Fourth Edition

InternationalBusiness

CHAPTER 8

Regional Economic Integration

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Chapter Focus

Exam the trend toward regional economic integration.By end 2001, all 136 WTO members reported participation in at least one regional trade agreement.

Explore the economic and political debate surrounding integration.Review the progress, worldwide, toward integration.Map the implications for business.

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Regional Trade Agreements Notified to GATT and the WTO, 1948-1999

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1983

Active, Dec 99

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631

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Figure 8.1

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Political Union

Economic Union

Common Market

Customs Union

FreeTradeArea

FreeTradeArea

NAFTA

EU1992 Level of Integration

Figure 8.2

Level of Economic Integration

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Economic IntegrationFree Trade Area

All barriers to trade among members removed.Each country can determine own trade policies toward nonmembers.

Customs UnionEliminates barriers among members and has a common external trade policy.

Economic UnionNo barriers among members, common external policy, common monetary and fiscal policy, harmonized tax rates and common currency.

Political UnionHas a coordinating bureaucracy accountable to all citizens.

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Case for Regional Integration

EconomicAllow countries to specialize in products they produce efficiently.Easier to gain agreement than GATT/WTO.Role of FDI is enhanced.Exploit gains from free flow of goods and services and investment.

PoliticalCreates incentive for political cooperation.

Reduces potential for violent confrontation.

Enhanced clout to deal with ‘superpowers’.

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Impediments to Integration

Although a nation may benefit, groups within a nation may be hurt.Concerns about national sovereignty.Debate:

Trade creation.Trade diversion.

Global

Integration

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U.S. Mexican Trade in Textiles, 1993-2000

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U.S. exports toMexico of yarns andfabrics

Mexican garmentexports to U.S.

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U.S. exports toMexico of yarns andfabrics

Mexican garmentexports to U.S.

Figure 8.3

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EU Evolution

Product of two political factors:

Devastation of WWI and WWII and desire for peace.Desire for European nations to hold their own, politically and economically, on the world stage.

1951 - European Coal and Steel Community.1957- Treaty of Rome establishes the European Community.1994 - Treaty of Maastricht changes name to the European Union.

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European Union GDP

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90 92 94 96 98 2000

% Growth

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90 92 94 96 98 2000

% Growth

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US Top European Trading Partners

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Germany France Switzerland

Exports toImports from

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Germany France Switzerland

Exports toImports from

$ Billions

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EU Governance

1 judge fromeach country

1 judge fromeach country

Heads of State and

CommissionPresident

Heads of State and

CommissionPresident

630 directlyelected members

630 directlyelected members

1 representative

from each member

1 representative

from each member

20 Commissioners appointed by members for 4 year terms

20 Commissioners appointed by members for 4 year terms

European Council

Resolves policy issues sets

policy direction.

European Commission

Proposing, implementing,

monitoring legislation.

Council of Ministers

Ultimate controlling authority. No EU laws w/o approval.

European Parliament

Propose amendments to legislation, veto

power over budget and single-market legislation, appoint

commissioners.

Court of Justice

Hears appeals

of EU Laws.

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The Single European Act

Stimulus:Disharmony among the EC member countries:

Trade policy.Technical standards.

Led to establishing the Delors Commission in 1985.

Basis for Single European Act.

Objectives:Remove frontier controls.“Mutual recognition” of product standards.Open public procurement to nonnationals.Lift barriers to banking and insurance competition.Remove restrictions on foreign exchange transactions.Abolish cabotage restrictions.

1987- EC agrees to work toward establishing a single market by December 31, 1992.

The Act can lead to gains in trade and investment and increased competition when barriers are removed.

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The EuroTreaty of Maastricht:

11 of 15 member states.Jan. 1, 1999 - Exchange rates locked in.Jan. 1, 2002 - Euro notes and coins issued.National currencies taken out of circulation.

Benefits:Savings from using only one currency.Easy to compare prices, resulting in lower prices.Forces companies to be more efficient and cut costs.Creates liquid pan-Europe capital market.Increases range of investments for individuals and institutions.

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Costs of the Euro

Countries lose monetary policy control.

European Central Bank controls policy for the “Euro zone”.

EU is not an”optimal currency area”.

Country economies are different.Early experience has seen a slump (approximately 20% through 2001) against the dollar.

Too early to judge whether the Euro is/is not a success.

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EU Issues

Enlargement.Fortress Europe?

Create European barriers to trade from the outside?EU promises to support GATT and the WTO.No guarantees, however.

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NAFTA

Applynational

environmentalstandards

Protectintellectual

property

Abolishtariffs

Two commissionsto enforce treaty

Jan. 1, 1994

Removecross-border

flow ofservices

Remove FDIrestrictions

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NAFTA: For/Against

Loss of jobs to Mexico.Mexican firms have to compete against efficient US/Canada firms.

Mexican firms become more efficient.

Environmental degradation.Loss of national sovereignty.

Enlarged and productive regional base.

Labor-intensive industries move to Mexico.Mexico gets investment and employment.Increased Mexican income to buy US/Canada goods. Demand for goods increases jobs.Consumers get lower prices.

For

Against

Impact of NAFTAhas been muted.

Small trade and jobs gain for US.

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Andean PACT

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ANCOM: Andean Pact

Bolivia, Colombia, Ecuador, Peru, VenezuelaCartagana Agreement, 1969. One of oldest still in existence.Nearly failed. Rejuvenated in 1990 in the Galápagos Declaration.

Changed from FTA to customs union in 1992.

Still has many political and economic problems.

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US Trade With The Andean Community

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Mercosur

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The Mercosur

1988: Argentina, Brazil. 1990: Paraguay, Uruguay 1995: Agreed to move toward a full customs union.Trade quadrupled between 1990-1998.Has significant trade diversion issues.

Yeats Report.

Economic problems, first in Brazil (1999), then in Argentina (2001) has put plans for the customs union on hold.

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Other Hemisphere Associations

Central American Common Market1960s: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua.Collapsed in 1969.

CARICOM1973: English-speaking Caribbean countries.191: Failed for third time to establish common external tariff.

Free Trade Area of the Americas1998: 34 heads of state met in Santiago, Chile and inaugurated talks to create a FTAA by 2005.

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ASEAN

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Association of Southeast Asian Nations

Created in 1967.Economic, political and social cooperation.

Little has been accomplished.Brunei, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand and Vietnam.

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0 5 10 15 20 25

Rest of World

South Korea

J apan

NAFTA

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Rest of World

South Korea

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NAFTA

%

Destination of Exports

Source of Imports

Asian Trade Flows

Inter ASEANInter ASEAN

EuropeEurope

ChinaChina

Aust./N.ZealandAust./N.Zealand

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0 5 10 15 20 25

Rest of World

South Korea

J apan

NAFTA

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Rest of World

South Korea

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NAFTA

Destination of Exports

Source of Imports

Asian Trade Flows

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Asia Pacific Economic Cooperation

Founded in 1990 to ‘promote open trade and practical economic cooperation’.

‘Promote a sense of community.’ 18 members.50% of world’s GNP.40% of global trade.

Brookings Institution: APEC “is in danger of shrinking into irrelevance as a serious forum.”

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Regional Trade Blocs in Africa

9 trade blocs on the continent.Many countries are members of more than one group.

Progress has been slow.Political turmoil.Deep suspicion of free trade.

Less developed, less diversified economies need “protection”.

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Impact on BusinessPositive:

Protected markets, now open.Lower costs doing business in single market.

Negative:Differences in culture and competitive practices make realizing economies of scale difficult.Threats:

More price competition.Firms become more competitive.Outside firms shut out of market.EU intervention in M and A activity.