CHAPTER 8
REGIONAL ECONOMIC INTEGRATION
LEARNING OBJECTIVES:
8.1 Outline the levels of economic integration and its debate.
8.2 Describe integration in Europe and its enlargement.
8.3 Describe the integration in the Americas and its prospects.
8.4 Summarize integration in the Asia and elsewhere.
CHAPTER OUTLINE:
Introduction
Levels of Integration and the Debate
Free Trade Area
Customs Union
Common Market
Economic Union
Political Union
The Case for Regional Integration
Trade Creation
Greater Consensus
Political Cooperation
Employment Opportunities
Corporate Savings
The Case Against Regional Integration
Trade Diversion
Shifts in Employment
Loss of National Sovereignty
Integration in Europe
European Union
Early Years
Single European Act
Maastricht Treaty
European Monetary Union
Management Implications of the Euro
Enlargement of the European Union
Structure of the EU
European Parliament
Council of the EU
European Commission
Court of Justice
Court of Auditors
European Free Trade Association (EFTA)
Copyright © 2019 Pearson Education, Inc.
Integration in the Americas
North American Free Trade Agreement (NAFTA)
Local Content Requirements and Rules of Origin
Effects of NAFTA
Expansion of NAFTA
Central American Free Trade Area (CAFTA-DR)
Andean Community (CAN)
Latin American Integration Association (ALADI)
Southern Common Market (MERCOSUR)
Central America and the Caribbean
Caribbean Community and Common Market (CARICOM)
Central American Common Market (CACM)
Free Trade Area of the Americas (FTAA)
Integration in Asia and Elsewhere
Association of Southeast Asian Nations (ASEAN)
Asia Pacific Economic Cooperation (APEC)
The Record of APEC
Closer Economic Relations (CER) Agreement
Gulf Cooperation Council (GCC)
Economic Community of West African States (ECOWAS)
African Union (AU)
Bottom Line for Business
A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 8.
These slides and the lecture outline below form a completely integrated package that simplifies the
teaching of this chapter’s material.
Lecture Outline
I. INTRODUCTION
This chapter focuses on regional efforts to encourage free trade and investment. Regional
integration is defined and its benefits and drawbacks are identified. The chapter also explores
several long-established trading agreements and some agreements in the earliest stages of
development.
II. LEVELS OF INTEGRATION AND THE DEBATE
Regional Economic Integration is countries of a region cooperating to reduce or eliminate
barriers to the international flow of products, people, or capital. A regional trading bloc is a
group of nations in a geographic region undergoing economic integration.
The goal is greater cross-border trade and investment and higher living standards.
Specialization and trade allow more choice, lower prices, and increased productivity. Regional
trade agreements help nations accomplish these objectives and protect intellectual property
rights, the environment, or even eventual political union.
There are five levels. Free trade area is the lowest extent of national integration, political
union the greatest. Each level of integration incorporates the properties of those levels that
precede it (See Figure 8.1).
A. Free Trade Area
1. Countries remove all barriers to trade among members, but each country
determines its own barriers against nonmembers.
2. Policies differ greatly against nonmember countries from one country to another.
Countries in a free trade area also establish a process to resolve trade disputes
among members.
B. Customs Union
1. Countries remove all barriers to trade among members but erect a common trade
policy against nonmembers.
2. Differs from a free trade area in that members treat all nonmembers similarly.
Countries might also negotiate as a single entity with other supranational
organizations such as the WTO.
C. Common Market
1. Countries remove all barriers to trade and the movement of labor and capital
among themselves, but erect a common trade policy against nonmembers.
2. Adds the free movement of important factors of production such as people and
cross-border investment. It can be difficult for nations to cooperate on economic
and labor policies.
D. Economic Union
1. Countries remove barriers to trade and the movement of labor and capital, erect a
common trade policy against nonmembers, and coordinate their economic
policies.
2. Requires members to harmonize their tax, monetary, and fiscal policies, create a
common currency, and concede a certain amount of sovereignty to the
supranational organization.
E. Political Union
1. Countries coordinate aspects of economic and political systems.
2. Members accept a common stance on economic and political policies regarding
nonmember nations. Nations are allowed a degree of freedom in setting certain
political and economic policies within their territories.
F. The Case for Regional Integration (See Table 8.1)
There are debates over effects on people, jobs, companies, culture, and living standards.
Nations engage in specialization and trade because of the gains in output and
consumption. Higher levels of trade among nations should increase specialization,
efficiency, and consumption, and raise standards of living.
1. Trade creation
a. Increase in trade that results from regional economic integration.
b. Gives consumers and industrial buyers a wider selection of goods and
services not available beforehand.
c. Buyers can acquire goods and services more cheaply following the
lowering of trade barriers such as tariffs. Lower costs lead to higher
demand for goods because people have more money after a purchase to
buy other products.
2. Greater consensus
Eliminating trade barriers in smaller groups of countries may make it easier to
gain consensus as opposed to working in the far larger WTO.
3. Political cooperation
A group of nations can have significantly greater political weight than nations
have individually. The group may have more clout in negotiating in a forum such
as the WTO. Integration involving political cooperation reduces the potential for
military conflict among members.
4. Employment opportunities
Regional integration can expand employment by enabling people to move from
country to country for work, or to earn a higher wage.
5. Corporate savings—agreements allow companies to alter their strategies.
Companies that do business throughout the region could save millions of dollars
annually from the removal of import tariffs under an eventual agreement, and
they could also save money from supplying entire regions from just a few
regional factories.
G. The Case Against Regional Integration
1. Trade diversion
a. Diversion of trade away from nations not belonging to a trading bloc and
toward member nations. Trade diversion can occur after formation of a
trading bloc because of the lower tariffs charged among member nations.
b. Can result in reduced trade with a more efficient nonmember nation in
favor of trade with a less efficient member nation. Unless there is other
internal competition, buyers will pay more due to inefficient production
methods.
2. Shifts in employment
a.Because trading blocs reduce or eliminate barriers to
trade, the producer of a particular good or service will be
decided by relative productivity. Industries requiring
unskilled labor shift production to low-wage nations
within a trading bloc.
b. Figures on jobs lost or gained vary with the source.
But job dislocation allows a nation to upgrade the
economy toward higher-wage-paying industries that can
increase competitiveness due to a more educated and
skilled workforce.
3. Loss of national sovereignty
a.Successive levels of integration require nations to
surrender more sovereignty. Political union requires
nations to give up a high degree of sovereignty in foreign
policy.
b. Because some members have delicate ties with
nonmember nations whereas others have strong ties, the
setting of a common foreign policy is difficult.
III. INTEGRATION IN EUROPE
European efforts at integration began shortly after the Second World War among a small group
of countries and involved a few select industries. Regional integration now encompasses
practically all of Western Europe and all industries.
A. European Union
1. Early Years
a. Europe in 1945 faced two challenges: (1) to rebuild itself and avoid
further conflict, and (2) to increase its industrial strength to stay
competitive with the United States.
b. Belgium, France, West Germany, Italy, Luxembourg, and the
Netherlands signed the Treaty of Paris in 1951, creating the European
Coal and Steel Community to remove barriers to trade in coal, iron, steel,
and scrap metal.
c. Members of the European Coal and Steel Community signed the Treaty
of Rome in 1957, creating the European Economic Community (EEC),
which outlined a future common market.
d. In 1967 the Community’s scope was broadened to include additional
industries, notably atomic energy, and changed its name to the European
Community. Enlargement continued and in 1994 the bloc changed its
name to the European Union (EU).
e. Today the 28-member European Union has a population of about 500
million people and a GDP of around $1 trillion (See Map 8.2) After the
United Kingdom completes its planned exit there will be 27 members.
f. Single European ACT (SEA)
Remove remaining barriers, increase harmonization, and enhance
competitiveness of EU companies. M&A’s swept Europe as large firms
combined their understanding of European needs, capabilities, and
cultures with economies of scale.
g. Maastricht Treaty
The 1991 Maastricht Treaty (effective in 1993): (1) created single,
common currency; (2) set monetary and fiscal targets for countries taking
part in monetary union; and (3) proposed eventual political union—
including a common foreign and defense policy and common citizenship.
2. European Monetary Union
a. The 19 EU member nations that adopted the single currency are Austria,
Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal,
Slovakia, Slovenia, and Spain. EU members not using euro : Bulgaria,
Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland,
Romania, Sweden, and the United Kingdom .
b. The euro eliminates exchange-rate risk for business deals among member
nations using the euro. Transparency in prices harmonizes prices across
markets.
3. Enlargement of the European Union
a. Expansion in 2004 and 2007 from 15 to 27 members today.
b. Croatia was the most recent country to join the EU in 2013. Albania,
Montenegro, Serbia, the Former Yugoslav Republic of Macedonia, and
Turkey remain candidates for EU membership.c. New members must
meet the Copenhagen Criteria.which requires that each country: (a) Has
stable institutions, which guarantee democracy, the rule of law, human
rights, and respect for and protection of minorities. (b) Has a functioning
market economy, capable of coping with competitive pressures and
market forces within the EU. (c) Is able to assume the obligations of
membership, including adherence to the aims of economic, monetary,
and political union. (d) Has the ability to adopt the rules and regulations
of the community, the rulings of the European Court of Justice, and the
treaties.
4. Structure of the EU
a. European Parliament
i. Composed of 736 members elected by popular vote within each
member nation every five years.
ii. Parliament acts as a consultative rather than a legislative body by
debating and amending legislation proposed by the European
Commission.
b. Council of the EU
i. The legislative body of the EU. Council members change
depending on the topic under discussion (e.g., for agriculture, the
Council is comprised of agriculture ministers of each member).
ii. No proposed legislation becomes EU law unless the Council
votes it into law. Some legislation today requires only a simple
majority to win approval.
c. European Commission
i. The executive body of the EU whose commissioners are
appointed by each country—larger nations get two
commissioners, smaller countries one.
ii. Drafts legislation, manages and implements policy, and monitors
compliance with EU law.
d. Court of Justice
i. Acts as the EU court of appeals and is composed of 28 members
(one from each member nation).
ii. One type of case heard is when a member nation is accused of not
meeting its treaty obligations.
iii. Justices are required to act in the interest of the EU as a whole,
not in the interest of their own countries.
e. Court of Auditors
i. Composed of 28 members (one from each member nation)
appointed for six-year terms.
ii. Duty is to audit EU accounts and implement EU budget, improve
EU financial management, and report to member nations’ citizens
on the use of public funds.
B. European Free Trade Association (EFTA)
1. Some nations wanted the benefits of a free-trade area but were wary of a full
common market. In 1960, they formed the European Free Trade Association
(EFTA) to focus on trade in industrial goods. Today members are Iceland,
Liechtenstein, Norway, and Switzerland (See Map 8.2).
2. EFTA has 13.5 million people and a combined GDP of $800 billion.
3. The EFTA and EU cooperate on the free movement of goods, persons, services,
and capital. They also cooperate in other areas, including the environment, social
policy, and education.
IV. INTEGRATION IN THE AMERICAS
Latin American countries began forming regional trading arrangements in the early 1960s but
made substantial progress only in the 1980s and 1990s. North America is taking major steps
toward economic integration.
A. North American Free Trade Agreement (NAFTA)
NAFTA (January 1994) seeks to eliminate most tariffs and nontariff trade barriers
on most goods originating from North America.
Calls for liberalized rules regarding government procurement practices, the granting
of subsidies, and the imposition of countervailing duties (See Chapter 6).
Other provisions deal with trade in services, intellectual property rights, and
standards of health, safety, and the environment.
1. Local content requirements and rules of origin
a. Producers and distributors must determine if their products meet NAFTA
rules to qualify for tariff-free status. The producer or distributor must also
provide a NAFTA “certificate of origin” to an importer to claim an
exemption from tariffs.
b. Four criteria to meet NAFTA rules of origin: (1) goods wholly produced
or obtained in the NAFTA region; (2) goods containing non-originating
inputs but meeting origin rules; (3) goods produced in the NAFTA region
wholly from originating materials; and (4) unassembled goods with
sufficient North American regional value content.
2. Effects of NAFTA
a. Trade among Canada, Mexico, and the United States has grown from
$297 billion in 1993 to around $1.6 trillion.
b. Mexico’s exports to the United States rose to about $280 billion, and
U.S. exports to Mexico grew to more than $226 billion.
c. Canada’s exports to the United States more than doubled to
approximately $332 billion, and U.S. exports to Canada grew to $300
billion.
d. Canada’s exports to Mexico grew to $3.9 billion, and Mexico’s exports
to Canada grew from $1.5 billion to $5.2 billion.
e. The agreement’s effect on employment and wages is not easy to
determine. The U.S. Trade Representative Office and the AFL-CIO
group of unions debate NAFTA’s effect on jobs.
3. Expansion of NAFTA
a. Continued ambivalence about NAFTA delays its expansion.
b. A boost would be if the U.S. Congress grants trade promotion authority
to successive U.S. presidents.
c. The Americas will experience further integration and North American
economies could even adopt a single currency.
B. Central American Free Trade Agreement (CAFTA-DR)
1. Established in 2006 between the United States and Costa Rica, El Salvador,
Guatemala, Honduras, Nicaragua, and the Dominican Republic.
2. CAFTA nations represent a U.S. export market larger than India, Indonesia, and
Russia combined. And nearly 80 percent of exports from the Central American
nations and the Dominican Republic already enter the United States tariff-free.
3. Central American nations have already cut average tariffs from 45 percent in
1985 to around 7 percent today.
4. Combined value of goods traded among the United States and the six CAFTA
countries is around $50 billion.
5. Benefits to the United States: (1) lower tariff and nontariff barriers; (2) ensures
U.S. companies are not disadvantaged by Central American nations’ trade
agreements with other countries; (3) requires Central American nations and
Dominican Republic to encourage competition and investment, protect
intellectual property rights, and promote transparency and the rule of law; (4)
supports U.S. national security interests by advancing regional integration,
peace, and stability.
C. Andean Community (CAN)
1. Formed in 1969 and today includes Bolivia, Colombia, Ecuador, and Peru. It
comprises a market of around 100 million consumers and a combined GDP of
about $600 billion.
2. Objectives include tariff reduction, a common external tariff, and common
policies in both transportation and certain industries.
3. But each member is given exceptions in the common tariff structure for trade
with nonmembers. The group has yet to create a customs union.
D. Southern Common Market (MERCOSUR)
1. MERCOSUR was established in 1988 between Argentina and Brazil but
expanded to include Paraguay and Uruguay in 1991 and Venezuela in 2006.
Venezuela’s membership was later suspended in 2016. Associate members of
MERCOSUR (www.mercosur.int) include Bolivia, Chile, Colombia, Ecuador,
Peru, and Suriname (see Map 8.1). Mexico has been granted observer status in
the bloc.
2. Acts as customs union and liberalizing trade and investment—emerging as the
most powerful trading bloc throughout Latin America. It is a market of more
than 290 million consumers and a GDP of around $4 trillion.
3. In the future, it could incorporate all of South America into a South American
Free Trade Agreement and link up with NAFTA.
4. Different trade agendas, various macroeconomic policy frameworks, and
economic problems of Argentina and Brazil hamper integration.
E. Central America and the Caribbean
Integration efforts here have been modest.
1. Caribbean Community and Common Market (CARICOM)
a. Formed in 1973. There are 15 full members, 5 associate members, and 8
observers active in CARICOM (www.caricom.org). Bahamas is a
member of the Community but does not belong to the Common Market.
Has combined GDP of nearly $30 billion and a market of almost 16
million people.
b. A key CARICOM agreement called for the establishment of a single
market, but the problem is that members trade more with nonmembers
than with one another.
2. Central American Common Market (CACM)
a. Intended to create a common market between Costa Rica, El Salvador,
Guatemala, Honduras, and Nicaragua. Progress was constrained by civil
wars and wars among members. Comprises a market of 30 million and
combined GDP of $200 billion.
b. Not yet a customs union, but officials say goal is integration, closer
political ties, and a single currency—likely the dollar. El Salvador
adopted the dollar as its official currency in 2000, and Guatemala already
uses the dollar alongside its own currency, the quetzal.
G. Free Trade Area of the Americas (FTAA)
1. Intends to create a trading bloc stretching from Alaska to Tierra del Fuego in
South America. The FTAA would comprise 34 nations and 830 million
consumers—with Cuba being the only Western Hemisphere nation excluded.
2. Would remove tariffs and nontariff barriers among members, but continues to
face opposition from labor organizations, environmentalists, and others against
globalization.
V. INTEGRATION IN ASIA AND ELSEWHERE
A. Association of Southeast Asian Nations (ASEAN)
1. Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the
Association of Southeast Asian Nations (ASEAN) in 1967. Brunei joined in 1984,
Vietnam in 1995, Laos and Myanmar (Burma) in 1997, and Cambodia in 1998
(see Map 8.1). Together, the 10 ASEAN (www.asean.org) countries comprise a
market of nearly 600 million consumers and GDP of nearly $2.4 trillion.
2. Objectives: (1) promote economic, cultural, and social development; (2)
safeguard economic and political stability; and (3) serve as a forum in which
differences can be resolved fairly and peacefully.
3. Adding Cambodia, Laos, and Myanmar, may help counter China’s strength and
resources of cheap labor and abundant raw materials.
B. Asian Pacific Economic Cooperation (APEC)
1. It initially was an informal forum among 12 trading partners, APEC
(www.apec.org) now has 21 members (see Map 8.1), and it comprises more than
44 percent of world trade and a GDP of more than $36 trillion.
2. Aims to strengthen the multilateral trading system and expand the global
economy by simplifying and liberalizing trade and investment procedures.
3. Hopes to have completely free trade and investment throughout the region by
2020.
4. Record of APEC
a. Succeeded in halving members’ tariff rates from an average of 15 to 7.5
percent. The early years saw the greatest progress, but liberalization
received a setback when the Asian financial crisis struck in the late
1990s.
b. Is a political body as much as it is a movement toward free trade. Open
dialogue and cooperation should encourage progress toward APEC goals,
however slowly.
c. Grants region-wide business visas without requiring multiple visas, and
recommends regional recognition of national qualifications for
professionals.
C. Closer Economic Relations (CER) Agreement
1. Australia and New Zealand created a free trade agreement in 1966 that slashed
tariffs and quotas 80 percent by 1980.
2. The agreement’s success encouraged the pair to form the Closer Economic
Relations (CER) Agreement in 1983 to advance free trade and further integrate
their two economies.
3. The two nations totally eliminated tariffs and quotas in 1990, five years ahead of
schedule.
4. Each nation allows goods (and most services) to be sold within its borders that
can be legally sold in the other country. Each nation also recognizes most
professionals who are registered to practice their occupation in the other country.
D. Gulf Cooperation Council (GCC)
1. Members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab
Emirates. Formed to cooperate with the increasingly powerful trading blocs in
Europe.
2. Main achievements: allowing citizens to travel freely among member nations,
and allowing citizens to own land, businesses, and other property in fellow
member nations without the need for local partners.
E. Economic Community of West African States (ECOWAS)
1. Intends to form a customs union and an eventual common market and monetary
union among its members. The ECOWAS nations comprise a large portion of
the economic activity in sub-Saharan Africa.
2. Progress on market integration is almost nonexistent, but ECOWAS has made
progress in the free movement of people, construction of international roads, and
development of telecommunication links.
3. Problems for ECOWAS arise because of political instability, poor governance,
weak national economies, poor infrastructure, and poor economic policies.
F. African Union (AU)
1. Group of 55 nations joined forces in 2002 to create the African Union.
2. Aims: (1) rid vestiges of colonialism and apartheid; (2) promote unity and
solidarity; (3) coordinate and intensify cooperation for development; (4)
safeguard members’ sovereignty and territorial integrity; (5) promote
international cooperation within the United Nations.
3. Although it is too early to judge the success of the AU, there is no shortage of
opportunities for it to demonstrate its capabilities.
VI. INTEGRATION AND BUSINESS OPERATIONS
This chapter describes regional integration efforts occurring today. There is much debate about
the merits and demerits of regional trade agreements. Some governments and independent
organizations act to counter the negative effects of integration. Although there are drawbacks to
integration, governments will continue to be enticed by the potential gains from increased trade
and by the desire to raise standards of living. Regional economic integration will likely continue
to roll back barriers to trade among nations and among existing trading blocs of nations.
VII. INTEGRATION AND EMPLOYMENT
Perhaps most controversial is the impact of regional integration on jobs. Companies can
affect the job environment by contributing to dislocations in labor markets. The nation that
supplies a particular good or service within a trading bloc is likely to be the most-efficient
producer. When that product is labor intensive, the cost of labor in that market is likely to be
quite low. Competitors in other nations may shift production to that relatively lower-wage
nation within the trading bloc to remain competitive. This can mean lost jobs in the relatively
higher-wage nation. Yet job dislocation can be an opportunity for workers to upgrade their
skills and gain more advanced training. This can help nations increase their competitiveness
because a more educated and skilled workforce attracts higher-paying jobs. An opportunity for
a nation to improve its competitiveness, however, is little consolation to people finding
themselves suddenly out of work.