Chapter 08 international business

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International Business7e

by Charles W.L. Hill


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Chapter 8

Regional Economic Integration


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Introduction

Regional economic integrationrefers toagreements between countries in a geographicregion to reduce tariff and non-tariff barriers tothe free flow of goods, services, and factors ofproduction between each other

Regional trade agreements are designed topromote free trade, but instead the world maybe moving toward a situation in which a numberof regional trade blocks compete against eachother


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Levels Of Economic Integration

There are five levels of economicintegration:

1.a free trade areaeliminates all barriers tothe trade of goods and services among

member countries, but members determinetheir own trade policies for nonmembers

the European Free Trade Association(between Norway, Iceland, Liechtenstein,

and Switzerland), and the North AmericanFree Trade Agreement(between the U.S.,Canada, and Mexico) are both free tradeareas


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2.a customs unioneliminates trade barriersbetween member countries and adopts a commonexternal trade policy

The Andean Pact(between Bolivia, Columbia,Ecuador and Peru) is an example of a customsunion

3.a common markethas no barriers to tradebetween member countries, a common externaltrade policy, and the free movement of the factors

of production

MERCOSUR(between Brazil, Argentina, Paraguay,and Uruguay) is aiming for common market status


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4. An economic unionhas the free flow of productsand factors of production between members, acommon external trade policy, a common currency,a harmonized tax rates, and a common monetaryand fiscal policy

The European Union(EU) is an imperfecteconomic union5. A political unioninvolves a central politicalapparatus that coordinates the economic, social,and foreign policy of member states

The EU is headed toward at least partial politicalunion, and the United States is an example of evencloser political union


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Figure 8.1


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The Economic Case For

Regional Integration

All countries gain from free trade andinvestment

Regional economic integration is anattempt to exploit the gains from freetrade and investment


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The Political Case For Regional Integration

Linking countries together, makingthem more dependent on each other:

creates incentives for politicalcooperation and reduces the likelihoodof violent conflict

gives countries greater political cloutwhen dealing with other nations


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Impediments To Integration

Economic integration can be difficultbecause:

while a nation as a whole may benefitfrom a regional free trade agreement,certain groups may lose

it implies a loss of nationalsovereignty


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The Case Against Regional Integration

Regional economic integration is onlybeneficial if the amount of trade it creates

exceeds the amount it divertsTrade creationoccurs when low costproducers within the free trade area replacehigh cost domestic producers

Trade diversionoccurs when higher costsuppliers within the free trade area replacelower cost external suppliers


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Regional Economic Integration In Europe

Europe has two trade blocs:

The European Union (EU) with 27

members

The European Free Trade Area(EFTA) with 4 members

The EU is seen as the worlds next

economic and political superpower


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Regional Economic Integration In Europe

Map 8.1: Member States of the European Union in 2007


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Evolution Of The European Union

The EU was formed as a result of thedevastation of two world wars on WesternEurope and the desire for a lasting peace, andthe desire by the European nations to hold theirown on the worlds political and economic

stageThe forerunner of the EU was the EuropeanCoal and Steel Community, which had the goalof removing barriers to trade in coal, iron, steel,and scrap metal formed in 1951

The European Economic Community wasformed in 1957 at the Treaty of Romewith thegoal of becoming a common market


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Political Structure Of The European Union

There are five main institutions of the EU:

the European Council- resolves major policyissues and sets policy directions

the European Commission- responsible forimplementing aspects of EU law and monitoring

member states to ensure they are complying withEU laws

the Council of the European Union- the ultimatecontrolling authority within the EU

the European Parliament- debates legislationproposed by the commission and forwarded to it bythe council

the Court of Justice- the supreme appeals courtfor EU law


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The Single European Act

The Single European Act:was adopted by the EU in 1987

committed the EC countries to work towardestablishment of a single market by December 31,

1992was born out of frustration among EC membersthat the community was not living up to its promise

provided the impetus for the restructuring of

substantial sections of European industry allowingfor faster economic growth than would otherwisehave been the case


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The Establishment Of The Euro

The Maastricht Treatycommitted the EU toadopt a single currency

By adopting the euro, the EU has createdthe second largest currency zone in theworld after that of the U.S. dollar

The euro is used by 12 of the 25 memberstates

For now, three EU countries, Britain,Denmark and Sweden, that are eligible toparticipate in the euro-zone, are opting out


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Benefits of the Euro:

There are savings from having to handle onecurrency, rather than many

A common currency will make it easier tocompare prices across Europe

European producers will be forced to look forways to reduce their production costs in order tomaintain their profit margins

It should give a strong boost to the developmentof highly liquid pan-European capital market

A pan-European euro denominated capital marketwill increase the range of investment options openboth to individuals and institutions


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Costs of the Euro:

National authorities lose control over the

monetary policyThe EU is not an optimal currency area(anarea where similarities in the underlyingstructure if economic activities make it

feasible to adopt a single currency and usea single exchange rate as an instrument ofmacro-economic policy)


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Since its establishment January 1,1999, the euro has had a volatile

trading history with the U.S. dollarInitially, the euro fell in value relativeto the dollar, but strengthened to a five

year high of $1.30 in February 2006


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Enlargement Of The European Union

Many countries have applied for EU

membershipTen countries joined on May 1, 2004 expandingthe EU to 25 states, with population of 450 millionpeople, and a single continental economy with a

GDP of11 trillionIn 2007, Bulgaria and Romania joined bringmembership to 27 countries

The new countries will not be able to adopt the

euro until at least 2007, nor will there be freemovement of labor between new and existingcountries until then



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In The Americas

There is a move toward greater regionaleconomic integration in the Americas

The biggest effort is the North AmericanFree Trade Area (NAFTA)

Other efforts include the AndeanCommunity and MERCOSUR

A hemisphere-wide Free Trade of theAmericas is under discussion


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The North American Free Trade Agreement

The North American Free Trade Area(NAFTA) became law January 1, 1994

NAFTAs participants are the UnitedStates, Canada, and Mexico


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Map 8.2


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NAFTA:

abolished tariffs on 99 percent of the goods tradedbetween members

removed most barriers on the cross-border flow ofservices

protects intellectual property rightsremoves most restrictions on FDI between the threemember countries

allows each country to apply its own environmentalstandards, provided such standards have a scientific base

establishes two commissions to impose fines andremove trade privileges when environmental standards orlegislation involving health and safety, minimum wages, orchild labor are ignored


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Critics of NAFTAs argued that:

that jobs would be lost and wage levels

would decline in the U.S. and CanadaMexican workers would emigrate north

pollution would increase due to Mexico'smore lax standards

Mexico would lose its sovereignty


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Research indicates that NAFTAs early impact

was subtle, and both advocates and detractors mayhave been guilty of exaggeration

The agreement has helped to create thebackground for increased political stability inMexico

Several other Latin American countries have

indicated their desire to eventually join NAFTACurrently both Canada and the U.S. are adopting await and see attitude with regard to most countries


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The Andean Community

The Andean Pact:

was formed in 1969 using the EU model

had more or less failed by the mid-1980swas re-launched in 1990, and nowoperates as a customs union

signed an agreement in 2003 withMERCOSUR to restart negotiations towards

the creation of a free trade area


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MERCOSUR

MERCOSUR:originated in 1988 as a free trade pactbetween Brazil and Argentina

was expanded in 1990 to include Paraguay

and Uruguayhas been making progress on reducing tradebarriers between member states

may be diverting trade rather than creatingtrade, and local firms are investing in industriesthat are not competitive on a worldwide basis

Central American Common


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Central American CommonMarket And CARICOM

There are two other trade pacts in the Americas:

the Central American Trade Market (CAFTA)to lower trade barriers between the U.S. andmembers

CARICOMto establish a customs union

Neither pact has achieved its goals yet

In 2006, six CARICOM members formed the

Caribbean Single Market and Economy (CSME) -to lower trade barriers and harmonize macro-economic and monetary policy betweenmembers


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Regional Economic Integration Elsewhere

Several efforts have been made tointegrate in Asia and Africa

One of the most successful is theAssociation of Southeast AsianNations (ASEAN)

Association Of


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Association OfSoutheast Asian Nations

The Association of Southeast Asian Nations(ASEAN):

was formed in 1967

currently includes Brunei, Indonesia, Malaysia,

the Philippines, Singapore, Thailand, Vietnam,Myanmar, Laos, and Cambodia

wants to foster freer trade between membercountries and to achieve some cooperation in their

industrial policiesan ASEAN Free Trade Area(AFTA) between thesix original members of ASEAN came into effect in2003

Association Of


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Association OfSoutheast Asian Nations

Map 8.3


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Asia-Pacific Economic Cooperation

The Asia-Pacific Economic Cooperation(APEC):

currently has 21 members including theUnited States, Japan, and China

wants to increase multilateral cooperationin view of the economic rise of the Pacific

nations and the growing interdependencewithin the region

f C


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Asia-Pacific Economic Cooperation

Map 8.4

R i l T d Bl I Af i


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Regional Trade Blocs In Africa

Progress toward the establishment ofmeaningful trade blocs in Africa has been

slowMany countries are members of more thanone of the nine dormant blocs in the region

Kenya, Uganda, and Tanzania committed

to re-launching the East African Community(EAC) in 2001, however so far, the effortappears futile

I li ti F M


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Implications For Managers

The EU and NAFTA

currently have the mostimmediate implications

for business


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Threats

Within each grouping, the businessenvironment becomes competitive

EU companies are becoming more capable

There is a risk of being shut out of the singlemarket by the creation of a trade fortress

The EU is becoming more willing to interveneand impose conditions on companies

proposing mergers and acquisitions whichcould limit the ability of firms to follow thestrategy of their choice

Chapter 08 international business

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