© 2001 Prentice Hall7-1 International Business by Daniels and Radebaugh Chapter 7 Regional Economic Integration and Cooperative Agreements

© 2001 Prentice Hall 7-1

International Businessby

Daniels and Radebaugh

Chapter 7Regional Economic Integration and Cooperative Agreements


ObjectivesTo define different forms of economic integration and

how it affects international businessTo describe the static and dynamic effects and the

trade creation and diversion dimensions of economic integration

To present different regional trading groups, such the European Union (EU), the North American Free Trade Agreement (NAFTA), and the Asia-Pacific Economic Cooperation (APEC)

To describe the rationale for and success of commodity agreements

To discuss the effects of economic integration on the environment


Regional Economic IntegrationGeographic proximity is an important reason for economic

integration• Similar political ideologies also a basis for forming trade

agreementsTypes of regional economic integration

• Free Trade Area (FTA)—abolish all tariffs among member countries

– each member maintains its own external tariffs against non-fta countries

• Customs union— in addition to eliminating internal tariffs, member countries levy a common external tariff on imports from nonmembers

• Common market—all of the elements of a customs union plus it allows free mobility of production factors among member countries

• Complete economic integration—harmonization increased by adopting common economic policies


Effects of IntegrationStatic effects— shifting of resources from inefficient to efficient

companies as trade barriers fall• Develop when either of two conditions occurs

– trade creation—comparative advantage is the cause of production shifts

» allows consumers access to more goods at lower prices

– trade diversion—trade shifts to member countries, even if nonmember company is more efficient

Dynamic effects—overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale

• Occur when trade barriers fall and the size of the market increases

• Leads to increased efficiency due to increased competition


Major Regional Trading Groups

Economic IntegrationEuropean Union

Free Trade AreasEuropean Free Trade AssociationCentral European Free Trade AgreementNorth American Free Trade AgreementAssociation of South East Asian Nations

Customs UnionMERCOSUR

Common MarketCaribbean Community and Common MarketCentral American Common MarketAndean Group

Greater Economic Integration


The European Union (EU)European evolution to integration

• Organization for European Economic Cooperation – established to facilitate the implementation of the

Marshall Plan after World War II• European Economic Community (EEC)

– eliminated internal tariffs– established a common external tariff– established common agricultural policy– expanded membership

• European Parliament– directly elected by the people– attempted to bring democracy into governance of

Europe• European Monetary System (EMS)

– established to link individual national currencies


Time Line For EU Membership

* European Free Trade Association

EFTA* formedAustriaDenmarkNorwayPortugalSwedenSwitzerlandUnited Kingdom

EEC formed

Iceland joins EFTA

Finland joins EFTAPortugal leaves EFTA and joins EUSpain joins EU

Greece joins EU

Denmark, UnitedKingdom, leaveEFTA and join EUIreland joins EU

Treaty of RomeBelgiumFranceWest GermanyItalyLuxembourgNetherlands

1995 20001986198119731970196919591957

Austria, Finland,Sweden leaveEFTA and join EU


EU Organizational Structure

15 nationalgovernments

European CouncilSummit meetings of heads ofgovernment and president ofthe commission to provideguidelines

Council of MinistersBrusselsLuxembourg (Apr, Jun, Oct)15 national ministers decide on Commission proposals (with different sets of ministers for agriculture, finance, etc.)

National organizations(employers, trade unions, farmers, etc.)

15 nationalelectorates

European ParliamentStrasbourg and Luxembourg (with parliamentary committees often sitting in Brussels and elsewhere)Directly elected members from the 15 (626 seats)

CommissionBrussels20 members appointed by governmentsIndependent of national interest

Committee of PermanentRepresentatives (of the 15 in Brussels)

Economic andSocial Committee (222 seats)

Committee ofthe Regions (222 seats)

Court of AuditorsLuxembourg

Court of JusticeLuxembourg


European Commission Provides the EU’s political leadership and direction

• Functions—initiating proposals for legislation– guardian of the treaties– manager and executor of EU policies and of

international trade relationships• 26 different Directorate-General offices carry out the

work of the Commission• Has lost power vis-à-vis the Council of Ministers

European Council (Council of Ministers)Collection of 25 different councils representing the different

ministries in each country• Members are elected officials in home countries• Has final say over legislation with parliament• Complex voting process — “pillars” of activity• European Summit comprised of the heads of state and

government of member countries


European ParliamentComprised of 626 elected members

• Membership based on country population

Three major responsibilities• Approves legislation before submission to Council• Approves EU’s budget and monitors spending • Supervises executive decisions

European Court of JusticeEnsures consistent interpretations and application of EU

treaties• Appeals court for individuals, firms, and organizations• One judge from each of the 15 member states• Required to hear every case referred to it

– even minor disputes


Single European MarketGiven force of law by Single European Act

• Designed to eliminate the remaining nontariff barriers to trade in Europe

An ongoing process—continues to face obstacles• Additional costs to render products or services

compatible with national specifications• Unusual testing, certification, or approval procedures• State aids favoring competitors• Difficulties related to the value-added tax• Restrictions on market access


Treaty of MaastrictSought to foster political union—had to address:

• Common European citizenship• Joint foreign, defense, immigration, and policing issues• Common social policy on working conditions and

employees’ rights

Gave Parliament veto power over new national laws• Principle of subsidiarity—implies that

– EU interference should occur only in areas of common concern

– most policies should be set at the national level• Not all countries accepted all points in the treaty


Treaty of Maastrict (cont.)Sought monetary union

• Began with European Monetary System (EMS)– required that countries converge their economic

policies to reduce public deficits and debt and reduce inflation and interest rates

– move to a common currency, the Euro– administered by the European Central Bank

» established on January 1, 1999– initially involved 11 EU members– EURO banknotes will replace national currencies in

2002• Will impact the way companies and financial institutions

do business in Europe– banks must update electronic networks to handle

currency exchange– Euro should increase price transparency


EU ExpansionCreated the European Economic Area in 1991

• Extended customs union privilegesEU signed numerous free trade agreements with other

countries• EU has become the world’s largest trading bloc

Set to expand to at least 12 more countries• New members from Central and Eastern Europe

– poor economies and fledging democracies• Threat to control and influence of large EU members

Implications of the EU on Corporate StrategyEU is a tremendous market

• Large, relatively prosperous population• More fragmented than U.S. market

– expansion likely to increase fragmentationMergers, takeovers, and spin-offs will continue


North American Free Trade Agreement (NAFTA)Preceded by free trade agreements with Canada

• Two-way trade between the U.S. and Canada largest in the world

• Now includes the U.S., Canada, and Mexico• May extend membership to other countries

Powerful trading bloc larger than the 15-member EU• Substantial differences in the size of member economies

in NAFTACalls for:

• The elimination of tariff and nontariff barriers• Harmonization of trade rules• Liberalization of restrictions on services and foreign

investmentGood example of trade diversity

• Some U.S. trade with and investment in Asia has been diverted to Mexico


MEMBERNATIONS

CANADA

MEXICO

UNITED STATES

POPULATION (millions)

30,287

94,349

267,636

GNP(billions US $)

$ 594,976

348,627

7,783,092

PER CAPITA GNP(US $)

$ 19,640

3,700

29,080

Comparative NAFTA Data


Rules of Origin and Regional Value ContentRules of origin—goods and services must originate in North

America to receive lower tariffs• Ensure that only goods that have been the subject of

substantial economic activity in the free trade area are eligible for more liberal tariff conditions

• Local content rules—percentage of value that must be from North America for the product to be considered “North American” in terms of country of origin

• 50 percent for most products• 62.5 percent for most automobiles

Special Provisions of NAFTATwo side agreements

• Labor standards—right to unionize• Environmental standards

Secretariat established to resolve disputes


Impact of NAFTA on Trade, Investment, and JobsNAFTA members have become more significant trading

partners with each other• Mexican imports and exports with U.S. increased• U.S. exports increased to both Canada and Mexico• Trade between Canada and Mexico increased• Overall trade with NAFTA members increased faster than

trade with the rest of the worldImpact of NAFTA on investment is complicated issue

• Portion of foreign direct investment in Mexico from other countries takes advantage of NAFTA

Impact of NAFTA on employment is difficult to measure• U.S. General Accounting Office concluded that it is

impossible to quantify the effect • No way of knowing exactly

– how many jobs the imports have displaced– if displaced workers have found other jobs


NAFTA ExpansionU.S political forces have been holding up expansion

• Protectionism has kept the U.S. from entering other bilateral trade relationships with other hemisphere countries

Canada and Mexico have developed NAFTA-like bilateral agreements with other countries

• Mexico and EU—ending tariffs on bilateral trade

Implications of NAFTA on Corporate StrategyNAFTA perceived as one big regional market

• Companies can rationalize production, financing– low-end manufacturing moving south– sophisticated manufacturing increasing in U.S.

• Canadian and Mexican companies have not been put out of business

• Mexico perceived as a market for U.S. goods, not just a location for low-cost production


TRADEGROUP

APEC

ASEAN

EU–15

EU Applicant–12

NAFTA

MERCOSUR

POPULATION (thousands)

2,447,436

495,531

374,225

106,095

392,272

207,717

GNP(millions US$$)

$16,918,386

704,787

8,565,466

342,261

8,726,695

1,133,555

PER CAPITA GNP(US$$)

$ 6,913

1,422

22,889

3,226

22,247

5,457

Comparative Data on Five Major Trade Groups, 1997


Other Regional Economic GroupsLatin America

• Latin American Integration Association (ALADI) and Caribbean Community and Common Market (CARICOM)

– provide for economic cooperation to enlarge the potential market size

– companies can achieve economies of scale and become more competitive worldwide

• MERCOSUR—major trading group in South America– significant because of its size– signed free trade agreements with other south

American countries– trying to become a customs union

• Andean Common Market (ANCOM)– Second-most-important regional group in area– more open to foreign trade and investment


Other Regional Economic Groups (cont.)Asia

• Association of South East Asian Nations (ASEAN)– promotes cooperation in industry and trade– members rely more on U.S. market for exports than

on each other– created ASEAN Free Trade Area (AFTA)

» goal is to cut tariffs on intrazonal trade– problems of ASEAN/AFTA—new members

» have weak economies» have serious political problems

• Asia Pacific Economic Cooperation (APEC)– objectives are to

» resist protectionist pressures» counter inward-looking regionalism» deal with economic conflicts in the region

– size and diversity of members are problems


Commodity AgreementsDesigned to stabilize the price and supply of a goodTwo basic types

• Producers’ alliances—exclusive membership agreements between producing and exporting countries

• International commodity and control agreements—agreements between producing and consuming countries

Countries producing commodities try to deal with price instability in a number of ways

• Buffer stock system—agreement by which reserve stocks of the good are bought and sold to regulate the price

• Quota system—determines how producing and consuming countries divide total output and sales

Not all commodity agreements work well


Organization of Petroleum Exporting Countries (OPEC)Producer cartel that has significant control over supply

• Band together to control output and price• Price controls established by production quotas• OPEC has strong influence on oil market

– OPEC oil exports are 60 percent of oil traded internationally

Politics an important dimension of OPEC deliberations

The EnvironmentEnvironmental degradation includes ozone depletion, air and

water pollution, acid rain, waste disposal, and deforestation• Problems require cross-national solutions• Role of the United Nations

Problems especially acute in developing countries

Documents

© 2001 Prentice Hall7-1 International Business by Daniels and Radebaugh Chapter 7 Regional Economic Integration and Cooperative Agreements