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 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.
The opening case explores the implications of a recent
ruling by the European Court of Justice supporting the
principles of the Single Market. The ruling allows
consumers to bypass agreements regarding the exclusive
rights to local broadcasts of Premier League soccer
matches. The closing case explores the implications of
NAFTA for the trucking industry, and in particular the
power of certain parties to limit the implementation of the
agreement.
9
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OUTLINE OF CHAPTER 9: REGIONAL ECONOMIC INTEGRATION
Opening Case: I Want My Greek TV
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
The Single European Act
The Establishment of the Euro
Enlargement of the European Union
Management Focus: The European Commission and Media Industry Mergers
Country Focus: Creating a Single European Market in Financial Services
Country Focus: Sovereign Debt Crisis in the Euro Zone
Regional Economic Integration of 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 Blocks in Africa
Implications for Managers
Opportunities
Threats
Chapter Summary
Closing Case: NAFTA and Mexican Trucking
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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.
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: I Want My Greek TV
The opening 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.
Discussion of the case can revolve around the following questions:
1. Explore the implications of the recent ruling by European Court of Justice on the
broadcasts of Premier League matches. What doe the ruling mean for consumers? How
does it affect companies? How might advertisers change their strategies?
2. The recent ruling caught both ESPN and Sky by surprise as well as the soccer clubs
themselves. Consider the decision from the perspective of the European companies.
How should they respond to the decision? What are the long term implications of the
ruling?
3. Reflect on your response to the first two questions, then discuss the benefits and
challenges of economic integration. Is it always beneficial for all parties? Explain your
response.
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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.
Slides 9-4-9-7 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).
Customs unions around the world include the current version of the Andean Pact
(between Bolivia, Columbia, 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.
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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 9-10-9-11 Regional Economic Integration in Europe
There are two trade blocks in Europe:
• the European Union (EU)
• the 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.
Slides 9-12-9-13 Evolution of the European Union
The EU is the product of two political factors:
• the devastation of two world wars on Western Europe and the desire for a lasting
peace
• the 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.
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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 8-14 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 8-15-8-16 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
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.
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Slide 8-17 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 27 countries.
Slide 9-18-9-19 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 9-20-9-23 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.
Another Perspective: To see new developments with the Andean Community go to
{http://www.comunidadandina.org/endex.htm}.
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.
Another Perspective: MERCOSUR’s Homepage, which includes a broad array of useful
information, can be accessed at {http://www.sice.oas.org/trade/mrcsr/mrcsrtoc.asp}.
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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.
Another Perspective: Additional information on the Free Trade of the Americas can be
found at {http://www.ftaa-alca.org/alca_e.asp}.
Slide 9-28 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 9-29-9-30 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 9-31-9-32 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
in view of the economic rise of the Pacific nations and the growing interdependence
within the region.
Another Perspective: For more on APEC, go to its web site at {http://www.apec.org/}.
Slide 9-33 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 9-34 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
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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. 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
Mexico. As low-income 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 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
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QUESTION 3: What effect is the creation of a single market and a single currency within the EU
likely to have 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: 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 5: 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 6: 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?
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ANSWER 6: 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
QUESTION 7: 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 7: 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
Another Perspective: Students can check the current status of the agreement online
{http://www.sice.oas.org/trade/mrcsr/mrcsrtoc.asp}.
QUESTION 8: 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 8: In 1994, a Free Trade of the Americas (FTAA) was proposed. If the
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QUESTION 9: Reread the Management Focus case on the European Commission and
Media Industry Mergers, then answer the following questions:
a) Given that both AOL and Time Warner were U.S. based companies, do you think the
European Commission had a right to review and regulate their planned merger?
b) Were the concessions extracted by the European Commission from AOL and Time
Warner reasonable? Whose interests was the Commission trying to protect?
c) What precedent do the actions of the European Commission in this case set? What are
the implications for managers of foreign enterprises with substantial operations in
Europe?
ANSWER 9: a) This question deals with the delicate issue of just how far a country can
extend the reach of its law, and should set the stage for a good debate. While some
b) Time Warner and EMI, bowing to pressure from the European Commission, agreed to
drop their joint venture plans after the European Commission raised concerns about the
c) Some students will argue that the European Commission had no right to become
CLOSING CASE: NAFTA and Mexican Trucking
The closing case explores the implications of regional economic integration for various
groups. Under the North American Free Trade Agreement (NAFTA), Mexican truckers
were to have been allowed to drive their trucks directly into the United States and avoid
the costly and time consuming border unloading and loading that took place prior to the
agreement. However, fearing job losses in the industry, the U.S. Teamsters Union
rigorously opposed the legislation. Although the group ultimately lost its fight, the
United States still did not give Mexican truckers freedom to deliver their goods,
prompting Mexico to institute retaliatory measures affecting $2.4 billion of goods