Regional Economic Integration
• http://online.wsj.com/article/SB10001424052702303443904575578583079053538.html?mod=WSJ_article_related
Objectives• Define different forms of economic integration and
how it affects international business• Describe the static and dynamic effects and the trade
creation and diversion dimensions of economic integration
• Present regional trade groups (NAFTA, EU)• Describe Cooperative Agreements and the rationale
for their creation and success• Examine the Development of World Trading
Approaches
Regional Economic and Political Integration Major Forms
• Free Trade Area• Customs Union • Common Market• Complete Economic Integration (Economic
Union)
• Political Union
Regional Economic and Political Integration Major Forms
• Free Trade Area– Tariffs are abolished among members-countries– Each country can determine their own trade
policies toward nonmembers. • Each member-country maintains its own external tariffs
on imports from nonmember countries
• Customs Union– A Free Trade Area - PLUS member-countries add a
common external tariff
Regional Economic and Political Integration Major Forms
• Common Market– A Customs Union PLUS the abolition of restrictions on the
mobility of capital and labor among member-countries
• Complete Economic Integration (Economic Union)– Involves a high degree of political integration as member-
countries surrender important elements of their sovereignty
– No barriers among members, common external policy, common monetary and fiscal policy, harmonized tax rates and common currency.
Economic Integration
• Political Union–Has a coordinating bureaucracy
accountable to all citizens.
ECONOMIC INTEGRATION• The Effects of Integration
trade creation, resources shift from the least - to the more-efficient producers / companies as trade barriers fall between the members
A dynamic effect is that as markets grow, companies achieve economies of scale. Production shifts to more efficient producers for reasons of comparative advantage
Efficiency increases because of competition thus the less efficient will fail
• Consumers access wider variety of goods at lower prices, higher quality products
ECONOMIC INTEGRATION• The Effects of Integration
trade diversionAs a result of COMMON external barriers trade shifts
from more efficient external sources to less efficient suppliers within the bloc.
discrimination against outside producers. Diverts trade to less-efficient producers within the country or group
Regional Economic Integration
Regional Economic IntegrationEI on a regional geographic basisRegional integration has political, social, and economic
effects
• FACTORS supporting the creation of REI– Distance goods need to travel between countries is short– Consumers’ tastes are likely to be similar– Distribution channels can be easily established in adjacent
countries– Neighboring countries may have common history and
interests
7-3
Regional Integration• Economic– Allow 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.
• Political– Creates incentive for
political cooperation.• Reduces potential for
violent confrontation.– Enhanced clout to deal
with ‘superpowers’.
The EU
EU Membership Conditions
• (a) Legal requirements • European integration has always been a political and
economic process that is open to all European countries prepared to sign up to the founding treaties and take on board the full body of EU law. According to Article 237 of the Treaty of Rome ‘any European state may apply to become a member of the Community’.
• Article F of the Maastricht Treaty adds that the member states shall have ‘systems of government […] founded on the principles of democracy’.
EU Membership Conditions• (b) The ‘Copenhagen criteria’ • In 1993, following requests from the former communist
countries to join the Union, the European Council laid down three criteria they should fulfil so as to become members. By the time they join, new members must have:
• stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;
• a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union;
• the ability to take on the obligations of membership, including support for the aims of the Union. They must have a public administration capable of applying and managing EU laws in practice.
EU Membership Conditions
• (c) The accession process • The entry negotiations are carried out between each candidate country
and the European Commission which represents the EU. Once these are concluded, the decision to allow a new country to join the EU must be taken unanimously by the existing member states meeting in the Council. The European Parliament must give its assent through a positive vote by an absolute majority of its members. All accession treaties must then be ratified by the member states and the candidate countries in accordance with each country’s own constitutional procedures.
• During the years of negotiation, candidate countries receive EU aid so as to make it easier for them to catch up economically. For the enlargement of the 10 countries in 2004, this involved a package of €41 billion aimed mainly at funding structural projects to allow the newcomers to fulfil the obligations of membership.
• http://europa.eu/abc/12lessons/lesson_3/index_en.htm
The European Union: 493 million people – 27 countries
Member states of the European Union
Candidate countries
Eight enlargements
1952 1973 1981 1986
1990 1995 2004 2007
EU population in the worldPopulation in millions, 2007
497
1322
128 142
301
EU China Japan Russia United States
The area of the EU compared to the rest of the world
Surface area, 1 000 km²
EU China Japan Russia United States
16 889
9327 9159
4234
365
How rich is the EU compared to the rest of the world?
EU China Japan Russia United States EU China Japan Russia United States
10 793
1 326
3676
468
10 035 24 700
6 400
27 800
10 000
37 300
Size of economy: Gross Domestic Product inbillion of euros, 2006
Wealth per person: Gross Domestic Productper person in Purchasing Power Standard, 2007
Energy sources in a changing world
Types of fuel used for making energy in the 27 EU countries,
2005
Import dependency: share of fuel imported from outside the EU-countries, 2005
Oil37%
Gas35%
Nuclear14%Coal
18% Renewables7%
39%
82%
57%
100%
50%
OilCoal Gas Nuclear(uranium)
Renewables All types of fuel
0%
The EU – a major trading power
Share of world trade in goods (2006)
Share of world trade in services (2005)
Others50.5%
EU17.1%
United States16%
Japan6.6%
China9.6%
Others44.9%
EU26%
United States18.4%
Japan6.9%
China3.8%
The euro – a single currency for Europeans
EU countries using the euroEU countries not using the euro
Can be used everywhere in the euro area
4Coins: one side with national symbols, one side common 4Notes: no national side
The European Union
– Problems of Expansion• Relatively lower income countries• Higher dependence on agriculture• New democracies• Financial pressure on structural assistance fund and
Common Agricultural Policy• Governance
• Other Issues– Challenge to companies: Establish a regional
strategy before different national strategies
US EI Trade Agreements
• http://www.ftaa-alca.org/View_e.asp
USA – Trade Agreements
• http://www.ustr.gov/trade-agreements/free-trade-agreements
• NAFTA_Myths_Facts.doc• http://www.sice.oas.org/trade/nafta/naftatce.
asp
• http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf
• http://www.eagleforum.org/topics/NAU/
US Free Trade Agreements• The United States has free trade agreements in force with 17 countries. These are:• Australia• Bahrain• Canada• Chile• Costa Rica• Dominican Republic• El Salvador• Guatemala• Honduras• Israel• Jordan• Mexico• Morocco• Nicaragua• Oman• Peru • Singapore• The United States has signed free trade agreements with Colombia, Korea, and Panama, but Congress must enact legislation to
approve and implement each individual agreement in order for them to go into effect.• The United States is also in nenegotiations of a regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement with the
objective of shaping a high-standard, broad-based regional pact.
http://www.kcsmartport.com/pdf/SmtPrtOneRoute.pdf
Population GDP GDP/CapitaCANADA 33,487,208 $1.319 trillion $38,400
MEXICO 111,211,789 $866.3 billion $13,200
UNITED STATES 307,212,123 $14.27 trillion $46,400
NAFTA (JULY 2009 Est.)CIA FACT Book https://www.cia.gov/library/publications/the-world-factbook/region/region_noa.html
Trade US- Canada-Mexico• Canada’s exports to its NAFTA partners increased by 173 percent in value from pre-NAFTA levels. Exports to the United States grew from USD116.8 billion to USD316.8 billion, while exports to Mexico reached USD3.9 billion.
• U.S. exports to Mexico and Canada grew by 157 percent, from USD 142 .0 billion (USD 41.6 billion to Mexico and USD 100.4 billion to Canada) to USD 364.5 billion (USD 134.2 and USD 230.3 billion, respectively).
• Mexican exports to the U.S. grew by 392 percent, reaching USD212.3 billion. Exports to Canada also grew substantially from USD1.5 to USD5.2 billion, an increase of almost 237 percent.
January 1, 2008 represents an important milestone in the trade and economic relationship between our three countries. On that day, the last scheduled NAFTA tariffs and quotas will be eliminated and North America will be joined in free trade.