Global Business Today Ninth Edition Chapter 9
Regional Economic Integration
Chapter Outline
OPENING CASE: Tomato Wars
INTRODUCTION
LEVELS OF ECONOMIC INTEGRATION
THE CASE FOR REGIONAL INTEGRATION
The Economic Case for Integration
The Political Case for Integration
Impediments to Integration
THE CASE AGAINST REGIONAL INTEGRATION
REGIONAL ECONOMIC INTEGRATION IN EUROPE
Evolution of the European Union
Political Structure of the European Union
Management Focus: The European Commission and Intel
The Single European Act
Country Focus: Creating a Single European Market in Financial Services
The Establishment of the Euro
Country Focus: The Greek Sovereign Debt Crisis
Enlargement of the European Union
REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS
The North American Free Trade Agreement
The Andean Community
MERCOSUR
Central American Common Market, CAFTA and CARICOM
Free Trade Area of the Americas
REGIONAL ECONOMIC INTEGRATION ELSEWHERE
Association of Southeast Asian Nations
Asia Pacific Economic Cooperation
Regional Trade Blocs in Africa
Global Business Today Ninth Edition Chapter 9
FOCUS ON MANAGERIAL IMPLICATIONS
Regional Economic Integration Threats
Opportunities
Threats
SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: I Want My Greek TV!
Learning Objectives
1. Describe the different levels of regional economic integration.
2. Understand the economic and political arguments for regional economic integration.
3. Understand the economic and political arguments against regional economic integration.
4. Explain the history, current scope, and future prospects of the world’s most important regional
economic agreements.
5. Understand the implications for business that are inherent in regional economic integration
agreements.
Chapter Summary
In this chapter, the topic of regional economic integration is explored. The levels of regional
economic integration discussed (from least to most integrated) include: a free trade area, a customs
union, a common market, an economic union, and a full political union. The arguments for and
against regional economic integration are provided. Many students will remember some of these
arguments from the debate of the ratification of the North American Free Trade Agreement
(NAFTA). The chapter also provides information about the major trade blocks of the world,
including the European Union, NAFTA, the Andean Group, MERCOSUR, and several other Latin
American and Asian trade alliances. In addition, the implications for business of these trade
agreements and others are fully discussed.
Opening Case: Tomato Wars
Summary
The opening case explores the conflict between U.S. and Mexican tomato producers. With the
support of U.S. growers, the United States signed an agreement under NAFTA to establish a price
floor on the price of tomatoes. However, U.S. growers later realized that the deal did not offer the
Global Business Today Ninth Edition Chapter 9
protection from Mexican growers that they had anticipated. This led to lobbying for changes to
the agreement – lobbying that was met with strong opposition from U.S. tomato companies that
have operations in Mexico that would be negatively affected by the proposed changes to the
agreement, and also from U.S. companies that supply Mexican growers. Discussion of the case can
revolve around the following questions:
Suggested Discussion Questions
QUESTION 1: Do you agree with the price floor policy for tomatoes that was initially established
under NAFTA? Should the deal have been changed? Who benefits from this type of policy?
Who is harmed?
QUESTION 2: Explore the long-term implications of the both the original price floor agreement
and the more recent agreement to raise the price floor. Do U.S. tomato producers really benefit
from these agreements? Why or why not? What other approaches could have been used to help
U.S. tomato growers?
Global Business Today Ninth Edition Chapter 9
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
INTRODUCTION
A) One notable trend in the global economy in recent years has been the accelerated movement
toward regional economic integration. Regional economic integration refers to agreements
between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of
goods, services, and factors of production between each other.
B) Despite the rapid spread of regional trade agreements designed to promote free trade, there are
those who fear that the world is moving toward a situation in which a number of regional trade
blocks compete against each other. In this scenario of the future, free trade will exist within each
bloc, but each bloc will protect its market from outside competition with high tariffs.
LEVELS OF ECONOMIC INTEGRATION
A) Several levels of economic integration are possible in theory (see Figure 9.1 in the textbook).
From least integrated to most integrated, they are a free trade area, a customs union, a common
market, an economic union, and, finally, a full political union.
B) In a free trade area all barriers to the trade of goods and services among member countries are
removed. In a theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or
administrative impediments are allowed to distort trade between member nations. Each country,
however, is allowed to determine its own trade policies with regard to nonmembers.
C) The most enduring free trade area in the world is the European Free Trade Association
(EFTA). EFTA currently joins four countries-Norway, Iceland, Liechtenstein, and Switzerland.
Other free trade areas include the North American Free Trade Agreement (NAFTA).
Teaching Tip: To find out more about EFTA, and its current issues, go to {http://www.efta.int/}.
D) The customs union is one step further along the road to full economic and political integration.
A customs union eliminates trade barriers between member countries and adopts a common
external trade policy.
E) Customs unions around the world include the current version of the Andean Community
(between Bolivia, Columbia, Ecuador, and Peru).
F) Like a customs union, the common market has no barriers to trade between member countries
and a common external trade policy. Unlike a customs union, in a common market, factors of
production also are allowed to move freely between members. Thus, labor and capital are free to
move, as there are no restrictions on immigration, emigration, or cross-border flows of capital
between markets.
Global Business Today Ninth Edition Chapter 9
G) Currently, Mercosur, the South America grouping that includes Brazil, Argentina, Paraguay,
and Uruguay, is aiming to eventually establish itself as a common market. Venezuela has been
accepted as a member of Mercosur, but as 2013, was still waiting for Paraguay to ratify its
membership.
H) An economic union entails even closer economic integration and cooperation than a common
market. Like the common market, an economic union involves the free flow of products and
factors of production between members and the adoption of a common external trade policy.
Unlike a common market, a full economic union also requires a common currency, harmonization
of the member countries’ tax rates, and a common monetary and fiscal policy.
I) The European Union (EU) is an economic union, although an imperfect one since not all
members of the EU have adopted the euro, the currency of the EU, and differences in tax rates
across countries still remain.
J) In a political union, independent states are combined into a single union. The EU is on the road
to at least partial political union. The United States provides an example of even closer political
union.
THE CASE FOR REGIONAL INTEGRATION
A) The case for regional integration is both economic and political.
The Economic Case for Integration
B) 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
C) The political case for integration has two main points: 1) by linking countries together, making
them more dependent on each other, and forming a structure where they regularly have to interact,
the likelihood of violent conflict and war will decrease, and 2) by linking countries together, they
have greater clout and are politically much stronger in dealing with other nations
Impediments to Integration
D) There are two main impediments to integration. First, although economic integration benefits
the majority, it has costs. Although a nation as a whole may benefit significantly from a regional
free trade agreement, certain groups may lose. A second impediment to integration arises from
concerns over national sovereignty.
THE CASE AGAINST REGIONAL INTEGRATION
Global Business Today Ninth Edition Chapter 9
A) Although the tide has been running strongly in favor of regional free trade agreements in recent
years, some economists have expressed concern that the benefits of regional integration have been
oversold, while the costs have often been ignored.
B) Whether regional integration is in the economic interests of the participants depends upon the
extent of trade creation as opposed to trade diversion. Trade creation occurs when low cost
producers within the free trade area replace high cost domestic producers. Trade diversion occurs
when higher cost suppliers within the free trade area replace lower cost external suppliers. A
regional free trade agreement will only make the world better off if the amount of trade it creates
exceeds the amount it diverts.
REGIONAL ECONOMIC INTEGRATION IN EUROPE
A) There are two trade blocks in Europe: the European Union (EU) and the European Free Trade
Association. Of the two, the EU is by far the more significant, not just in terms of membership,
but also in terms of economic and political influence in the world economy.
Evolution of the European Union
B) The European Union (EU) is the product of two political factors: first, the devastation of two
world wars on Western Europe and the desire for a lasting peace, and second, the European
nations’ desire to hold their own on the world’s political and economic stage.
Teaching Tip: The EU maintains an excellent web site at
{http://europa.eu/geninfo/atoz/en/index_1_en.htm}. Students can click on a number of subjects to
see the EU’s position and role in the area. The site also contains a broad array of information
about the historical role and current activities of the EU in the global economy.
C) The forerunner of the EU was the European Coal and Steel Community, which had the goal of
removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951. The European
Community was formed in 1957 at the Treaty of Rome. While the original goal was for a
common market, progress was generally very slow. Over the years the EU expanded in spurts, as
well as moved towards ever-greater integration. Today, the EU has 28 members. Map 9.1 in the
text shows the current membership of the EU.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Turkey Torn between Tradition and Modernization
explores Turkey’s efforts to be a part of the global economy and its desire to become a member of
the EU.
Political Structure of the European Union
D) The four main institutions of the EU are the European Commission (responsible for proposing
EU legislation, implementing it, and monitoring member states to ensure they are complying with
EU laws), the European Council, (the ultimate controlling authority within the EU), the
Global Business Today Ninth Edition Chapter 9
European Parliament, (debates legislation proposed by the commission and forwarded to it by
the council), and the Court of Justice, (the supreme appeals court for EU law).
E) The Treaty of Lisbon gives more power to the European Parliament, which is effectively the
co-equal legislator for almost all European laws.
Lecture Note: To learn more about the Lisbon Agreement and its implications for the European
Union countries, consider {http://europa.eu/lisbon_treaty/index_en.htm}.
Management Focus: The European Commission and Intel
Summary
This feature explores the European Commission’s case against computer chip maker Intel.
According to the European Commission which fined the company $1.45 billion, Intel engaged in
anti-competitive behavior from 2002 until 2007. Discussion of the feature can begin with the
following questions.
Suggested Discussion Questions
1. Was the European Commission justified in its case against Intel? Why or why not?
2. Why are the actions of institutions like the European Commission important to the function of
markets? How does the European Commission protect consumers?
Global Business Today Ninth Edition Chapter 9
The Single European Act
F) The Single European Act, adopted by the EU member nations in 1987, committed the EC
countries to work toward establishment of a single market by December 31, 1992.
The Stimulus for the Single European Act
G) The Single European Act was born out of frustration among EC members that the community
was not living up to its promise. In the early 1980s, many of the EC’s prominent businesses
people mounted an energetic campaign to end the EC’s economic divisions. The result was the
Single European Act, which was independently ratified by the parliaments of each member
country and became EC law in 1987.
The Objectives of the Act
H) The purpose of the Single European Act was to have a single market in place by December 31,
1992. The changes the act proposed included the following:
(i) the removal of all frontier controls between EC countries,
(ii) mutual recognition of standards to apply the principle of “mutual recognition,” which is
that a standard developed in one EC country should be accepted in another, provided it
meets basic requirements in such matters as health and safety,
(iii) open public procurement to non-national suppliers,
(iv) financial services to lift barriers to competition in the retail banking and insurance
businesses,
(v) the removal of all restrictions on foreign exchange transactions between members by
the end of 1992,
(vi) the abolishment of all restrictions on cabotage (the right of foreign truckers to pick up
and deliver goods within another member’s borders), by the end of 1992.
Impact
I) The Single European Act has had a significant impact on the EU economy. The act provided the
impetus for the restructuring of substantial sections of European industry allowing for faster
economic growth than would otherwise have been the case.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Europe Struggles for Consensus on Economic Recovery
explores the EU’s difficulties in getting the bloc back on track following the recent global
economic recession.
Country Focus: Creating a Single European Market in Financial Services
Summary
Global Business Today Ninth Edition Chapter 9
This feature explores the European Union’s progress towards creating a single financial market.
The quest, started in 1999, was to have been completed by 2005, however, progress has been
slowed by various factors related to the tradition of each member country operating autonomously.
By 2014, significant progress had been made. More than 40 measures designed to create a single
market were in place, and others were in the pipeline. The current issue facing the EU revolves
around the enforcement of the rules that have been established as law. Some experts believe that it
will be years before the benefits of the new rules become apparent. Discussion of this feature can
begin with the following questions.
Suggested Discussion Questions
1. What are the benefits of creating a single financial market in the European Union for
companies? Does it make sense for consumers?
2. What are the impediments to creating a single financial market in the European Union? What
does the potential for this type of market mean for countries like Great Britain that have not joined
the euro-zone?
The Establishment of the Euro
J) The Maastricht Treaty, signed in 1992, committed the EU to adopt a single currency, the euro,
by January 1, 1999. The euro is now used by 18 of the 28 member states. By adopting the euro,
the EU has created the second largest currency zone in the world after that of the U.S. dollar. For
now, three EU countries, Britain, Denmark, and Sweden, are opting out of the euro-zone.
Teaching Tip: The European Central Bank maintains a web site with current information on the
euro. The site is available at {http://www.ecb.europa.eu/ecb/html/index.en.html}.
Global Business Today Ninth Edition Chapter 9
K) Euro notes and coins were not actually issued until January 1st, 2002. In the interim, national
currencies circulated in member countries. However, in each participating state the national
currency stood for a defined amount of euros.
Benefits of Euro
L) There are a number of reasons why the Europeans decided to establish a single currency in the
EU. First, they believe that business and individuals will realize significant savings from having to
handle one currency, rather than many. Second, and perhaps most importantly, the adoption of a
common currency makes it easier to compare prices across Europe. Third, faced with lower prices
European producers must look for ways to reduce their production costs in order to maintain their
profit margins. Fourth, the introduction of a common currency should give a strong boost to the
development of a highly liquid pan-European capital market. Finally, the development of a pan-
European euro denominated capital market will increase the range of investment options open both
to individuals and institutions.
Costs of Euro
M) The drawback of a single currency is that national authorities lose control over monetary
policy. Thus, it is crucial to ensure that the EU’s monetary policy is well managed. The Maastricht
treaty called for the establishment of an independent European Central Bank (ECB), similar in
some respects to the U.S. Federal Reserve, with a clear mandate to manage monetary policy so as
to ensure price stability. The ECB is based in Frankfurt. Like the U.S. Federal Reserve, the ECB is
meant to be independent from political pressure – although critics question this. Among other
things the ECB sets interest rates and determines monetary policy across the euro-zone. The
implied loss of national sovereignty to the ECB underlies the decision by Britain, Denmark and
Sweden to stay out of the euro-zone for the time being.
O) Another drawback of the euro is that the EU is not what the economists would call an optimal
currency area. An optimal currency area is an area where similarities in the underlying structure
of economic activities make it feasible to adopt a single currency and use a single exchange rate as
an instrument of macro-economic policy. Many of the European economies in the euro-zone,
however, are very dissimilar.
The Euro Experience: 1999 to the Sovereign Debt Crisis
P) Since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S.
dollar. Initially, the currency fell in value relative to the dollar, but strengthened to an all time
high of €1=$1.54 in March 2008, before falling back to €1=$1.35 in early 2014.
Country Focus: The Greek Sovereign Debt Crisis
Summary
Global Business Today Ninth Edition Chapter 9
This feature explores the causes of the 2010 financial crisis in Greece and its implications for other
countries in the Euro Zone. Years of overspending by the Greek government led to huge deficits
that the country could not manage. While the country’s problems had been hidden throughout
much of the decade, a new government that took power in 2009 revealed that Greece’s problems
were actually worse than had been suspected. Investors lost faith in the Greece and its ability to not
only refinance its debt, but also implement policies to reduce its debt load. This combined with
concerns that other countries in the Euro Zone could have problems sent the euro to its lowest
level in years. Discussion of this feature can begin with the following questions:
Suggested Discussion Questions
1. Discuss the implications of the financial crisis in Greece on other countries in the Euro Zone.
What does the loss of confidence in Greece and indeed in Spain, Portugal, and Italy as well mean
for the bloc?
2. What does a falling euro mean for U.S. companies exporting to the European Union and for
U.S. companies with operations in the bloc?
Enlargement of the European Union
Q) A number of countries, particularly from Eastern Europe, have applied for membership in the
EU. In December of 2002, the EU formally agreed to accept the applications of 10 countries that
joined on May 1, 2004. Their inclusion expanded the EU to 25 states, creating an EU population
Global Business Today Ninth Edition Chapter 9
of 450 million people, and a single continental economy with a GDP of €11 trillion. In 2007, the
EU welcomed Bulgaria and Romania. Croatia joined in 2013 bringing the total number of member
countries to 28.
REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS
A) Regional economic integration is on the rise in the Americas. The North American Free Trade
Agreement (NAFTA) is the most significant attempt. Other efforts include the Andean group and
MERCOSUR. In addition, there are plans to establish a hemisphere wide Free Trade Area of the
Americas (FTAA.)
The North American Free Trade Agreement (NAFTA)
B) The United States, Canada, and Mexico established the North American Free Trade
Agreement (NAFTA) in 1994.
NAFTA’s Contents
C) The free trade agreement between the United States, Canada, and Mexico contains the
following actions:
• abolishes by 2004, tariffs on 99 percent of the goods traded between Mexico,
Canada, and the United States,
• removes most barriers on the cross-border flow of services,
• protects intellectual property rights,
• removes most restrictions on FDI between the three member countries,
• allows each country to apply its own environmental standards, provided such
standards have a scientific base,
• establishes two commissions with the power to impose fines and remove trade
privileges when environmental standards or legislation involving health and safety,
minimum wages, or child labor are ignored.
Teaching Tip: For more information on NAFTA, go to {http://www.ustr.gov/trade-
agreements/free-trade-agreements/north-american-free-trade-agreement-nafta}.
The Case for NAFTA
D) Proponents of NAFTA have argued that it will provide economic gains to all countries: Mexico
will benefit from increased jobs as low cost production moves south, and will attain more rapid
economic growth as a result. The United States and Canada will benefit from the access to a large
and increasingly prosperous market and from the lower prices for consumers who buy goods
produced in Mexico. In addition, U.S. and Canadian firms with production sites in Mexico will be
more competitive on world markets
The Case against NAFTA