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CHAPTER
7
Regional Economic
Integration
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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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7-1
Key Issues
• Understand the different levels of economic
integration among nations
• What are the political and economic arguments for
and against regional integration?
• Be familiar with the world’s most important
regional economic agreements
• What are the implications for business from
regional economic integreation?
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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
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Levels of Economic Integration
• Free Trade Area (FTA):
– removes tariffs among members
– members retain own trade policies toward others
• Customs Union (CU): FTA and …
– common trade policy toward others
• Common Market (CM): CU and …
– elimination of intra-market factor of production
movements
• Economic Union (EU): CM and …
– full integration of member economies (common
policy)
• Political Union: EU and …
– political integration
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Reasons for Regional Integration
• Economic enhancement of the member states
– Free trade
– Fee FDI
• Political Reasons
– Linked economies create interdependencies that
reduce the potential for armed conflict
– Grouping gives countries more political clout
world-wide
• Impediments
– Painful adjustments in certain segments of economy
– Threat to national sovereignty
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European Union
• 15 member countries; 350mm 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
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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
• 2002 5th enlargement: Cyprus, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the
Slovak Republic and Slovenia conclude accession
agreements.
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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 (x-Sweden, Denmark,
Britain)
• Currency was issued 1/1/2002 and 12 national
currencies were withdrawn by April 2002
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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
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Costs of the Euro (€)
• Loss of monetary policy control at national level
• ECB sets interest rates and determines monetary policy
(Frankfurt, Ger.)
• ECB is not under political control; issues instructions to
national central banks
• EU is not an optimal currency area
• Not enough similarities in the underlying structure of economic
activity (e.g., Finland vs Portugal)
• Interest rates may be too high in depressed regions or too low
for economically booming regions
• May need to deal with this through fiscal transfers from
prosperous to depressed regions
• Economic issues may come against political ones
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Enlargement of the EU
• Enlargement means more disparity and more
difficult governance and control
• Norway opted out of the EU (1994)
• The EU plans to conclude accession negotiations
by the end of the 2002 with: Cyprus, the Czech
Republic, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, the Slovak Republic and Slovenia.
• US and Asian countries fear that EU will become
protectionist (“fortress Europe”)
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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
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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
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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
• Continuation of opening process
through elimination of tariffs
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NAFTA - Key provisions
• General (effective 1/1/94)
– Tariffs reduced across all sectors 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
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Implications for Business
• Opportunities
– Less protectionism; higher economic growth
– Lower cost of doing business (fewer borders)
• Threats
–
–
–
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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
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