Chapter 09 ‒ Regional Economic Integration
Regional Economic Integration
Learning Objectives
• LO9-1: Describe the different levels
of regional economic integration.
• LO9-2: Understand the economic
and political arguments for regional
economic integration.
• LO9-3: Understand the economic
and political arguments against
regional economic integration.
• LO9-4: Explain the history, current
scope, and future prospects of the
world’s most important regional
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.
9
8
Chapter 09 ‒ Regional Economic Integration
The vote to leave the European Union
was very close, making negotiations
especially difficult. The closing case
explores the run up to the renegotiation
of NAFTA and the implications of its
Chapter 09 ‒ Regional Economic Integration
OUTLINE OF CHAPTER 9: REGIONAL ECONOMIC INTEGRATION
Opening Case: The Cost of Brexit
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
Management Focus: The European Commission and Google
The Single European Act
The Establishment of the Euro
Country Focus: The Greek Sovereign Debt Crisis
Enlargement of the European Union
British Exit from the European Union (Brexit)
Other Trade Agreements
Focus on Managerial Implications
Regional Economic Integration Threats
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: NAFTA 2.0: The USMCA
Chapter 09 ‒ Regional Economic Integration
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: The Cost of Brexit
Summary
The opening case explores the implications of the decision by the United Kingdom to leave
the European Union. A member of the European Union since 1973, the United Kingdom
voted to leave in 2016 as concern grew among some citizens that remaining in the bloc was
compromising the country’s national sovereignty, making the country vulnerable to an
unwanted increase in immigration, and limiting the country’s ability to make its own trade
deals. The vote to leave was a close one, making the negotiations of what the break will
look like especially challenging. Discussion of the case can begin with the following
questions:
QUESTION 1: Discuss the vote by the United Kingdom to leave the European Union.
What led to the decision? Were there any benefits to remaining in the bloc? Why did the
country vote to leave?
ANSWER 1: When the United Kingdom joined the European Economic Community, now
the European Union, expectations were high that membership would bring better trading
relationships with other member countries and economic growth a result. At the time, there
were concerns, though, that the country was compromising its national sovereignty, a
concern that ultimately factored into the 2016 vote to leave. By 2016, there were also
Chapter 09 ‒ Regional Economic Integration
QUESTION 2: The vote to leave the European Union was hotly contested. What are the
benefits of leaving? Will the United Kingdom be better off outside the bloc? Why has the
process of leaving been so challenging?
ANSWER 2: The decision by the United Kingdom to leave the European Union, a bloc that
it had been part of since 1973, was a divisive one with nearly half of the votes to remain,
and just over half to leave. Like the population of the United Kingdom, students will
QUESTION 3: What are the implications for foreign companies of the decision by the
United Kingdom to leave the European Union? Should they also leave?
ANSWER 3: Students should recognize that for companies, the uncertainty surrounding the
vote by the United Kingdom to leave the European Union has been challenging. For many
companies, the United Kingdom has long been an attractive location for investment and
gaining access to the European Union market. The decision to leave the bloc has thrown a
spanner in the works for many companies operating in the United Kingdom and since the
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each Power Point slide
along with teaching tips and additional perspectives.
Chapter 09 ‒ Regional Economic Integration
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.
Slides 9-4 ‒ 9-9 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). EFTA currently joins four countries—Norway, Iceland, Liechtenstein, and
Switzerland. Other free trade areas include the North American Free Trade Agreement
(NAFTA) and its successor, the United States–Canada–Mexico Agreement (USCMA).
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.
Slides 9-10 – 9-12 The Case for Regional Integration
The Economic 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.
Chapter 09 ‒ Regional Economic Integration
The Political Case for Integration
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.
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.
A regional free trade agreement will only make the world better off if the amount of trade it
creates exceeds the amount it diverts.
CONNECT
Click and Drag
Regional Integration
Summary
This activity explores regional economic integration as it relates to trade creation and trade
diversion. Regional economic integration is beneficial when it creates more trade than it diverts.
Slides 9-14 – 9-25 Regional Economic Integration in Europe
Two trade blocs in Europe are the:
• European Union (EU)
• European Free Trade Association
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.
Evolution of the European Union
The European Union (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.
Political Structure of the European Union
The main institutions of the EU are the:
• European Commission (responsible for proposing and implementing aspects of EU
• Court of Justice (the supreme appeals court for EU law)
The Single European Act
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.
The Establishment of the Euro
The Maastricht Treaty, 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 U.S.
dollar.
Chapter 09 ‒ Regional Economic Integration
site 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.
CONNECT
Click and Drag
EU Expansion
Summary
This activity explores regional economic integration and specifically, the evolution of the European
Union (EU) from its early formation to its most recent incarnation. The EU is the world’s most
advanced example of the benefits and challenges associated with regional economic integration.
CONNECT
Click and Drag
Regional Trade Pacts and Member Countries
Summary
This activity explores regional economic integration across the globe. Groups of countries have
worked to integrate their economies in order to benefit from free trade and other advantages
associated with economic integration.
Activity
Students are asked to match various examples of regional economic integration with the correct
description.
Chapter 09 ‒ Regional Economic Integration
British Exit from the European Union (BREXIT)
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
has been a counterbalance to Germany. Its departure will diminish the EU’s power in the
global economy, at least in the short term. Britain’s future is uncertain for now. In the near
future, it is likely to be less attractive to foreign investors, its long-term attractiveness will
depend on its ability to negotiate appealing trade deals with major economic powers.
CONNECT
Case Analysis
Regional Economic Integration and Brexit
Summary
This activity focuses on regional economic integration and specifically on the implications of
Britain’s withdrawal from the EU following a vote to leave or remain.
Slides 9-26 – 9-36 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 Community and
Mercosur. In addition, there are plans to establish a hemisphere wide Free Trade Area of the
Americas (FTAA).
The North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA), a free trade agreement between
the United States, Canada, and Mexico, became law January 1, 1994.
Chapter 09 ‒ Regional Economic Integration
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.
The United States–Mexico–Canada Agreement (USMCA)
Minor changes to the original NAFTA agreement resulted in the United States–Mexico-
Canada Agreement (USMCA). While the Trump agreement claims that the changes will
increase the production of automobiles and component parts in the United States, critics
believe the new agreement will result in trade diversion rather than trade creation ultimately
raising costs for North American auto producers and prices for consumers.
CONNECT
Video Case
Did You Know? NAFTA Is in the Process of Being Replaced by the USMCA
Summary
This activity explores regional economic integration and specifically NAFTA and its replacement
agreement, USMCA. Renegotiating NAFTA has been at the top of President Trump’s agenda since
he took office.
The Andean Community
The Andean Community, originally formed in 1969, was based on the EU model, but was
far less successful in achieving its stated goals. In 1990, the Andean Community was
relaunched and now operates as a customs union.
Chapter 09 ‒ Regional Economic Integration
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.
Central American Common Market, CAFTA, and CARICOM
Other trade pacts in the Americas have not been successful. The Central American
Common Market collapsed only a few years after it was created. The five founding
countries plus the Dominican Republic then created the Central America Free Trade
Agreement (CAFTA) in 2004.
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 barriers between members. So far, little progress has been made though.
CONNECT
Click and Drag
REI in the Americas
Summary
This activity explores regional economic integration and specifically regional economic integration
in the Americas. While none of the agreements has had an impact as large as the EU, regional
economic integration in the Americas is significant.
Slides 9-37 – 9-40 Regional Economic Integration Elsewhere
Several efforts have been made to integrate in Asia. One of the most successful is the
Association of Southeast Asian Nations (ASEAN)
Association of Southeast Asian Nations
Formed in 1967, the Association of Southeast Asian Nations (ASEAN) currently includes
Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, and, most recently, Vietnam,
Chapter 09 ‒ Regional Economic Integration
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
There are 19 trade blocs on the African continent; however, progress toward the
establishment of meaningful trade blocs has been slow. A recent sign of progress, though, is
the move involving 26 countries toward forming the Tripartite Free Trade Area (TFTA). If
the effort is successful, it will create a market of 630 million people with a combined gross
domestic product of $1.2 trillion and more than $102 billion in trade between members. In
2018, 44 countries agreed to work together under the Continental Free Trade Area (CFTA)
signaling further interest in free trade in Africa.
CONNECT
Case Analysis
Push Toward Free Trade in Africa
Summary
This activity explores regional economic integration in Africa where 26 countries recently agreed to
the Tripartite Free Trade Area. The new agreement will create a market of 630 million with a
combined GDP of $1.2 trillion.
Activity
Students are asked to read a case on free trade in Africa then respond to a series of questions related
to the case.
Class Discussion
Discuss the benefits of regional economic integration. What benefits can the 26 members of the
Tripartite Free Trade Area expect? Are there any drawbacks?
Slide 9-41 – 9-42 Focus on Managerial Implications
Regional Economic Integration Threats
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
Chapter 09 ‒ Regional Economic Integration
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.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: NAFTA has produced significant benefits for the Canadian, Mexican, and
U.S. economies. 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
Mexico. As low-skilled jobs move from Canada and the United States to Mexico, the
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 economic
integration within a geographic region, the net effect is greater prosperity for the nations of
the region. From a more philosophical perspective, regional economic integration can be
Chapter 09 ‒ Regional Economic Integration
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 they
manufacture the most efficiently, and the freedom to trade those products with other EU
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 companies.
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,
Chapter 09 ‒ Regional Economic Integration
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 economics
of a common market suggest that outsiders can be at a disadvantage to insiders. The opening
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 could
either be linked so that each specializes in the production of only certain items or several
sites should be closed down and production consolidated at the most efficient locations.
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 goal
of becoming a full free trade area by 1994, and a common market sometime after. While
initially considered a success, critics began to question whether the trade diversion effects of
Chapter 09 ‒ Regional Economic Integration
To solve the problems of Mercosur, the countries should reduce or eliminate high tariffs on
products that can be produced more efficiently in other parts of the world. It should strive to
develop industries in which it has a comparative advantage and direct its financial resources
to those industries. Finally, it should begin to develop an economy that fosters the free flow
of trade and goods throughout the region.
CLOSING CASE: NAFTA 2.0: The USMCA
Summary
The closing case explores the North American Free Trade Agreement (NAFTA) in the
Trump era. During his campaign for office, President Donald Trump repeatedly criticized
the agreement saying that it was a poor deal for the United States and should either be
renegotiated or scrapped altogether. This criticism continued after he took office, creating
uncertainty about the future of the agreement and sending shockwaves through entire
industries in both Mexico and the United States, especially in the auto industry. Indeed,
criticism from Trump prompted Ford to cancel its plans to expand its operations in Mexico.
In 2018, a revised NAFTA agreement was negotiated. The new agreement, the United
States-Mexico-Canada Agreement (USMCA) is set to go into effect in 2020. Discussion of
the case can begin with the following questions:
QUESTION 1: On balance, do you think that NAFTA has been a net positive or negative
for the United States economy? What about for the economies of Mexico and Canada?
ANSWER 1: Most students will probably agree that NAFTA has been a net positive effect
for the U.S. economy and for the economies of Canada and Mexico. While some industries
in the United States suffered from job losses as production moved to Mexico where wages
QUESTION 2: Why do you think Donald Trump was so focused on renegotiating NAFTA
during and after his successful presidential campaign?
ANSWER 2: 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
Chapter 09 ‒ Regional Economic Integration
QUESTION 3: What is your assessment of the USMCA? What are the potential benefits of
this agreement for the United States? What are the costs? On balance, does this agreement
represent an improvement over NAFTA?
ANSWER 3: Responses to this question will vary by student. 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, with the new USMCA, automakers are determining whether their manufacturing
strategies will be viable going forward. Under the new agreement, automakers will be
required to produce 75 percent of the content of their vehicles in North America in order to
qualify for zero tariffs and by 2023, 40 percent of the parts for a tariff-free vehicle must
come from a high-wage factory. Students are likely to agree that while in theory these
revisions to the original NAFTA may encourage some automakers to bring jobs back to the
QUESTION 4: On balance, is the USMCA good for Canada and Mexico?
ANSWER 4: 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
United States and Canada, this meant lower prices as production costs plummeted thanks to
lower wages in Mexico. For consumers in Mexico, the agreement meant jobs and increased
purchasing power. Students will probably recognize that if Trump’s demands make it less
Chapter 09 ‒ Regional Economic Integration
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CONNECT
Geography
Summary
This activity is designed to test the student’s knowledge of geography. Questions related to chapter
material are asked, requiring students to understand the topics and the locations of the countries
involved.
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
The World Trade Organization maintains a database of regional trade agreements. You can
search this database to identify all agreements that a specific country participates in. Search
the database to identify the trade agreements that Japan currently participates in. What
patterns do you see? Which region (or regions) of the world does Japan seem to be focusing
on its trade endeavors?
Exercise 2
Your company has assigned you with the task of investigating the various trade blocs in
Africa to see if your company can benefit from these trade agreements while expanding into
Chapter 09 ‒ Regional Economic Integration
Exercise 1 Answer
Additional Info:
The Regional Trade Agreements page of the WTO provides a lot of background and
analysis on RTA’s around the world. To access individual agreements, one has to enter the
“RTA Database” following a link on this page. You can also access Maps of RTAs by
Country to see the agreements for each country.
Exercise 2 Answer
Additional Info:
The Common Market for Eastern and Southern Africa (COMESA) is a free trade area that
encompasses 19 countries stretching from Libya to Zimbabwe. The Trade Blocs section of
globalEDGE™ provides information on the history and objectives of the trade bloc, as well
as its member states.