Chapter 09 ‒ Regional Economic Integration
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Regional Economic Integration
Learning objectives
• Describe the different levels of
political arguments for 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
In order of increasing integration, they include
free trade area, customs union, common
market, economic union, and full political
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
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
Chapter 09 ‒ Regional Economic Integration
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The opening case describes the looming battle
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OUTLINE OF CHAPTER 9: REGIONAL ECONOMIC INTEGRATION
Opening Case: Renegotiating NAFTA
The Political Case for Integration
Impediments to Integration
The Case against Regional Integration
Regional Economic Integration in Europe
Evolution of the European Union
Enlargement of the European Union
British Exit from the European Union (Brexit)
Regional Economic Integration in the Americas
The North American Free Trade Agreement
The Andean Community
Other Trade Agreements
Focus on Managerial Implications
Opportunities
Threats
Chapter Summary
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CLASSROOM DISCUSSION POINT
Choose either the European Union or the North American Free Trade Area, and 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.
OPENING CASE: Renegotiating NAFTA
Summary
The opening case explores the future of North American Free Trade Agreement (NAFTA)
in the Trump era. President Donald Trump has repeatedly criticized the agreement saying
that it is a poor deal for the United States and should either be renegotiated or scrapped
altogether. The uncertainty about the future of the agreement has sent shockwaves through
entire industries in both Mexico and the United States. One industry that would certainly be
affected by a renegotiated agreement is the auto industry. Criticism from Trump has already
prompted Ford to rethink its plans to expand its operations in Mexico. Discussion of the
case can begin with the following questions:
QUESTION 1: Discuss NAFTA in the Trump era. What changes in the agreement would he
like to see?
ANSWER 1: NAFTA was a controversial topic throughout the 2016 U.S. presidential
election. Then candidate Trump was a vocal critic of the agreement arguing that it was not
beneficial to the United States and that as president he would renegotiate better terms or
withdraw altogether. Since his victory in the election, companies from around the world,
and especially from the United States, Canada, and Mexico have been wondering what
happen to the agreement. Many students will note that while Trump clearly feels the
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QUESTION 2: As an American consumer looking for a new car, what does NAFTA mean
to you? Does your response change if you are a consumer from Mexico or Canada?
ANSWER 2: When NAFTA was signed, all major auto companies moved much of their
assembly to Mexico along with some other elements of their business. For consumers in the
QUESTION 3: As CEO of an auto company with manufacturing facilities in Mexico, what
do Trump’s promises on NAFTA mean to you?
ANSWER 3: The global auto industry has been transformed as a result of NAFTA. All
major players currently have operations in Mexico where they capitalize on the country’s
low-cost workforce. In addition, supply chains have emerged on both sides of the border to
provide parts to factories in Mexico. Now, automakers on are edge wondering whether their
manufacturing strategies will be viable going forward. Trump has already called out some
Another Perspective: For an in-depth discussion of the political and economic impacts of
NAFTA, go to {https://www.bloomberg.com/news/articles/2017-10-11/auto-industry-
warns-trump-proposing-lose-lose-changes-to-nafta} and
{https://www.bloomberg.com/news/articles/2017-10-18/how-trump-getting-his-way-on-
nafta-would-reshape-the-auto-sector}.
Teaching Tip: To extend this discussion, consider NAFTA Bickering Begins Again Today
and NAFTA Renegotiations Hit Impasse Raising Doubts About Its Future in the
International Business Library at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your
keyboard to search for the video title.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
on “view,” then on “notes.” The following provides a brief overview of each Power Point
slide along with teaching tips and additional perspectives.
Chapter 09 ‒ Regional Economic Integration
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Slide 9-3 Introduction
Regional economic integration refers to agreements between countries in a geographic
will exist within each bloc, but each bloc will protect its market from outside competition
with high tariffs.
Slides 9-4 ‒ 9-8 Levels of Economic Integration
The five levels of economic integration are: free trade area, customs union, common
{https://ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-
agreement-nafta}.
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
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.
Slides 9-8 – 9-11 The Economic and Political Case for Integration
Regional economic integration can be seen as an attempt to achieve additional gains from
Chapter 09 ‒ Regional Economic Integration
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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
• Concerns over national sovereignty.
Slide 9-12 The Case Against Regional Integration
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
Two trade blocs in Europe are the:
• European Union (EU)
• European Free Trade Association
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.
The forerunner of the EU was the European Coal and Steel Community, formed in 1951,
which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal. 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 website is {http://europa.eu/index_en.htm}. The site contains
Chapter 09 ‒ Regional Economic Integration
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Political Structure of the European Union
The main institutions of the EU are the:
• Court of Justice (the supreme appeals court for EU law)
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 19 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
explore this further and understand the Trump’s Administration’s perspective of the euro go
to {https://www.forbes.com/sites/timworstall/2017/01/31/trump-trade-team-gets-one-right-
germany-benefits-on-trade-from-weak-euro/#4818bd1b5e75}.
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
Several countries, particularly from Eastern Europe, have applied for membership in the
EU. In December 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 2013.
In 2016, the EU’s second largest economy, Britain, voted to leave the EU. Key issues in the
vote to leave were immigration and national sovereignty. As a member of the EU, Britain
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Slides 9-24 – 9-32 Regional Economic Integration in the Americas
The North American Free Trade Agreement (NAFTA) is the most significant attempt at
January 1, 1994.
Following the recent election of Donald Trump, NAFTA’s future is uncertain. Trump
promised to renegotiate the agreement or abandon it. Either of these scenarios is likely to
result in higher tariffs on exports from Mexico, and higher prices for U.S. consumers.
Another Perspective: More on NAFTA can be found at {https://ustr.gov/trade-
offered by NAFTA. The NAFTA Register
{http://www.globalcontact.com/gc/directory/search.php?table=NAFTA}is a directory of
export management companies, export service providers, and trading companies that want
to profit from NAFTA by helping buyers and sellers take advantage of NAFTA-related
opportunities.
{http://www.sice.oas.org/TPD/AND_MER/AND_MER_e.asp}.
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
countries plus the Dominican Republic then created the Central America Free Trade
Agreement (CAFTA) in 2004.
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Two other agreements, CARICOM, formed between English-speaking Caribbean countries,
and the Caribbean Single Market and Economy (CSME), also have the goal of lower trade
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.
Regional Trade Blocks in Africa
Other Trade Agreements
Renewed interest in bilateral and multilateral trade agreements during the Obama
Administration generated interest in forming the Trans Pacific Partnership (TPP) between
the United States and 11 Pacific Rim countries and also the Transatlantic Trade and
Investment Partnership (TTIP) between the United States and the European Union. The
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