International business - Chapter - 8

Chapter 08 - Regional Economic Integration

Regional Economic Integration Chapter Outline

LEVELS OF ECONOMIC INTEGRATION THE CASE FOR REGIONAL INTEGRATION The Economic Case for Integration The Political Case for Integration Impediments to Integration

THE CASE AGAINST REGIONAL INTEGRATION REGIONAL ECONOMIC INTEGRATION IN EUROPE Evolution of the European Union

Political Structure of the European Union

Management Focus: The European Commission and Media Industry Mergers The Single European Act

Country Focus: Creating a Single European Market in Financial Services The Establishment of the Euro

Enlargement of the European Union

REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS The North American Free Trade Agreement The Andean Community MERCOSUR

Central American Common Market, CAFTA and CARICOM Free Trade Area of the Americas

REGIONAL ECONOMIC INTEGRATION ELSEWHERE Association of Southeast Asian Nations Asia Pacific Economic Cooperation Regional Trade Blocs in Africa

Learning Objectives

1. Be able to explain the different levels of regional economic integration.

2. Understand the economic and political arguments for regional economic integration. 3. Understand the economic and political arguments against regional economic integration.

4. Be familiar with the history, current scope, and future prospects of the world's most important regional economic agreements.

5. Understand the implications for business that are inherent in regional economic integration agreements.

Chapter Summary

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Chapter 08 - Regional Economic Integration

In this chapter, the topic of regional economic integration is explored. The levels of regional economic integration discussed (from least integrate to most integrated) include: a free trade area, a customs union, a common market, an economic union, and a full political union. The arguments for and against regional economic integration are provided. Many students will remember some of these arguments from the debate of the ratification of the North American Free Trade Agreement (NAFTA). The chapter also provides information about the major trade blocks of the world,

including the European Union, NAFTA, the Andean Group, MERCOSUR, and several other Latin American and Asian trade alliances. In addition, the implications for business of these trade agreements and others are fully discussed.

INTRODUCTION

A) One notable trend in the global economy in recent years has been the accelerated movement toward regional economic integration. Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

B) Despite the rapid spread of regional trade agreements designed to promote free trade, there are those who fear that the world is moving toward a situation in which a number of regional trade blocks compete against each other. In this scenario of the future, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs.

LEVELS OF ECONOMIC INTEGRATION

A) Several levels of economic integration are possible in theory (see Figure 8.1 in the textbook). From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and, finally, a full political union.

B) In a free trade area all barriers to the trade of goods and services among member countries are removed. In a theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between member nations. Each country, however, is allowed to determine its own trade policies with regard to nonmembers.

C) The most enduring free trade area in the world is the European Free Trade Association (EFTA). EFTA currently joins four countries-Norway, Iceland, Liechtenstein, and Switzerland. Other free trade areas include the North American Free Trade Agreement (NAFTA).

D) The customs union is one step further along the road to full economic and political integration. A customs union eliminates trade barriers between member countries and adopts a common external trade policy.

E) Customs unions around the world include the current version of the Andean Pact (between Bolivia, Columbia, Ecuador, and Peru).

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Chapter 08 - Regional Economic Integration

F) Like a customs union, the common market has no barriers to trade between member countries and a common external trade policy. Unlike in a customs union, in a common market, factors of production also are allowed to move freely between members. Thus, labor and capital are free to move, as there are no restrictions on immigration, emigration, or cross-border flows of capital between markets.

G) Currently, MERCOSUR, the South America grouping that includes Brazil, Argentina,

Paraguay, Venezuela, and Uruguay, is aiming to eventually establish itself as a common market.

H) An economic union entails even closer economic integration and cooperation than a common market. Like the common market, an economic union involves the free flow of products and factors of production between members and the adoption of a common external trade policy. Unlike a common market, a full economic union also requires a common currency, harmonization of the member countries’ tax rates, and a common monetary and fiscal policy.

I) The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, the currency of the EU, and differences in tax rates across countries still remain.

J) In a political union, independent states are combined into a single union. The EU is on the road to at least partial political union. The United States provides an example of even closer political union.

THE CASE FOR REGIONAL INTEGRATION

A) The case for regional integration is both economic and political.

The Economic Case for Integration

B) Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the World Trade Organization.

The Political Case for Integration

C) The political case for integration has two main points: 1) by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease, and 2) by linking countries together, they have greater clout and are politically much stronger in dealing with other nations

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Chapter 08 - Regional Economic Integration

Impediments to Integration

D) There are two main impediments to integration. First, although economic integration benefits the majority, it has costs. Although a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. A second impediment to integration arises from concerns over national sovereignty.

THE CASE AGAINST REGIONAL INTEGRATION

A) Although the tide has been running strongly in favor of regional free trade agreements in recent years, some economists have expressed concern that the benefits of regional integration have been oversold, while the costs have often been ignored.

B) Whether regional integration is in the economic interests of the participants depends upon the extent of trade creation as opposed to trade diversion. Trade creation occurs when low cost

producers within the free trade area replace high cost domestic producers. Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers. A regional free trade agreement will only make the world better off if the amount of trade it creates exceeds the amount it diverts.

REGIONAL ECONOMIC INTEGRATION IN EUROPE

A) There are two trade blocks in Europe: the European Union (EU) and the European Free Trade Association. Of the two, the EU is by far the more significant, not just in terms of membership, but also in terms of economic and political influence in the world economy.

Evolution of the European Union

B) The European Union (EU) is the product of two political factors: first, the devastation of two world wars on Western Europe and the desire for a lasting peace, and second, the European nations’ desire to hold their own on the world’s political and economic stage.

C) The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951. The European Community was formed in 1957 at the Treaty of Rome. While the original goal was for a

common market, progress was generally very slow. Over the years the EU expanded in spurts, as well as moved towards ever-greater integration. Today, the EU has 27 members, a population of almost 500 million, and a GDP of

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