Chapter 09 – Regional Economic Integration
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Regional Economic Integration
Learning objectives
• Describe the different levels of
regional economic integration.
• Understand the economic and
political arguments against
regional economic integration.
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
without costs for the minority. Concerns over sovereignty
often slow or stop integration attempts.
The creation of single markets in the EU and North
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
Chapter 09 – Regional Economic Integration
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OUTLINE OF CHAPTER 9: REGIONAL ECONOMIC INTEGRATION
Opening Case: Tomato Wars
Introduction
Levels of Economic Integration
The Case Against Regional Integration
Regional Economic Integration in Europe
Evolution of the European Union
Political Structure of the European Union
The Single European Act
The Establishment of the Euro
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
Chapter Summary
Closing Case: I Want My Greek TV!
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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.
OPENING CASE: Tomato Wars
The opening case explores the complicated case of importing tomatoes from Mexico and
the impact on both sides of the border. When NAFTA went into effect, tariffs on
imported tomatoes from Mexico were dropped. U.S. growers firmly believed that they
would lose much of their business to their Mexican counterparts. The U.S. growers
lobbied the government to set a minimum floor price for Mexican tomatoes, with the idea
being that such a pricing structure would stop Mexican producers from cutting prices
below the floor. As it turned out, the deal didn’t offer much protection to U.S. tomato
growers.
1. Explore the U.S. growers’ sentiment that they were being shut out of the local tomato
market by the low prices agreed to by both countries. How does Mexico’s competitive
wages and growing conditions help the Mexican growers?
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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.
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).
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.
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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.
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
Slides 9-10 and 9-11 Regional Economic Integration in Europe
There are two trade blocks in Europe:
• the European Union (EU)
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.
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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
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.
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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
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.
Slide 9-24 The Andean Community
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.
Slide 9-25 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.
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Slide 9-26 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 9-27 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.
Slide 9-28 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 9-29 and 9-30 Association of Southeast Asian Nations
Formed in 1967, ASEAN currently includes Brunei, Indonesia, Malaysia, the Philippines,
Slides 9-31 and 9-32 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
Slide 9-33 Regional Trade Blocks in Africa
There are nine trade blocs on the African continent however progress toward the
Slide 9-34 Implications for Managers
The EU and NAFTA currently have the most immediate implications for business.
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CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: NAFTA has produced significant benefits for the Canadian, Mexican,
and U.S. economy. Discuss.
ANSWER 1: NAFTA’s proponents argue that the agreement should be viewed as an
opportunity to create an enlarged and more productive base for the U.S., Canada, and
QUESTION 2: What are the economic and political arguments for regional economic
integration? Given these arguments, why don’t we see more substantial examples of
integration in the world economy?
ANSWER 2: The economic case for regional integration is straightforward. As we saw
in Chapter 5, unrestricted free trade allows countries to specialize in the production of
goods and services that they can produce most efficiently. If this happens as the result of
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QUESTION 3: What in general was the effect of the creation of a single market and a single
currency within the EU on competition within the EU? Why?
ANSWER 3: By creating a single market and currency, member countries can expect
significant gains from the free flow of trade and investment. This will result from the
ability of the countries within the EU to specialize in the production of the product that
QUESTION 4: Do you think it is correct for the European Commission to restrict
mergers between American companies that do business in Europe? (For example, the
European Commission vetoed the proposed merger between WorldCom and Sprint, both
U.S. companies, and it carefully reviewed the merger between AOL and Time Warner,
again both U.S. companies.)
ANSWER 4: Many students will probably suggest that the European Commission has a
right to regulate the European market, even if the regulation involves American
QUESTION 5: What were the causes of the 2010–2012 sovereign debt crisis in the EU?
What does this crisis tell us about the weaknesses of the euro? Do you think the euro will
survive the sovereign debt crisis?
ANSWER 5: Since 2008, the euro has weakened, reflecting persistent concerns over slow
economic growth and large budget deficits among several EU members, particularly
Greece, Portugal, Ireland, Italy, and Spain. Before the global recession, the governments
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QUESTION 6: How should a U.S. firm that currently exports to only ASEAN countries
respond to the creation of a single market in this regional grouping?
ANSWER 6: A U.S. business firm that is currently exporting to only ASEAN countries
should seriously consider opening a facility somewhere in this grouping, as the
QUESTION 7: How should a firm with self-sufficient production facilities in several
ASEAN countries respond to the creation of a single market? What are the constraints on
its ability to respond in a manner that minimizes production costs?
ANSWER 7: The creation of the single market means that it may no longer be efficient
to operate separate duplicative production facilities in each country. Instead, the facilities
QUESTION 8: After a promising start, Mercosur, the major Latin American trade
agreement, has faltered and made little progress since 2000. What problems are hurting
Mercosur? What can be done to solve these problems?
ANSWER 8: Mercosur originated in 1988 as a free trade pact between Brazil and
Argentina. The pact was expanded in 1990 to include Paraguay and Uruguay with the
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QUESTION 9: Would establishment of a Free Trade Area of the America’s (FTAA) be
good for the two most advanced economies in the hemisphere, the United States and
Canada? How might the establishment of FTAA impact the strategy on North American
firms?
ANSWER 9: In 1994, a Free Trade of the Americas (FTAA) was proposed. If the
agreement comes about, it would effectively create a free trade area of nearly 800 million
CLOSING CASE: I Want My Greek TV!
The closing case explores the fallout from a recent ruling by the European Court of
Justice on the rights of companies like Sky Broadcasting Corporation to limit local
viewing options for consumers. Prior to the ruling Sky Broadcasting and ESPN had
exclusive rights to show broadcasts of English Premier League soccer matches. Under
the agreements, the companies divided the European market into segments and charged
consumers different prices in each market. The ruling now gives consumers the right to
access cheaper broadcasts being shown in other European Union markets. The Court
defends the ruling arguing that it upholds the basic principles of a single Market system.
exported from the United States. Discussion of the case can revolve around the following
questions:
QUESTION 1: Why do you think the English Premier League has historically charged
different prices for broadcasting rights in different European markets?
ANSWER 1: The Premier League has charged different prices based on local demand for
QUESTION 2: Do you think the European Court of Justice was right to rule that the
league could not stop people from buying Premier League feeds from other countries?
Chapter 09 – Regional Economic Integration
ANSWER 2: Student answers will vary. Sky Broadcasting and ESPN pay the Premier
QUESTION 3: Who benefits from the EU ruling? Who will the losers be?
ANSWER 3: Small business owners will benefit from the ruling. However, if the Premier
QUESTION 4: If you were running the English Premier League, what would your
strategy be on broadcast rights going forward?
ANSWER 4: Student answers will vary. One tactic would be to negotiate with ESPN and
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: Spanish and Greek Responses to Debt Crisis Unleash Backlash from
Citizens
Run Time: 6:48
Abstract: This video explores the new protests against proposed austerity measures in
Greece, a country that has seen significant turmoil in recent months because of its high
Key Concepts: European Union, euro, globalization, political economy, political risk,
economic integration, economic risk, global economy, International Monetary Fund
(IMF)
Notes: New protests broke out in Greece last week as Greek officials contemplated
implementing new austerity measures. The protests, which turned violent at times, came