in automobile trade and intellectual property rights.

• European Union (EU): 27 member countries, aims for integrated economic and social policies.

• MERCOSUR: Includes Brazil, Argentina, Paraguay, and Uruguay; facilitates free trade.

• ASEAN: Southeast Asian nations collaborating on economic and trade matters.

• APEC: Involves 21 members including major economies like the U.S., Japan, and China.

European Union Details

• Formation: Established post-WWII for economic integration; involved in maintaining global influence. Renamed from its original agreement in 1994.

• Maastricht Treaty (1991): Committed EU member states to adopt a shared currency, leading to the euro.

Pros and Cons of the Euro

• Pros:

  • Fosters easier price comparisons and boosts competition.

  • Strengthens Europe's capital market and opens diverse investment options.

• Cons:

  • Individual states lose control over monetary policy; managed independently by the European Central Bank (ECB).

  • Economic structure differences among member states complicate the use of a single currency.

NAFTA Analysis

• Elements of NAFTA: Eliminated tariffs on 99% of goods, removed barriers to services, offered protection for intellectual property, upheld environmental standards.

• Pros for Mexico: Job increases, economic growth from low-cost production.

• Pros for U.S. and Canada: Access to a larger market, lower consumer prices due to competitive goods.

• Cons of NAFTA: Potential job losses in the U.S. and Canada, environmental concerns, and loss of Mexican sovereignty.

Implications for Managers

• Importance of understanding regional economic integration for global companies:

  • As markets open, competition increases among regional blocs.

  • Adaptability to regional dynamics is crucial for strategic success.