Chapter 8

Regional Economic Integration

8 - 3

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 4

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 5

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

8 - 6

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 7

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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 - 8

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 9

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

8 - 10

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 11

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 12

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 13

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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 issues may conflict with political ones

8 - 14

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 15

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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”)

8 - 16

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

8 - 17

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 18

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

8 - 19

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 20

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

8 - 21

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

8 - 22

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 23

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

8 - 24

McGraw-Hill/IrwinGlobal Business Today, 4/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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