The European Union and Other Regional Trade Areas

1. The European Union and Other Regional Trade Areas Chapter 15 © 2002 West/Thomson Learning

2. 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

3. Impediments to Regional Integration • Painful adjustments in certain segments of economy -- some “losers” • low skilled, low tech jobs lost (US textiles) • Threat to national sovereignty -- • countries give up control of some key policies • monetary policy, tax policy and trade policy • Debate: • Trade creation or trade diversion?

4. Economic Case for Regional Integration • Stimulates economic growth in countries through FDI and free trade • Countries specialize in those goods and services efficiently produced. • Additional gains from free trade beyond international agreements such as GATT and WTO. 8-2

5. Political Case for Economic Integration • Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation. • Together, the countries have the economic clout to enhance trade with other countries or trading blocs. 8-3

6. 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+ • elimination of intra-market factor of production movements • Economic Union (EU): CM+ • full integration of member economies (common policy) • Political Union: US • political and economic integration

7. European Union • European Coal and Steel Community (1952) • Treaty of Rome (1957) created European Community • Single European Act (1987) set 1992 deadline of achieving single market • Maastricht Treaty (1991) European common currency adopted 1/1/99 • Common foreign and defense policy • Common citizenship • EU parliament with “teeth” created European Union and set path for monetary union

8. European Union • Treaty of Amsterdam: 1999 (incorporated the principle of freedom of movement from the Schengen Agreement) • Treaty of Nice: 2000, voting rights in preparation for enlargement – target date of 2004 - rejected • Treaty of Lisbon: 2007 – proposes to streamlines procedures and institutions

9. Euro Timetable • January 1, 1999: Euro single currency is born • 1999-2002: National currencies continue to exist and work in parallel; Euro as “virtual currency” • 2002: switch to single currency; Euro in circulation

10. 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

11. Costs of the Euro • Loss of monetary policy control at national level • ECB sets interest rates and determines monetary policy • ECB is not under political control; issues instructions to national central banks • EU is not an optimal currency area • Not enough similarities in the underlying structure of economic activity (e.g., Finland vs Portugal) • Interest rates may be too high in depressed regions or too low for economically booming regions • May need to deal with this through fiscal transfers from prosperous to depressed regions • Economic issues may come in conflict with political issues

12. Monetary Union Criteria • Budget deficit no greater than 3% of GDP • Public debt no greater than 60% GDP • Price stability (inflation controlled) • Long term interest rates within 2% of the best 3 countries • Exchange rate stability

13. Austria* Belgium* Denmark Finland* France* Germany* Greece* Ireland* Italy* Luxembourg* The Netherlands* Portugal* Spain* Sweden The United Kingdom Cyprus* Czech Republic Estonia* Hungary Latvia Lithuania Malta* Poland Slovakia* Slovenia* Bulgaria Romania * Countries that have adopted the Euro as the common currency of the EU Members of the European Union

14. Map

15. EU Governance European Council European Commission 27 Commissioners appointed by members for 4 year terms Heads of State and Commission President Proposing, implementing, monitoring legislation. Resolves policy issues Sets policy direction. Council of Ministers 1 representative from each member Ultimate controlling authority. No EU laws w/o approval. European Parliament Court of Justice 785 directly elected members Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners. 1 judge from each country Hears appeals of EU Laws.

16. Law-making within the EU • Regulations vs. directives • Directive: Binding as to result, but left to members to choose form and methods • Regulation: Binding in entirety, applies directly to all members • Role of • Council: Decides to adopt regulation or directive • Commission: Proposes action to Council & Parliament • Parliament: may amend or reject measures on single market, consumer protection, environment, health, education, culture • Court of Justice: interprets and applies EU law; reviews member actions for compliance

17. Treaty of Lisbon - 2007 • Adopted Dec. 13, 2007 – to be ratified by all 27 members by January 2009 • Amends Current EU Treaties • Simplifies voting rules – double majority of states representing at least 55% of members and 65% of EU population • Creates President of EU Council – appointed by Council for 2 ½ year term • Creates High Representative for Foreign Affairs and Security Policy and Vice President of Council • Reduces Size of Commission after 2014 • European Parliament: fixes size at 751; gives broader co-decision power with the Council

18. EU Cases • Commission of EC v. Italian Republic: Chocolate labeling reqt. violates obligations under Art. 30 (now Art. 28) • National Farmers’ Union and Secretariat general: French restrictions on UK beef violate EU Directive 89/662 and Decision 98/256

19. Cotonou Agreement • 2000 • EU, African, Caribbean and Pacific countries • EU had GSP program since 1971 and in effect until 2007 • 2007 new “partnerships” begin

20. Andean PACT Map

21. ANCOM: Andean Pact • Bolivia, Colombia, Ecuador, Peru; Chile is Associate Member • Cartagana Agreement, 1969: One of oldest still in existence • Population: 120 mm (14% of hemisphere) • GDP: 2005: $745.3 billion (includes Venezuela) • Changed from FTA to customs union in 1992

22. Mercosur Map

23. The Mercosur Accord • 1988: Argentina, Brazil; 1990: Paraguay, Uruguay; 2006: Venezuela • Associate Membership Granted to Andean Community Members 1995: Agreed to move toward a full customs union. • Population: 220 mm • GDP: $1 Trillion • Trade doubled in first 3 years

24. Other Western Hemisphere Associations • Central American Common Market • CARICOM • Free Trade Area of the Americas

25. ASEAN

26. Association of Southeast Asian Nations • Created in 1967 • 400 million citizens • Economic, political and social cooperation • Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, Laos, Myanmar and Cambodia

28. Asia Pacific Economic Cooperation • Founded in 1989 to ‘promote open trade and practical economic cooperation’. ‘Promote a sense of community’. • 18 members • GDP: $13 trillion (1995) • 50% of total world income • 40% of global trade

29. Other Trade Areas • African trade areas (AEC, COMESA, SADC) • Arab League • Gulf Cooperation Council

30. 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

31. Web Sites • http://www.europa.eu.int/index.htm • http://www.ita.doc.gov