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chapter 8Regional Economic Integration

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Chapter Objectives

• Explain the different levels of regional economic integration

• Understand the economic and political arguments for regional economic integration.

• Understand the economic and political arguments against regional economic integration.

• Understand the history, current scope, and future of the world most important regional economic integration.

• Implications for business that are inherent in regional economic integration agreements

Regional Economic Integration

• What is regional economic integration?

Agreements among countries in certain region to reduce and or remove tariff and nontariff barriers to the flow of goods, services, and factors of production between each other.

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Regional Economic Integration

• The EU and the euro

• WTO must be notified of any agreement.

• 155 states are members of the WTO

• KSA 11/12/2005

• Jordan 11/4/2000

• Kuwait 1/1/1995

• USA 1/1/1995

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Regional Economic Integration

• EU= 27 states

• NAFTA= 3 states Canada, Mexico and the US.

• MERCOSUR= Argentina, Brazil, Paraguay, and Uruguay

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First sectionLevels of Economic

Integration• Check figure 8.1 page 267

1- free trade area like NAFTA

2- the customs union; the same as above but with common external policy- like the EU.

3- Common market: the same as the custom union but allows factors of production to move freely between members to the extent that no restrictions on immigration. EU

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Levels of Economic Integration

4- Economic union: EU 2003. the same as number 3 but adds a common currency and labour policies. Common tax rates and fiscal and monetary policies.

5- Political Union: for economic, social, and foreign policy of the member states like the EU with EU parliament.

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Second sectionThe Case of Regional

Integration

1. The economic case for integration: this is for economic growth and stability.

2. The political case for integration: economic power and unity leads to political power- look what happened to the Soviet Union after the collapse of the communisis.

GCC and the Union for security.

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The political case for integration

• Political stability means economic stability.

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Impediments (obstacles) to Integration

• Employees issue

• Sovereignty issue

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General Agreement on Tariffs and Trade

• Representatives of the leading trading nations met in Cuba to create International Trade Organization(ITO) to promote international trade.

• Disagreement about the degree of power that organization would have led to failure.

• Instead the ITO planned mission was taken over by GATT.

• Developed as part of the Havana, Cuba, conference in 1947.

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The Role of the GATT

• The GATT’s goal was to promote a free and competitive international trading environment benefiting efficient producers by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers.

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Table 10.1 GATT Negotiating Rounds

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Most Favored Nation (MFN) Principle

• To help international business the most favored nation principle was followed. This principle requires that any preferential treatment granted to one country must be extended to all countries.

• For instance, if a country gives tariff reductions to import from a country it should give the same treatment to all members.

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Exceptions to the MFN Principle

• Members permitted to lower tariffs to developing countries without lowering them for more developed countries

• Regional arrangements promote economic integration (e.g., EU and NAFTA)

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Goals of the World Trade Organization (WTO)

• Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies

• Reduce remaining trade barriers through multilateral negotiations

• Establish impartial procedures for resolving trade disputes among members

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Differences between WTO and GATT

• GATT focused on promoting trade in goods; WTO’s mandate includes

– trade in goods

– trade in services

– international intellectual property protection

– trade-related investment

• WTO’s enforcement powers are stronger

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Economic Integration

• Integration can be defined as the political and economic agreements among countries that give preference to member countries in the agreement.

• Three ways to approach integration: Global through WTO, bilateral where two countries decide to integrate, and regional.

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Economic Integration 2

• Regional Integration: Where a group of countries located in the same geographic proximity decide to cooperate.

• Why do we need to understand the nature of these agreements?

• These agreements have influence on MNCS. They can define size of the market, how MNCs operate.

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Forms of Economic Integration

Free Trade Area

Common Market

Economic Union

Customs Union

Political Union

Free Trade Area

• An agreement between two or more countries to reduce or eliminate customs duties and nontariff trade barriers among partner countries while members maintain individual tariff schedules for external countries.

• Examples: North Atlantic Free Trade Area (NAFTA), and Arab Free Trade Area(AFTA).

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Customs Union

• In addition to eliminating tariffs member countries have a common trade policy with nonmembers on products imported from countries outside the union.

Example:

- Mercosure (Argentina, Brazil, Paraguay, Uruguay).

- Gulf countries.

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Common Market

• Eliminates all tariffs and other restrictions on internal trade, adopts a set of common external tariffs, and removes all restrictions on the free flow of capital, labor, and technology among member nations.

- Example: European Economic Area

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Economic Union

• A full integration of the economies of two or more countries

• In addition to eliminating internal trade barriers, adopting common external policies, and removing restrictions on mobility of factors of production among members, it also requires members to coordinate economic policies (monetary, fiscal, taxation, and social welfare)

- Example: EU adopting the Euro

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Political Union

– Involves complete political and economic integration, either voluntary or enforced.

Example: USA 13 colonies

– Commonwealth – a voluntary organization providing for the loosest possible relationship that can be classified as economic integration.

– Two new political unions came into existence in the 1990s:

• The Commonwealth of Independent States (CIS)

• The European Union (EU)

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The impact of economic integration on firms

• Lower average production and distribution cost.

• Enable firms Compete internationally outside the bloc.

• Attract FDI from nonmember countries, as firms outside the bloc seek the benefits of insider.

• May threaten established firm in the bloc

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Figure 10.2 Forms of Economic Integration

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European Union (EU)

• Most important regional trading bloc

• 27 member countries

• 455.3 million population

• Combined GDP of $12.7 trillion

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Map 10.1 The European Union

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Governing Organizations of the EU

• The Council of the European Union

• The European Commission

• The European Parliament

• The European Court of Justice

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The Council of European Union

• Previously called the council of ministers.

• Composed of 27 representatives.

• The representative sent depends on the council’s agenda.

• It is the most powerful decision making body.

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The European Commission

• It consists of 27 people. One from each country. They act on behalf of the Union not on behalf of their own countries.

• Main duties:

• Initiate proposals for legislation.

• Serving as guardian of the treaties.

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The European Parliament

• Consists of representatives elected in national elections to serve for five years.

• Representatives reflect the country population. Representatives of Germany, Uk are greater in number than those from small countries.

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Other Institutions

• The European Court of Justice, Economic and Social Committee..etc.

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Map 10.2 Free Trade Agreements in Central and South America

and the Caribbean

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Map 10.3 The ASEAN Members

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Map 10.4 Asia-Pacific Economic Cooperation Initiative (APEC)

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Map 10.5 Free Trade Agreements in Africa