Regional Economic Integration Ch 8

1
Regional Economic IntegrationCh 8

• Levels of regional economic integration
• Regional integration pros cons
• Major trade blocks of the world
• Implications for business

2
Regional Economic Integration

• Agreements among countries in a geographic region
  to reduce/remove tariff non-tariff barriers to
  the free flow of goods, services factors of
  production with each other
• Comparative advantage freer trade within
  regions will produce gains for all
• Critics worry that there will be a world where
  regional trading blocs compete against each other

3
Levels of Economic Integration

• Free trade area
• All barriers to trade of goods/services are
  removed
• Each country allowed to determine non-member
  policy
• Customs Union
• Eliminates trade barriers between member
  countries
• Adopts common external trade policy
• Common Market
• No barriers to trade among member countries
• Common external trade policy
• Allows factors of production to mover freely
  among members
• Economic Union
• Free flow of products factors of production
• Adoption of common external trade policy
• Requires common currency, harmonization of tax
  rates, common monetary fiscal policy
• Political Union

4
Economic Case for Integration

• Unrestricted free trade will allow countries to
  specialize in the production of goods/services
  that they can produce most efficiently
• Greater world production than is possible with
  restrictions
• Stimulates economic growth creating dynamic gains
  from trade
• FDI can transfer technological, marketing
  managerial know-how to host nations
• Positive-sum game

5
Case for Regional IntegrationPolitical case
for integration

• Linking economies making them increasingly
  dependent on each other creates incentives for
  political cooperation reduces potential for
  violent conflict
• By grouping economies, countries can enhance
  their political weight in the world

6
Case for Regional IntegrationImpediments to
Integration

• Economic integration benefits the majority has
  costs certain groups lose
• Concerns over national sovereignty economic
  integration requires that members give up some
  degree of control over monetary policy,
  fiscal/tax policy trade policy

7
Case Against Regional Integration

• Benefits of regional integration have been
  oversold the costs have often been ignored
• Trade creation (high-cost domestic producers are
  replaced by low-cost producers within a region)
  vs. trade diversion (low-cost external suppliers
  are replaced by higher-cost suppliers within the
  region)
• Regional trading blocs could emerge whose markets
  are protected by high non-tariff barriers (WTO
  does not cover)

8
Regional Economic Integration in Europe

• European Union product of 2 political factors
• Devastation of 2 World Wars desire for peace
• Desire to hold their own on the worlds political
  and economic stage
• Treaty of Rome Creation of Common Market
• Elimination of internal trade barriers
• Creation of common external tariff
• Abolish obstacles to free movement of factors of
  production
• Harmonization of member states laws
• Common policies in agriculture transportation

9
Political Structure of European Union

• European Council
• Heads of State President of European Commission
• Resolves major policy issues sets direction
  2x year
• European Commission Brussels, Belgium
• Proposing, implementing monitoring compliance -
  EU laws
• Commissioners appointed by each country 5 year
  renewable terms
• Competition Commissioner regulator of competition
  and MA
• Council of the European Union
• Ultimate controlling authority approves
  proposed laws
• 1 representative from each state varies with
  topic
• Use majority voting rules rather than unanimous
  agreement
• European Parliament Strasbourg, France
• Directly elected by population 732 members
• Debates legislation Consultative body
• Court of Justice

10
Single European Act

• Adopted in 1987 - Committed EU to work toward
  single market by 12/31/92
• Objectives of Act
• Remove all frontier controls
• Apply the principal of mutual recognition to
  all product standards
• Open public procurement to nonnational suppliers
• Lift barriers to competition in retail banking
  and insurance
• Remove all restrictions to foreign exchange
  transactions
• Abolish restrictions on cabotage

11
Single European Act - Impact

• Lowered the cost of doing business in EC
• Given EC firms greater opportunities to exploit
  economies of scale
• Increased competition forced EC firms to become
  more efficient
• Impetus for restructuring substantial sections of
  EC industry shift from national to pan-European
  production distribution systems
• Established legal, cultural and language
  differences mean that implementation has been
  uneven

12
Establishment of Euro

• Used by 12 of 25 member states
• New countries adopt when (2007)
• High degree of price stability
• Sound fiscal situation
• Stable exchange rates
• Converged long-term interest rates

13
Benefits Costs of Euro

• Benefits
• Savings with 1 currency lower foreign exchange
  hedging costs
• Easier to compare prices across Europe
• Lower prices reduce production costs to
  maintain profit margins
• Lower cost of capital
• Increase range of investment options

• Costs
• National loss of control over monetary policy
  European Central Bank in Frankfurt
• Not optimal currency area different wage rates,
  tax regimes business cycles e.g. Finland
  Poland
• Pressure for tax harmonization fiscal transfer
  need appropriate political structure

14
Enlarging EU

• To qualify
• Privatize state assets
• Deregulate markets
• Restructure industries
• Tame inflation
• Enshrine EU laws into own systems
• Establish stable democratic government
• Respect human rights

15
Regional Economic IntegrationAmericas

• NAFTA
• 1989 US Canada 1994 Mexico
• Remove tariffs on 99 of goods in 10 years
• Removal of barriers to cross-border flow of
  services
• Protection of intellectual property rights
• Removal of most restrictions on FDI
• Application of national environmental standards
  (scientific basis)
• Establishment of 2 commissions
• Monitor environmental standards health/safety,
  minimum wage or child labor laws
• Impose fines remove trade privileges for
  violations

16
Regional Economic IntegrationAmericas

• For NAFTA
• Opportunity to create an enlarged efficient
  production base for region
• Mexico would benefit from inwards FDI
• US Canada benefit
• increased Mexican incomes importing
• consumers benefit lower prices
• Competitiveness of firms that move production to
  Mexico

• Against NAFTA
• Mass exodus of jobs from US Canada to Mexico
• Mexicos lower wage less strict environmental
  laws
• Impact
• Expose Mexico to more competitive US Canadian
  firms ST - Economic restructuring
  unemployment in Mexico
• Trade grew by 109
• Increase in productivity growth
• Increase in political stability in Mexico

17
Regional Economic IntegrationAmericas

• Andean Community
• 1969 1997 Customs Union of Bolivia, Chile,
  Ecuador, Colombia, Peru
• Internal tariff reduction, common external
  tariff, transportation policy, common industrial
  policy
• Political (radical/socialist) economic
  (hyperinflation, unemployment debt) problems
• MERCOSUR
• 1988 Brazil Argentina 1990 Paraguay
  Uruguay
• Aim for free trade area then common market
• 200 million people
• Critics trade diversion effects greater than
  trade creation fastest growing sectors most
  inefficient

18
Regional Economic IntegrationAmericas

• Central American Common Market
• 1960s Costa Rica, El Salvador, Guatemala,
  Honduras Nicaragua
• Collapse 1969 war after soccer game
• CARICOM
• 1973 Caribbean Community
• Failure to meet 3rd deadline 1991
• FTAA Free Trade Area of the Americas
• Proposed at 1994 Summit of the Americas
• 2003 34 countries sign blueprint agreement
• Brazil US disagreements prevent progress

19
Regional Economic Integration

• ASEAN
• 1967 Brunei, Cambodia, Indonesia, Laos,
  Malaysia, Myanmar, Phillipines, Singapore,
  Thailand Vietnam
• 500 million people GDP 740 B
• Foster freer trade cooperate in industrial
  policies
• APEC Asia-Pacific Economic Cooperation
• 1990 -21 Members (US, Japan, China, Australia)
• gt 50 GDP 41 of world trade
• Increase multilateral cooperation in light of
  interdependence of Pacific nations
• Regional Trade Blocs in Africa
• 9 trade blocs on continent
• Hard to establish free trade areas because are
  less developed diversified need to be
  protected by tariff barriers from unfair
  competition
• Potential of EAC (Kenya, Uganda Tanzania) no
  free trade yet

20
Managerial Implications

• Creation of single market through regional
  economic integration offers opportunities by
  opening markets to exports FDI
• Lower cost of doing business in a single market -
  Cost economies
• Free movement of goods across borders
• Harmonized product standards
• Simplified tax regimes
• Centralizing production where mix of factor costs
  skills are optimal
• Threats inside in terms of more competitive
  business environment outside in terms of trade
  fortress shut-out
• Governments willingness to intervene the
  impose conditions on companies proposing MAs