CHAPTER

2. CHAPTER 7 Regional Economic Integration

3. Slide 7-1 Key Issues • Understand the different levels of economic integration among nations • What are the political and economic arguments for and against regional integration? • Be familiar with the world’s most important regional economic agreements • What are the implications for business from regional economic integreation?

4. Slide 7-1 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. Slide 7-2 Levels of Economic Integration • Free Trade Area (FTA): • removes tariffs among members • members retain own trade policies toward others • Customs Union (CU): FTA and … • common trade policy toward others • Common Market (CM): CU and … • elimination of intra-market factor of production movements • Economic Union (EU): CM and … • full integration of member economies (common policy) • Political Union: EU and … • political integration

6. Slide 7-3 Reasons for Regional Integration • Economic enhancement of the member states • Free trade • Fee FDI • Political Reasons • Linked economies create interdependencies that reduce the potential for armed conflict • Grouping gives countries more political clout world-wide • Impediments • Painful adjustments in certain segments of economy • Threat to national sovereignty

7. Slide 7-4 European Union • 15 member countries; 350mm 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

8. Slide 7-5 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 • 2002 5th enlargement: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia conclude accession agreements.

9. Slide 7-6 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 (x-Sweden, Denmark, Britain) • Currency was issued 1/1/2002 and 12 national currencies were withdrawn by April 2002

10. Slide 7-7 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. Slide 7-8 Costs of the Euro (€) • Loss of monetary policy control at national level • ECB sets interest rates and determines monetary policy (Frankfurt, Ger.) • 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 against political ones

12. Slide 7-9 Enlargement of the EU • Enlargement means more disparity and more difficult governance and control • Norway opted out of the EU (1994) • The EU plans to conclude accession negotiations by the end of the 2002 with: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia. • US and Asian countries fear that EU will become protectionist (“fortress Europe”)

13. Slide 7-10 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 Common Market (CARICOM) • Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

14. Slide 7-11 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

15. Slide 7-12 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 • Continuation of opening process through elimination of tariffs

16. Slide 7-13 NAFTA - Key provisions • General (effective 1/1/94) • Tariffs reduced across all sectors 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

17. Slide 7-14 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