Global Business Today Eleventh Edition Chapter 9
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Regional Economic Integration
Table of Contents
Learning Objectives
Chapter Summary
9-2
9-2 Understand the economic and political arguments for regional economic integration.
9-4 Explain the history, current scope, and future prospects of the world’s most important
regional economic agreements.
9-5 Understand the implications for management practice that are inherent in regional economic
integration agreements.
Chapter Summary
In this chapter, we explore regional economic integration. The levels of regional economic
integration (from least to most integrated) include: a free trade area, a customs union, a common
9-3
NAFTA 2.0: The USMCA
opening case
Summary
1. Discuss NAFTA in the Trump era. What changes to trade based on the new USMCA
agreement would he like to see?
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? What about under the new
USMCA?
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When NAFTA was signed, all major auto companies moved much of their assembly to Mexico
3. As CEO of an auto company with manufacturing facilities in Mexico, what does the new
USMCA deal mean to you?
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or administrative impediments are allowed to distort trade between member nations. Each
country, however, is allowed to determine its own trade policies with regard to nonmembers.
C) The most enduring free trade area in the world is the European Free Trade Association
factors of production are allowed to move freely between members. Thus, labor and capital are
free to move, as there are no restrictions on immigration, emigration, or cross-border flows of
capital between markets.
G) Currently, Mercosur, the South America grouping that includes Brazil, Argentina, Paraguay,
and Uruguay, is aiming to eventually establish itself as a common market. Venezuela has been
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THE ECONOMIC CASE FOR INTEGRATION
B) 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
concerns over national sovereignty.
The Case against Regional Integration
A) Although the tide has been running in favor of regional free trade agreements in recent years,
some economists have expressed concern that the benefits of regional integration have been
oversold, while the costs have often been ignored.
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Class Discussion
International managers need to understand the benefits and drawbacks of regional economic
integration and how it might affect their company’s ability to operate in a market. Discuss
current examples of trade creation and trade diversion.
Regional Economic Integration in Europe
A) There are two trade blocks in Europe: the European Union (EU) and the European Free Trade
Association. Of the two, 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
B) The European Union (EU) is the product of two political factors: first, the devastation of two
World Wars on Western Europe and the desire for a lasting peace, and second, the European
nations’ desire to hold their own on the world’s political and economic stage.
Teaching Tip: The EU maintains an excellent website at http://europa.eu/european-
union/index_en. Students can click on a number of subjects to see the EU’s position and role in
the area. The site also contains a broad array of information about the historical role and current
activities of the EU in the global economy.
C) 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 European
Community was formed in 1957 at the Treaty of Rome. While the original goal was for a
common market, progress was generally very slow. Over the years the EU expanded in spurts, as
well as moved towards ever-greater integration. Today, the EU has 28 members, although that
will fall to 27 when Britain exits the EU. Map 9.1 in the text shows the current membership of
the EU.
POLITICAL STRUCTURE OF THE EUROPEAN UNION
D) The four main institutions of the EU are the European Commission (responsible for
proposing EU legislation, implementing it, and monitoring member states to ensure they are
complying with EU laws), the European Council (the ultimate controlling authority within the
EU), the European Parliament (debates legislation proposed by the commission and forwarded
to it by the Council), and the Court of Justice (the supreme appeals court for EU law).
E) The Treaty of Lisbon gives more power to the European Parliament, which is effectively the
co-equal legislator for almost all European laws.
Lecture Note: To learn more about the Lisbon Agreement and its implications for the European
Union countries, consider http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=OJ:C:2007:306:TOC.
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management FOCUS: The European Commission and Intel
1. Was the European Commission justified in its case against Intel? Why or why not?
2. Why are the actions of institutions like the European Commission important to the function of
markets? How does the European Commission protect consumers?
Global Business Today Eleventh Edition Chapter 9
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European Act, which was independently ratified by the parliaments of each member country and
became EC law in 1987.
The Objectives of the Act
end of 1992
• The abolishment of all restrictions on cabotage (the right of foreign truckers to pick up
and deliver goods within another member’s borders), by the end of 1992
Impact
I) The Single European Act has had a significant impact on the EU economy. The act provided
K) Euro notes and coins were not actually issued until January 1st, 2002. In the interim, national
currencies circulated in member countries. However, in each participating state the national
currency stood for a defined quantity of euros.
Benefits of the Euro
L) There are a number of reasons why the Europeans decided to establish a single currency in the
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European euro-denominated capital market will increase the range of investment options open
both to individuals and institutions.
Costs of the Euro
currency area. An optimal currency area is an area where similarities in the underlying
structure of economic activities make it feasible to adopt a single currency and use a single
exchange rate as an instrument of macroeconomic policy. Many of the European economies in
the euro zone, however, are very dissimilar.
The Euro Experience
Greece’s problems were actually worse than had been suspected. Investors lost faith in Greece
and its ability to not only refinance its debt but also to implement policies to reduce its debt load.
This combined with concerns that other countries in the euro zone could have problems sent the
euro to its lowest level in years. Discussion of this feature can begin with the following
questions.
1. Discuss the implications of the financial crisis in Greece on other countries in the euro zone.
What does the loss of confidence in Greece and in Spain, Portugal, and Italy as well mean for the
bloc?
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The financial crisis in Greece highlighted the difficulties associated with having multiple
2. What does a falling euro mean for U.S. companies exporting to the European Union and for
U.S. companies with operations in the bloc?
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Class Discussion
Understanding regional economic integration, its benefits, and its challenges, is important for
managers as they seek to consider the implications of the external environment on the ability of
voted to exit.
S) In 2017, Britain formally notified the EU of its intention to leave the bloc. Under the terms of
the Treaty of Lisbon, Britain must conclude its exit negotiations within two years. The country is
scheduled to officially leave the bloc on March 29, 2019.
CONNECT
EU means to the trade bloc and to Britain itself. Discuss these issues and how companies should
respond to the changing situation.
Regional Economic Integration in the Americas
A) Regional economic integration is on the rise in the Americas. The North American Free Trade
Agreement (NAFTA) is the most significant attempt. Other efforts include the Andean group and
Global Business Today Eleventh Edition Chapter 9
THE NORTH AMERICAN FREE TRADE AGREEMENT
B) The United States, Canada, and Mexico established the North American Free Trade
Agreement (NAFTA) in 1994.
• Establishes two commissions with the power to impose fines and remove trade
privileges when environmental standards or legislation involving health and safety,
minimum wages, or child labor are ignored
Teaching Tip: For more information on NAFTA, go to http://www.ustr.gov/trade-
agreements/free-trade-agreements/north-american-free-trade-agreement-nafta.
to Mexico’s more lax standards, and Mexico would lose its sovereignty.
NAFTA: The Results
F) Studies of NAFTA’s impact to date suggest that its initial effects were at best muted, and both
advocates and detractors may have been guilty of exaggeration. The most significant impact of
NAFTA may not have been economic, but rather political. The agreement has helped to create