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)
Integration in the Americas
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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
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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
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
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
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
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
1. Trade creation
a. Increase in trade that results from regional economic
integration.
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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
3. Political cooperation
A group of nations can have significantly greater political weight
4. Employment opportunities
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
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
3. Loss of national sovereignty
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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
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
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
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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
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—
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larger nations get two commissioners, smaller
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
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.
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
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“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
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
2. CAFTA nations represent a U.S. export market larger than India,
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)
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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,
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
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—
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
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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
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
(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,
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.
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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.
D. Gulf Cooperation Council (GCC)
1. Members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the
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
2. Progress on market integration is almost nonexistent, but
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
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3. Q: An increase in trade between nations as a result of regional economic
integration is called what?
4. Q: Trade shifting away from nations not belonging to a trading bloc and member
nations is called what?
Quick Study 2
1. Q: What is the name of the official single currency of the European Union?
2. Q: A country may receive membership in the European Union once it meets what
is called the what?
Copyright © 2019 Pearson Education, Inc.
3. Q: Why did nations belonging to the European Free Trade Association not want
to join the European Union?
Quick Study 3
1. Q: Canada, Mexico, and the United States belong to the regional trading bloc
called what?
2. Q: What countries belong to the regional trading bloc called CAFTA-DR?
3. Q: What is the name of Latin America’s most powerful regional trading bloc?
Quick Study 4
1. Q: What are the stated aims of the Association of Southeast Asian Nations
(ASEAN)?
2. Q: The stated aims of which organization is not to build a trading bloc but instead
to strengthen the multilateral trading system?
3. Q: What is the name of the grouping of 55 nations across the continent of Africa?
Ch 8: Regional Economic Integration
15
Ethical Challenge
8-5 Given the impact on nonmembers, do you think such trade agreements are
ethical?
A: Student responses will vary. The key issues that could be included in their
review should address whether the trade agreement pay enough attention to the
quality of the jobs? What impact do they have on workers’ rights and working
conditions? Are they set up mainly for the benefit of government or businesses?
8-6 Why do you think the Caribbean islands are not part of NAFTA or CAFT-DR?
8-7 What arguments would you make for including the Caribbean in the expansion of
NAFTA or CAFTA-DR?
A: One question to be addressed here is the responsibility that the United States
Teaming Up
Debate Project. Two groups of four students each will debate the merits of extending
NAFTA to more advanced levels of economic (and political) integration. After the first
student from each side has spoken, the second student will question the opponent’s
arguments, looking for holes and inconsistencies. The third student will attempt to
answer these arguments. A fourth student will present a summary of each side’s
arguments. Finally, the class will vote to determine which team offered the more
compelling argument.
Ch 8: Regional Economic Integration
16
A: There would be many economic and political obstacles in expanding NAFTA to more
advanced levels of integration and to include other countries. First, there is the problem
Practicing International Management Case
Global Trade Deficit in Food Safety
8-16 Q: How do you think countries with a high volume of exports to the United States,
such as Mexico, would respond to stricter food-safety rules? Do you think such
measures are a good way to stem the tide of food-related illnesses? Why or why
not?
A: They will clearly be opposed to it. How would the U.S. government react if
Mexico wanted to send its federal investigators around the United States to
inspect its farming methods and safety systems? It would rightly say that the
8-17 Q: Some people believe that free trade agreements force consumers to trade the
health and safety of their families for free trade. What are the benefits and
drawbacks of putting food safety regulations into regional trade pacts?
8-18 Q: The lack of harmonized food-safety practices and standards is just one of the
challenges faced by the food industry as it becomes more global. What other
Ch 8: Regional Economic Integration
17
challenges face the food industry in an era of economic integration and opening
markets?