978-1259578113 Chapter 9 Lecture Notes

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Chapter 09 – Regional Economic Integration

Regional Economic Integration

Learning objectives

Describe the different levels of regional economic integration.

Understand the economic and political arguments for regional economic integration.

Understand the economic and political arguments against regional economic

integration.

Explain the history, current scope, and future prospects of the world’s most important

regional economic agreements.

Understand the implications for business that are inherent in regional economic

integration agreements.

This chapter discusses regional economic integration, agreements among countries within

a geographic region to achieve economic gains from the free flow of trade and investment

among themselves.

There are five levels of economic integration. In order of increasing integration, they

include free trade area, customs union, common market, economic union, and full

political union.

Integration is not easily achieved or sustained. Although integration brings benefits to the

majority, it is never without costs for the minority. Concerns over sovereignty often slow

or stop integration attempts.

The creation of single markets in the EU and North America means that many markets

that were formerly protected from foreign competition are now more open. This creates

major investment and export opportunities for firms within and outside these regions.

The free movement of goods across borders, the harmonization of product standards, and

the simplification of tax regimes make it possible for firms based in a free trade area to

realize potentially enormous cost economies by centralizing production in those locations

within the area where the mix of factor costs and skills is optimal.

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Chapter 09 – Regional Economic Integration

The opening case describes the growth of the Mexican auto industry due to a wave of

foreign direct investment spurred by regional trade agreements, such as NAFTA. The

closing case discusses the complicated case of Mexican tomato growers, U.S. tomato

growers, and the pricing structure that was in place once NAFTA went into effect.

OUTLINE OF CHAPTER 9: REGIONAL ECONOMIC INTEGRATION

Opening Case: Regional Trade Pacts Give the Mexican Auto Industry an Edge

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

Focus On Managerial Implications

Opportunities

Threats

Chapter Summary

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Chapter 09 – Regional Economic Integration

Critical Thinking and Discussion Questions

Closing Case: Tomato Wars

CLASSROOM DISCUSSION POINT

Choose either the European Union or the North American Free Trade Area, and then ask

students to think about what economic integration means for companies inside the bloc.

Then, ask students to consider economic integration from the perspective of a firm

outside the bloc.

Next, ask students to consider economic integration from the perspective of a consumer.

Try to organize student responses in a positive/negative chart on the board, and then at

the end of the discussion, ask students whether they would support economic integration

or not.

LECTURE OUTLINE

This lecture outline follows the Power Point Presentation (PPT) provided along with this

instructor’s manual. The PPT slides include additional notes that can be viewed by

clicking on “view,” then on “notes.” The following provides a brief overview of each

Power Point slide along with teaching tips, and additional perspectives.

Slide 9-3 Introduction

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.

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.

Slides 9-4 through 9-7 Levels of Economic Integration

The five levels of economic integration are: free trade area, customs union, common

market, economic union, and political union.

The most enduring free trade area in the world is the European Free Trade Association.

EFTA currently joins four countries–Norway, Iceland, Liechtenstein, and Switzerland.

Other free trade areas include the North American Free Trade Agreement (NAFTA).

Another Perspective: A site with information and additional links on NAFTA is available

at {http://www.fas.usda.gov/itp/Policy/NAFTA/nafta.asp}. The site includes

downloadable power point presentations on the benefits of NAFTA.

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Another Perspective: To find out more about EFTA, go to {http://www.efta.int/}, and

click on “EFTA AELE.” From here you can click on several icons to get quick facts,

more in-depth reports, information on the European Economic Area, and many other

issues related to EFTA.

Customs unions around the world include the current version of the Andean Pact

(between Bolivia, Colombia, Ecuador, and Peru).

Currently, Mercosur, the South America grouping that includes Brazil, Argentina,

Paraguay, and Uruguay, is aiming to eventually establish itself as a common market.

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.

Slide 9-8 The Economic and Political Case for Integration

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 WTO.

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.

Slide 9-9 Impediments to Integration

There are two main impediments to integration:

although a nation as a whole may benefit significantly from a regional free trade

agreement, certain groups may lose

concerns over national sovereignty

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.

Slides 9-10 and 9-11 Regional Economic Integration in Europe

There are two trade blocks in Europe:

the European Union (EU)

the European Free Trade Association

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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.

Slides 9-12 and 9-13 Evolution of the European Union

The EU is the product of two political factors:

devastation of two world wars on Western Europe and the desire for a lasting

peace

European nations’ desire to hold their own on the world’s political and economic

stage.

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 EEC was formed in 1957 at the Treaty of Rome. While the original goal was for a

common market, progress was generally very slow.

Another Perspective: The EU web site is {http://europa.eu/index_en.htm}. The site

contains a broad array of information about the historical role and current activities of the

EU in the global economy.

The Single European Act called for the removal of border controls, mutual recognition

of standards, open public procurement, a barrier free financial services industry, no

currency exchange controls, free and open freight transport, and freer and more open

competition.

Slide 9-14 Political Structure of the European Union

The main institutions of the EU are:

the European Council (ultimate controlling authority within the EU)

the European Commission (responsible for implementing aspects of EU law and

monitoring member states to ensure they are complying with EU laws)

the European Parliament (debates legislation proposed by the commission and

forwarded to it by the council)

the Court of Justice (the supreme appeals court for EU law).

Slides 9-15 and 9-16 The Establishment of the Euro

The Treaty of Maastricht, signed in 1991, committed the EU to adopt a single currency,

the euro, by January 1, 1999. The euro is used by 17 of the 27 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.

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 has since

strengthened.

Another Perspective: The European Union has a web page devoted to the euro

{http://ec.europa.eu/economy_finance/euro/index_en.htm}. Students can explore the site

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and click on the pages to see pictures of the coins and notes, the advantages of

participating in the euro zone, and frequently asked questions about the euro.

Another Perspective: The European Central Bank maintains a web site with current

information on the euro. The site is available at {http://www.euro.ecb.int/}.

Another Perspective: At one point in time, joining the Euro Zone had been the goal of

many Eastern European countries. Now however, given the recent financial crises that is

threatening the future of the euro, many are rethinking their plans. To learn more, go to

{http://www.businessweek.com/magazine/content/11_27/b4235017725502.htm}.

Slide 9-17 Enlargement of the European Union

Several 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, and they joined on May 1, 2004. Today, membership is up to 28 countries,

with Croatia joining in July of 2013.

Slides 9-18 and 9-19 Regional Economic Integration in the Americas

The North American Free Trade Agreement (NAFTA) is the most significant attempt

at economic integration in the Americas. 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.)

Slides 9-20 through 9-23 The North American Free Trade Agreement

The free trade agreement between the United States, Canada, and Mexico became law

January 1, 1994.

Another Perspective: More on NAFTA can be found at

{http://www.fas.usda.gov/itp/Policy/NAFTA/nafta.asp}.

Following approval of NAFTA by the U.S. Congress a number of other Latin American

countries indicated their desire to eventually join NAFTA. Currently the governments of

both Canada and the U.S. are adopting a wait and see attitude with regard to most

countries.

Another Perspective: Many organizations are anxious to take advantage of the

opportunities offered by NAFTA. The NAFTA Register

{http://www.naftaregister.com/}is a directory of export management companies, export

service providers, and trading companies that want to profit from NAFTA by helping

buyers and selling take advantage of NAFTA related opportunities.

Slide 9-24 Think Like a Manager: NAFTA

Slide 9-25 The Andean Community

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The Andean Pact, originally formed in 1969, was based on the EU model, but was far less

successful in achieving its stated goals. In 1990, the Andean Pact was re-launched, and now

operates as a customs union.

Another Perspective: To see new developments with the Andean Community go to

{http://www.comunidadandina.org/endex.htm}.

Slide 9-26 Mercosur

In some industries Mercosur is trade diverting rather than trade creating, and local firms

are investing in industries that are not competitive on a worldwide basis.

Another Perspective: Mercosur’s website, which includes a broad array of useful

information, can be accessed at {http://www.sice.oas.org/trade/mrcsr/mrcsrtoc.asp}.

Slide 9-27 Central American Trade Agreement Market and CARICOM

There are two other trade pacts in the America, the Central American Trade Market and

CARICOM, although neither has made much progress as yet.

Slide 9-28 Free Trade of the Americas

If the FTAA is established, it will have major implications for cross-border trade and

investment flows within the hemisphere. The FTAA would create a free trade area of 850

million people.

Another Perspective: Additional information on the Free Trade of the Americas can be

found at {http://www.ftaa-alca.org/alca_e.asp}.

Slide 9-29 Regional Economic Integration In Asia

Several efforts have been made to integrate in Asia

One of the most successful is the Association of Southeast Asian Nations (ASEAN)

Slides 9-30 and 9-31 Association of Southeast Asian Nations

Formed in 1967, ASEAN currently includes Brunei, Indonesia, Malaysia, the Philippines,

Singapore, Thailand, and, most recently, Vietnam, Myanmar, Laos, and Cambodia. The

basic objectives of ASEAN are to foster freer trade between member countries and to

achieve some cooperation in their industrial policies.

Slides 9-32 and 9-33 Asia-Pacific Cooperation

APEC currently has 21 members including such economic powerhouses as the United

States, Japan, and China. The stated aim of APEC is to increase multilateral cooperation

in view of the economic rise of the Pacific nations and the growing interdependence

within the region.

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Another Perspective: For more on APEC, go to its web site at {http://www.apec.org/}.

Slide 9-34 Regional Trade Blocks in Africa

There are nine trade blocs on the African continent however progress toward the

establishment of meaningful trade blocs has been slow.

Slide 9-35 Implications for Managers

The EU and NAFTA currently have the most immediate implications for business.

The greatest implication for MNEs is that the free movement of goods across borders, the

harmonization of product standards, and the simplification of tax regimes, makes it

possible for firms to realize potentially enormous cost economies by centralizing

production in those locations where the mix of factor costs and skills is optimal. Through

specialization and shipping of goods between locations, a much more efficient web of

operations can be created.

Just as the emergence of single markets in the EU and North America creates

opportunities for business, so it also presents a number of threats.

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