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The European Union and Other Regional Trade Areas

The European Union and Other Regional Trade Areas

Chapter 14

© 2002 West/Thomson Learning

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

Impediments to Regional Integration

Painful adjustments in certain segments of economy -- some “losers” low skilled, low tech jobs lost (US

textiles) Threat to national sovereignty --

countries give up control of some key policies

monetary policy, tax policy and trade policy

Debate: Trade creation or trade diversion?

Economic Case for Regional Integration

Stimulates economic growth in countries through FDI and free trade

Countries specialize in those goods and services efficiently produced.

Additional gains from free trade beyond international agreements such as GATT and WTO.

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Political Case for Economic Integration

Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation.

Together, the countries have the economic clout to enhance trade with other countries or trading blocs.

8-3

Free Trade Area (FTA): removes tariffs among members members retain own trade policies toward

others Customs Union (CU): FTA+

common trade policy toward others Common Market (CM): CU+

elimination of intra-market factor of production movements

Economic Union (EU): CM+ full integration of member economies

(common policy) Political Union: US

political and economic integration

Levels of Economic Integration

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European UnionEuropean Union European Coal and Steel Community (1952) Treaty of Rome (1957) created European

Community Single European Act (1987) set 1992

deadline of achieving single market Maastricht Treaty (1991) European common

currency adopted 1/1/99 Common foreign and defense policy Common citizenship EU parliament with “teeth” created European

Union and set path for monetary union

European Union Treaty of Amsterdam: 1999

(incorporated the principle of freedom of movement from the Schengen Agreement)

Treaty of Nice: 2000, voting rights in preparation for enlargement – target date of 2004

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Euro Timetable Euro Timetable

January 1, 1999: Euro single currency is born

1999-2002: National currencies continue to exist and work in parallel; Euro as “virtual currency”

2002: switch to single currency; Euro in circulation

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

Costs of the Euro Loss of monetary policy control at national

level ECB sets interest rates and determines monetary

policy 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 in conflict with political issues

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Monetary Union CriteriaMonetary Union Criteria

Budget deficit no greater than 3% of GDP

Public debt no greater than 60% GDP

Price stability (inflation controlled)

Long term interest rates within 2% of the best 3 countries

Exchange rate stability

Members of the European Union Austria* Belgium* Denmark Finland* France* Germany* Greece* Ireland* Italy* Luxembourg* The Netherlands* Portugal* Spain* Sweden The United Kingdom

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia* Bulgaria Romania

* Countries that have adopted the Euro as the common currency of the EU

Map

EU Governance

Heads of State and

CommissionPresident

1 representative

from each member

27 Commissioners appointed by members for 4 year terms

European Council

Resolves policy issues Sets policy direction.

European Commission Proposing,

implementing, monitoring legislation.

Council of MinistersUltimate controlling authority. No EU laws w/o approval. European

Parliament

785 directly elected

members

Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners.

1 judge from each country

Court of Justice

Hears appeals of EU Laws.

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Law-making within the EULaw-making within the EU

Regulations vs. directives Directive: Binding as to result, but left to

members to choose form and methods Regulation: Binding in entirety, applies directly

to all members Role of

Council: Decides to adopt regulation or directive Commission: Proposes action to Commission Parliament: may amend or reject measures on

single market, consumer protection, environment, health, education, culture

Court of Justice: interprets and applies EU law; reviews member actions for compliance

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Rewe-Zentral AG (Cassis de Dijon) (ECJ 1979)

Rewe-Zentral AG (Cassis de Dijon) (ECJ 1979)

Facts: German law limits importation of spirits with less than 32% alcohol Germany defends law on basis of

public health Issue: Does law amount to

quantitative restriction on imports in violation of Art. 30 & 37 of the Treaty of Rome?

Decision: Yes, Reasons: Germany’s arguments were

not for “purpose in general interest sufficient to take precedence over the principle of free movement of goods

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Commission of EC v. Fed. Rep. of Germany (ECJ

1987)

Commission of EC v. Fed. Rep. of Germany (ECJ

1987) Facts: German law prohibits additives

in beer EC Commission claims law violates

Arts. 30 and 36 Issue: Does law violate Treaty’s

commitment to free movement of goods?

Decision: Yes Reasons: law is not justified on the

basis of health or protection of health (Art. 36) and violates Art. 30

Imperial Tobacco v. European Imperial Tobacco v. European ParliamentParliament (ECJ 2000) (ECJ 2000)

Facts: referral for preliminary ruling on validity of Directive 98/43/EC restricting tobacco advertising

Issue: Does Directive have sufficient legal basis, and does it infringe right of free expression?

Decision: Directive annulled Directive Reasons: Similar issue decided in Germany v.

European Parliament Inadequate legal basis for Directive under

Arts. 100a, 57(2), and 66 Because Directive annulled, no need to give

preliminary ruling

Cotonou Agreement 2000 EU, African, Caribbean and

Pacific countries EU had GSP program since

1971 and in effect until 2007 2007 new “partnerships” will

begin

Andean PACT

Map

ANCOM: Andean Pact

Bolivia, Colombia, Ecuador, Peru; Chile is Associate Member

Cartagana Agreement, 1969: One of oldest still in existence

Population: 120 mm (14% of hemisphere)

GDP: 2005: $745.3 billion (includes Venezuela)

Changed from FTA to customs union in 1992

Mercosur

Map

The Mercosur Accord

1988: Argentina, Brazil; 1990: Paraguay, Uruguay; 2006: Venezuela

Associate Membership Granted to Andean Community Members

1995: Agreed to move toward a full customs union.

Population: 220 mm GDP: $1 Trillion Trade doubled in first 3 years

Other Western Hemisphere Associations

Central American Common Market

CARICOM Free Trade Area of the

Americas

ASEAN

Association of Southeast Asian Nations

Created in 1967 400 million citizens Economic, political and social

cooperation Brunei, Indonesia, Malaysia, the

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

Asia Pacific Economic Cooperation Founded in 1989 to ‘promote open

trade and practical economic cooperation’. ‘Promote a sense of community’.

18 members GDP: $13 trillion (1995) 50% of total world income 40% of global trade

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African trade areas (AEC, COMESA, SADC)

Arab League Gulf Cooperation Council

Other Trade AreasOther Trade AreasOther Trade AreasOther Trade Areas

Implications for Business

Opportunities Less protectionism; higher economic growth Lower cost of doing business (fewer

borders)

Threats 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

Web Sites http://www.europa.eu.int/index.htm http://www.ita.doc.gov