Hand Out Chap 8

7/30/2019 Hand Out Chap 8

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[ Ref. Chapter- 8, Global Business Today ]

Regional EconomicRegional Economic IntegrationIntegration

Introduction

Regional economic integration refers toagreements between countries in ageographic region to reduce tarif f and non-tarif f barriers to the free flow ofgoods,services, and factors of productionbetween member countries.

In theory, regional economic integration

Over the last two decades, the number ofregional trade agreements has been on therise


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Introduction

Question: Is regional economic integrationa good thing?

There is some concern that the world ismoving toward a situation in which anumber of regional trade blocks competeagainsteach other

If this scenario materializes, the gains

from free trade within blocs could beoffset by a decline in trade between

blocs

Levels of Economic Integration


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There are fivefive levelslevels of economic integration1. Free trade area - all barriers to trade in goods

,members determine their own trade policies withregard to non-members

This is the most popular form of integration

Examples include

the Euro ean Free Trade Association(between Norway, Iceland, Liechtenstein, and

Switzerland) the North American Free Trade Agreement

(between the U.S., Canada, and Mexico)


2.Customs union: eliminates trade barriersbetween member countries and adopts acommon external trade policy

Most countries that enter a customs uniondesire further integration in the future

Exam les include:

the Andean Pact (between Bolivia,Columbia, Ecuador, Venezuela, andPeru)


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3. Common market :

1. no barriers to trade between member countries,

. ,

3. free movement of the factors of production

This type of integration can be difficult to achieveandrequires significant harmonyamongmembersin fiscal, monetary, andemployment policies

Examples : MERCOSUR (between

Brazil, Argentina, Paraguay, and Uruguay) hopeto achieve this status


4. Economic union:

free flow of products and factors of productionbetweenmembers

the adoption of a common external tradepolicy,

a common currency,

harmonization of the member countries tax

, and a common monetary and fiscal policy

This level of integration involves sacrificing asignificant amount of national sovereignty

Example: European Union (EU)


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5. Polit ical union - independent states arecombined into a single union

This requires that a central politicalapparatus coordinate economic, social, andforeign policy for member states

The EU is headed toward at least partialpolitical union, and the United States is an

example of even closer political union

The Case for Regional Integration

There are both economic andolitical ar uments su ortin

regional economic integration

Generally, many groups within acountry oppose the notion of economic inte ration


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The Economic Case for Integration

Attempt to further liberalise free flow oftrade and investment between

under international agreements suchas the WTO

Easier to form an agreement with a.

The Political Case for Integration

Politically, integration is attractive because:

B makin countires more de endent oneach other, and forming a structurewhere they regularly have to interact, thelikelihood of violent conflict and war

will decrease

,greater clout and are politically muchstronger in dealing with other nations


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Impediments to Integration

Integration is not easy to achieve or maintain

1. it can be costly - while a nation as a wholemay benefit from a regional free tradeagreement, certain groups may lose

. sovereignty

The Case Against

Regional Integration

Regional economic integration is beneficialonly when the amount of trade it createsexcee s e amoun ver s

Trade creation occurs when high costdomestic producers are replaced with low costproducers within the free trade area.

Trade diversion occurs when higher costsuppliers within the free trade area replacelowercostexternal suppliers


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Regional Economic Integrationin Europe

Europe has two trade blocsEuro ean Union with 27 members

European Free Trade Associationwith 4 members

The European Union is expected tobecome a superpower of the same

order as the United States.

Evolution of the European Union

The European Union (EU) is the result of:

the devastation of two world wars on Western Europeand the desire for a lasting peace

the desire by the European nations to hold their ownon the worlds political and economic stage

The forerunner of the EU was the European Coaland Steel Communit formed in 1951

The Treaty of Rome established the EuropeanEconomic Community (EEC) in 1957

The name was changed to the EU in 1994


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1 Austria 10 Italy2 Belgium 11 Luxembourg

EURO Zone MembersEURO Zone Members

3 Finland 12 Malta

4 Cyprus 13 Netherlands

5 Estonia 14 Portugal6 France 15 Slovakia7 Germany 16 Slovenia8 Greece 17 S ain

9 Ireland

The European Union:

500 mill ion people 27 countr ies

Member states of the European UnionMember states of the European Union

Candidate and potential candidateCandidate and potential candidatecountriescountries


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How rich is the EU compared to the rest

of the world?

Political Structure of

the European UnionThe four main institutions of the EU are

1. the European Commission - proposes EU, ,

compliance

2. the European Council - the ultimate controllingauthority within the EU

3. the European Parliament - debates legislation

by the council

4. the Court of Justice - the supreme appealscourt for EU law


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The Establishment of the Euro

The Maastricht Treaty (1991) committed EU members to

adopt a single currency, the Euro.

Introduced on 1 Jan 1999 initiall for accountin and cashlesstransaction; circulation of notes and coins from1 Jan, 2002.

The Euro is used by 17 of the 27 member states

This has created the Euro zone, the second largest currencyzone in the world after that of the U.S. dollar

Countries that participate have agreed to give up control of

their monetary policy

Britain, Denmark and Sweden have opted out of the eurozone

Benefits of Euro

Firms and individuals should save by handling onecurrency, rather than many

Consumers should find it easie to compare pricesacross Europe

Producers should become more efficient as theyreduce their production costs in order to maintain theirprofitmargins

The hi hl li uid an-Euro ean ca ital marke shouldgeta strong boost

The range of investment options open both toindividuals and institutions should increase


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Costs of Euro?Costs of Euro?

Membership in the euro zone implies that nations

lose control over the monetary policy

The Euro ean Central Bank ECB wasestablished to manage monetary policy, butsome question its ability to act independently

The EU is not an optimal currency area (an areawhere similarities in the underlying structure ofeconomic activities make it feasible to adopt a

an instrument of macro-economic policy)

So, countries may react very differently tochanges in the euro

USD - Euro ExchangeExchange Rate

{Euro has had a volatile trading history withthe U.S. dollar

{ Initially, the euro was valued at $1.17, thenfell in value relative to the dollar, butstrengthened to an all-time high of $1.54 inMarch 2008


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Enlargement ofthe European Union

Many countries, particularly from EasternEurope, have applied for membership in theEU

Ten countries joined in 2004 expanding theEU to 25 states, with population of 450million people, and a single continentaleconomy with a GDP of 11 trillion

In 2007 Bul aria and Romania oinedbringingmembership to 27countries

Turkey has also applied for membership

Evolution of the European UnionEvolution of the European Union

Member States of the European: 6 to 27 countries

2004: 10 new EU members:

Cyprus, CzechRepublic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia

2007: Bulgaria andRomania join the EU


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Regional Economic Integrationin the Americas

Regional economic integration is on therise in the Americas

North American Free TradeAgreement (NAFTA)

Other agreements include

MERCOSUR

There are also attempts to form a FreeTrade Area of the Americas

Regional Economic Integration

in the Americas


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The North AmericanFree Trade Agreement

The North American Free Trade Agreement (NAFTA)between the U.S., Canada, and Mexico became lawin 1994

NAFTA

abolished tariffs on 99 percent of goods traded

removed barriers on the cross-border flow ofservices

protects intellectual property rights

standards

establishes two commissions to impose fines andremove trade privileges when environmentalstandards or legislation involving health andsafety, minimumwages, or child labor are ignored

The North American

Free Trade AgreementQuestion: What are the benefits of NAFTA?

Mexico will benefit from increased jobs as low costproduction moves south, and will attain more rapideconomic growth as a result

The U.S. and Canada will benefit from the accessto a large and increasingly prosperous market andfrom the lower prices for consumers from goods

U.S. and Canadian firms with production sites inMexico will be more competitive on world markets


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Question: What are the drawbacks of NAFTA?

J obs could be lost and wage levels could decline. .

Mexican workers could emigrate north

Pollution could increase due to Mexico's more laxstandards

Mexico would lose its sovereignty


Question: How successful has NAFTA been?

Studies of NAFTAs early impact suggest that both advocates and

Trade between the three countries has increased by 250 percent

The members have become more integrated

Productivity has increased in member nations

Employment effects have been small

Mexico has become more politically stable

Should NAFTA accept new members?

Several other Latin American countries have indicated theirdesire to eventually join NAFTA

Currently both Canada and the U.S. are adopting a wait and seeattitude with regard to most countries


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The Andean Community

TheAndean Pact (formed in 1969) was basedon the EU model The a reement hadmore or less failed b the

mid-1980s In the late 1980s, Latin American governments

began to adopt free market economic policies In 1990, the Andean Pact was re-launched,

and now operates as a customs union

In2003 it si ned an a reement withMERCOSUR to restart negotiations towards the

creation of a free trade area Members : Bolivia, Ecuador, Peru, andColumbia

MERCOSUR

MERCOSUR originated in 1988 as a free tradepact between Brazil and Argentina

In 1990, it was expanded to include Paraguayan ruguay

MERCOSUR has been successful at reducingtrade barriers between member states

Critics worry that MERCOSUR is diverting traderather than creating t rade, and local firms areinvestin in industries that are not com etitive ona worldwide basis

Members -Brazil, Argentina, Paraguay, Uruguay, andVenezuela


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Central American Common Market, CAFTAand CARICOM

Two other trade pacts in the Americas are:

1. Central American Common Market

urrent mem ers : osta ca, a va orGuatemala, Honduras, Nicaragua, and the DominicanRepublic

These countries were joined by the U.S.A. in 2003 tocreate a free trade agreement, the Central AmericanFree Trade Agreement, CAFTA (2003)

2. CARICOM (1973) Customs union between English-speaking Caribbean countries 15 Members 6 members of CARICOM formed the Caribbean Single

Market and Economy (CSME) in 2006 to lower trade barriersand harmonize macro-economic and monetary policy

ProposedProposed FreeFree TradeTrade Area ofArea of thethe

AmericasAmericas Talks began in 1998 to establish a Free

Trade of The Americas (FTAA) by 2005

e was not esta s e asplanned

Current support for the agreement bythe U.S. and Brazil is limited

If the FTAA is established, it wouldcreate a free trade area of nearly 800million people


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Regional EconomicIntegration Elsewhere

There have been various attempts atregional economic integration throughout

The success of these attempts have beenlimited

The most significant efforts are:

1. Association of Southeast Asian Nations, and

2. As ia-Paci fic Economic Cooperation

ssoc a on oSoutheast Asian Nations

TheAssociation of Southeast Asian Nations (ASEAN)was formed in1967

ASEAN members: Brunei , Indones ia, Malaysia, thePhil ippines, Singapore, Thailand, Vietnam, Myanmar,Laos and Cambodia

The goal of ASEAN is to foster freer trade betweenmember countries and to achieve some cooperation intheir industrial policies

In 2003, anASEAN Free Trade Area (AFTA) between thesix original members of ASEAN came into full effectwith agoal of reducing importtariffs among theolder members

Vietnam, Laos, and Myanma have all oined AFTA morerecently

India - ASEAN FTA: After the implementation of FTA in goods, bilateral trade grew 41% in

2011-12. Trade between India and Asean is worth $80 billion, and the two sides aim to

increaseitto $100billionby2015and $200billionby2022. FTA inServices and Investment is

beingfinalised(ET 21 Dec 2012)


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Asia-Pacific Economic Cooperation [1]

Asian Pacific Economic Cooperation(APEC) - founded in 1990

Currently 21 members including the UnitedStates, Japan, and China

APEC wants to increase multilateral

the Pacific nations and the growinginterdependence within the region

Asia-Pacific Economic Cooperation [2]

Countries

Date of Joining Date of Joinin g

11 Mexico 17-19 Nov 1993

Rim

1 Austra a 6-7 Nov 19892 Brunei Darussalam 6-7 Nov 1989

3 Canada 6-7 Nov 19894 Chile 11-12 Nov 1994

5 PR of China 12-14 Nov 19916 Hong Kong, China 12-14 Nov 19917 Indonesia 6-7 Nov 1989

8 J apan 6-7 Nov 1989

9 Republic of Korea 6-7 Nov 198910 Malaysia 6-7 Nov 1989

12 New Zealand 6-7 Nov 198913 Papua New Guinea 17-19 Nov 1993

14 Peru 14-15 Nov 1998

15 The Philippines 6-7 Nov 1989

16 Russia 14-15 Nov 1998

17 Singapore 6-7 Nov 1989

18 Chinese Taipei 12-14 Nov 1991

19 Thailand 6-7 Nov 1989

20 The United States 6-7 Nov 1989

21 Viet Nam 14-15 Nov 1998


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Regional Trade Blocs in Africa

Nine trade blocs on the Africancontinent

Progress toward meaningful trade blocshas been slow

Many countries believe that they need

foreign competition making it difficult tocreate free trade areas or customsunions

Implications for Managers

Question: Why is regional economic integration

important to international companies?

Threats

Markets that had been protected from foreigncompetition are increasingly opened up

These developments are particularly significant in

the European Union and NAFTA

However, regional economic integration is likely toincrease competition


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Opportunities

1. Markets formerly protected now open toexports and foreign direct investment

2. Due to:

(a) free movement of goods across borders,(b) the harmonization of product standards, and

(c) simplification of tax regimes, firms can realize

centralizing production in those locations wherethe mixof factorcosts and skills is optimal.

Threats

1. Lower trade and investment barriers could leadto increased price competition within the EU andNAFTA

2. Increased competition within the EU is forcingEU firms to become more efficient, and strongerglobal competitors

3. Firms outside the blocs risk being shut out ofthesingle marketby the creation of a trade fortress

4. Firms may be limited in their ability to pursue thestrategy of their choice in the EU as EUintervenes and imposes conditions oncompanies proposing mergers and acquisitions.


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Critical Discussion Question

What are the significant benefits of NAFTA for

the Canadian, Mexican, and U.S. economy?

Discuss.1. NAFTA could be viewed as an opportunity to create an enlarged

and a more productive base for the United States, Canada, andMexico.

2. As low-income jobs move from Canada and the United States toMexico, the Mexican economy should be strengthened givingMexican consumers the ability to purchase higher-cost Americanproducts.

. e ne e ec o e ower ncome o s movng o exco anMexico increasing its imports of higher quality American goods

should bepositive for theAmerican economy.4. International competitiveness ofU.S. and Canadian firms thatmoveproduction to Mexico will be enhanced (due to lower labor costs) ,enabling themto better compete withAsian and European rivals.

Critical Discussion Question - 2

Q. What are the economic and political arguments for regionaleconomic integrat ion? Given these arguments, why dont we see more

substantial examples of integration in the world economy?

The economic case forregional integration

Unrestricted free trade allows countries to s ecialize in the roduction of oods and services

that they can produce most efficiently. If this happens as the result of economic integration

within a geographic region, the net effect is greater prosperity for the nations of the region.

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 -.

Linking neighboring economies and making them increasingly dependent on each other

creates incentives for political cooperation between neighboring states. The potential for

.

In addition, by grouping their economies together, the countries can enhance their political

weight in the world.

It is not easy to achieve on a meaningful integration level. There are two main reasons for this.

1. First, although economic integration benefits the majority, it has its costs. While a set of

nations as a whole may benefit significantly from a regional free trade agreement, certain

groups may lose.

2. The second impediment to integration arises from concerns over national sovereignty.


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Q. What effects will the creation of a single market and a

single currency within the EU likely to have oncompetitionwithin the EU? If the EU succeeds in maintaining a single market and currency, member

countr es can expect s gn cant ga ns rom t e ree ow o tra e an

investment.

Countries within EU will specialize in the production of the product that

they can manufacture most efficiently, and the freedom to trade those

products with other EU countries without being encumbered by tariffs and

other trade barriers.

.

inefficient firms may go out of business because they will no longer be

protected from other European companies by high tariffs, quotas, oradministrative trade barriers.

Companies from those countries that have not adopted the euro may find

that their costs are higher as they deal with currency exchanges.


Do you think it is correct for the European Commissionto restrict mergers between American companies thatdo business in Europe? (For example, the European

ommss on ve oe e propose merger e weenWorldCom and Sprint, both U.S. companies, and itcarefully reviewed the merger between AOL and TimeWarner, again both U.S. companies.)

While it may be argued that the European Commission is

American companies doing business in Europe, the U.S. might

act in a similar fashion if American firms were being threatened

by foreign companies seeking to merge and operate in the U.S.

market.


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How should a U.S. firm that currently only exportsto ASEAN countries respond to the creation of asingle market in this regional grouping?

The opening of borders within a common market has thepotential to increase the size of the marketfor the firm.

However, a U.S. firm that is currently only exporting toASEAN markets should consider opening a facilitysomewhere within the region, as the economics of acommon market suggest that outsiders can be at adisadvantage relative to insiders.

It is also possible, that exporting may still be the mostappropriate means of serving the market in somesituations.


How should a firm that has self-sufficient productionfacilities to in several ASEAN countries respond to thecreation of a single market? Whatare the constraints on its

production costs? The creation of the single market means that it may no longer be efficient to operate

separate production facilities in each country. Instead, the facilities should either be

linked so that each specializes in the production of only certain items, or several sites

should be closed down and production consolidated into the most efficient locations.

customers may limit a firms ability to fully consolidate or relocate production

facilities for production cost reasons.

Similarly, location of production near R&D facilities can be critical for new productdevelopment and future economic success.

Thus what is most important in location decisions is long run economic success, notjust cost minimization..


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After a promising start, in the last few years, MERCOSUR, the

major Latin American trade agreement, has faltered and madelittle progress since 2000. What problems are hurtingMERCOSUR? Whatcan be done to solve these problems?

Case on European Commission

and Media Industry MergersRead the Management Focus case on the EuropeanCommission and Media Industry Mergers, and answerthe followingquestions:

a ven a o an me arner were . .based companies, do you think the EuropeanCommission had a right to review and regulate theirplannedmerger?

b) Were the concessions extracted by the EuropeanCommission from AOL and Time Warner

trying to protect?

c) What precedent do the actions of the EuropeanCommission in this case set? What are theimplications for managers of foreign enterprises withsubstantial operations in Europe?


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Quiz1. In a _______, all barriers to the free flow of goods

and services between member countries areremoved, and a common policy towardnonmembers is establisheda) Free trade area

b) Customs union

c)Common market

d) Economic union

2. The European Union is an example of a(n)

a) Free trade area

b) Customs union

c) Common market

d) Economic union

Quiz

3. The ultimate decision making body of the

Euro ean Union is the:

a) Council of the European Union

b) European Parliament

d) European Commission


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TRADE CREATION

TRADE DIVERSION

Consumer surplus increases by area: 1 + 2 + 3 + 4. Reduction in theproducer surplus of area: 1.

There wi ll be a loss of government tari ff revenueof: 3 + 5.


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CARICOM

APEC Memership(21 Economies)

Date of Joining

Australia 6-7 Nov 1989Brunei Darussalam 6-7 Nov 1989

Canada 6-7 Nov 1989

Chile 11-12 Nov 1994PR of China 12-14 Nov 1991

Hong Kong, China 12-14 Nov 1991

Indonesia 6-7 Nov 1989

J apan 6-7 Nov 1989

Republic of Korea 6-7 Nov 1989

Malaysia 6-7 Nov 1989

Mexico 17-19 Nov 1993

New Zealand 6-7 Nov 1989

Papua New Guinea 17-19 Nov 1993Peru 14-15 Nov 1998

The Philippines 6-7 Nov 1989Russia 14-15 Nov 1998

Singapore 6-7 Nov 1989

Chinese Taipei 12-14 Nov 1991Thailand 6-7 Nov 1989

The United States 6-7 Nov 1989

Viet Nam 14-15 Nov 1998

Documents

Hand Out Chap 8