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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.
9-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9
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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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Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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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McGraw-Hill Education.
Chapter 09 - Regional Economic Integration
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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McGraw-Hill Education.
Chapter 09 - Regional Economic Integration
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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McGraw-Hill Education.
Chapter 09 - Regional Economic Integration
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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McGraw-Hill Education.
Chapter 09 - Regional Economic Integration
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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Chapter 09 - Regional Economic Integration
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.
9-8
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McGraw-Hill Education.
