Regional Economic IntegrationRegional Economic Integration

Regional Economic IntegrationRegional Economic Integration

Levels of economic integration among nations Economic and political arguments for/against History/scope, scope and future prospects for:

– EU– NAFTA– MERCOSUR, and – APEC

Implications for business

Regional Economic IntegrationRegional Economic Integration

Agreements among geographically proximate countries to reduce/remove tariff and non-tariff barriers to free flow of:– Goods– Services– Factors of production

Levels of Economic IntegrationLevels of Economic Integration

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+– eliminates intra-market factor of production movements

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

Political Union: EU+– political and economic integration

Reasons for Regional IntegrationReasons for Regional Integration

Economic enhancement of the member states– Free trade– Fee FDI

Political Reasons– Linkages of economies create interdependencies that

reduce the potential for violent conflict– Grouping gives countries more political clout world-wide

Impediments– Painful adjustments in certain segments of economy– Threat to national sovereignty

European UnionEuropean Union 25 member countries; 450mm 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

European UnionEuropean 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 2003 5th enlargement: Poland, Hungary, Czech Republic,

Lithuania, Estonia, Latvia, Slovenia, Cyprus, Malta, Slovakia

The Euro (€)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 (since 1/1/02) – Sweden, Denmark, Britain opted out– 10 new countries have to qualify

Benefits of the Euro (€)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 (€)Costs of the Euro (€)ECB has monetary policy control not nations

Sets interest rates, monetary policy (Frankfurt, Ger.) Is independent; instructs national central banks

EU is not an optimal currency area Few similarities in structure of economic activity

(e.g., Finland vs Portugal) Interest rates too high in depressed regions or too low

for economically booming regions May need fiscal transfers from prosperous to

depressed regions

Economic and political issues may conflict

Early Experience of the Euro (€)Early Experience of the Euro (€)

Volatile trading history

– 1999 -- €1 = US$1.17

– 10/2000 -- €1 = US$0.83

– 10/2004 -- €1 = US$1.24

EU enlargement will complicate Euro adoption;

new members with weaker economies

Major members ignoring monetary union rules to

retain control over their fiscal and monetary

policies

Enlargement of the EUEnlargement of the EUMore member disparity, more difficult

governance Norway opted out of the EU (1994)Membership applications pending: Turkey,

Bulgaria, Rumania, Croatia– Turkish application controversial (economic

development, religion, labor movement problems)Other non-European countries will seek

membershipUS and Asian countries fear that EU will

become protectionist (“fortress Europe”)

The AmericasThe 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 Free Trade Agreement

(CAFTA): Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua

The AmericasThe Americas

ElsewhereElsewhere

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

NAFTANAFTA

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

Trade opening process through tariff

elimination

NAFTA - Key provisionsNAFTA - Key provisions General (effective 1/1/94)

– Tariffs of all sectors reduced 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

Implications for BusinessImplications 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