Regional Economic Integration

1. Regional Economic Integration

2. 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

3. 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

5. 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

6. 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

8. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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”)

17. 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

18. The Americas

20. 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

23. 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

24. 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

25. 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