1. Regional Economic Integration8
Regional Economic Integration
Welcome to Chapter 8, Regional Economic Integration.
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2. Chapter Objectives
Define regional economic integration and identify its five levels.
Discuss the benefits and drawbacks of regional economic integration.
Describe regional integration in Europe and its pattern of enlargement.
Discuss regional integration in the Americas and analyze its future prospects.
Characterize regional integration in Asia and how it differs from integration elsewhere.
Describe integration in the Middle East and Africa and explain the slow progress.
In this chapter, you will explore regional economic integration.
You will also:
Learn about the five different levels of integration.
Understand the potential benefits and drawbacks of regional integration.
And examine the progress of various efforts at integration around the world.
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3. Nestlé Largest food company in the world
Food is integral to cultural fabric
Must monitor regional integration
Nestlé is the world’s largest food company, earning only 2 percent of its sales at home in Switzerland.
Food and dietary tradition is integral to every culture’s social fabric. So, as Nestlé expands abroad, it monitors changing consumer attitudes resulting from greater regional integration.
When Nestlé and Coca-Cola announced a joint venture to develop coffee and tea drinks, they first had to show the European Union (EU) Commission that they would not stifle the competition.
And to abide by EU environmental protection laws, Nestlé works with Europe’s governments to develop and manage waste-recovery programs.
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4. Regional Economic Integration
Process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital
The goal of regional economic integration is higher living standards through increased cross-border trade and investment.
Greater specialization is a byproduct of integration that increases productivity, adds to product choices, and lowers prices.
A regional trading bloc is a group of nations in a geographic region that are undertaking economic integration.
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5. Levels of Regional Integration
Remove barriers to trade among members, but each country has own policies for nonmembers
Free-Trade Area
Remove barriers to trade among members, and set a common trade policy against nonmembers
Customs Union
Remove barriers to trade, labor, and capital among members, and set a common trade policy against nonmembers
Common Market
Nations can pursue five different levels of regional integration, with each one incorporating the properties of the preceding one.
A free trade area removes all barriers to trade between members with each nation determining its own barriers against nonmembers. Members may also establish a process for resolving trade disputes.
A customs union adds the requirement that all members set a common trade policy against nonmembers. Members may also negotiate as a group with organizations like the World Trade Organization.
A common market adds the free movement of labor and capital and sets a common trade policy against nonmembers.
An economic union requires members to harmonize their tax, monetary, and fiscal policies, create a common currency, and concede some sovereignty to the larger organization.
A political union requires members to coordinate their economic and political policies against nonmembers, with a few exceptions.
Remove barriers to trade, labor, and capital,
set a common trade policy against nonmembers, and coordinate members’ economic policies
Economic Union
Coordinate aspects of members’ economic and political systems
Political Union
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6. Benefits of Integration
Trade creation
Greater consensus
Political cooperation
Creates jobs
Regional integration offers several benefits.
Integration should create new trade opportunities and deliver a wider selection of goods and services at lower cost.
Building consensus may be easier among a small group of countries than it is in larger groups, such as the World Trade Organization.
Political cooperation may reduce the potential for military conflict among members.
And new employment opportunities can arise when people are allowed to relocate internationally for work or higher wages.
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7. Drawbacks of Integration
Trade diversion
Shifting employment
Less sovereignty
But regional integration also has potential drawbacks.
Trade may be diverted away from nonmember nations and toward members because of the lower tariffs levied on goods from members. Unfortunately, this can reduce trade with a more efficient nonmember nation and boost trade with a less efficient member.
In the absence of trade barriers, productivity decides where a good or service is produced. So, a member nation’s unskilled, low-wage jobs may move to a relatively lower-wage member’s economy.
And integration always means surrendering some degree of national sovereignty, with political union demanding the most from member nations.
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8. Discussion Question
What are several potential benefits of regional economic integration and several potential drawbacks of integration?
What are several potential benefits of regional economic integration and several potential drawbacks of integration?
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9. Answer to Discussion Question
Potential benefits of regional economic integration include trade creation, greater consensus, political cooperation, and job creation.
Potential drawbacks include trade diversion, shifting employment, and less sovereignty.
Answer:
Potential benefits of regional economic integration include trade creation, greater consensus, political cooperation, and job creation. Potential drawbacks include trade diversion, shifting employment, and less sovereignty.
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10. European Union Pop: 500 million GDP: $15 trillion Members: 27
Economic Union
Began: 1951
European integration began shortly after the Second World War when a small group of countries began cooperating in a few key industries.
Today, the 27-member European Union has a population of 500 million people and a gross domestic product of $15 trillion.
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11. European Union: Early Years
European Coal and Steel Community (1951): Removed trade barriers in coal, iron, and steel
European Economic Community (1957): Outlined and took initial steps toward common market
European Community (1967): Expanded to other industries including atomic energy
Single European Act (1987): Harmonized regulations, strived for lower barriers
Maastricht Treaty (1991): Set single currency targets, outlined eventual political union
European Union (1994): Final name change and reduced barriers further
In 1951, six countries created the European Coal and Steel Community to remove barriers to trade in coal, iron, and steel.
In 1957, those same countries expanded their cooperation and created a common market, called the European Economic Community.
The Community broadened its scope in 1967 to include additional industries and changed its name to the European Community.
The Single European ACT of 1987 removed remaining trade barriers, increased harmonization of members’ policies, and enhanced the competitiveness of EU companies.
The Maastricht Treaty of 1991 created a common currency, set monetary and fiscal targets for countries in the monetary union, and proposed an eventual political union.
In 1994, the group changed its name one final time to the European Union (EU).
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12. Culture Matters: Czech List
Don’t rush familiarity
Build relationships
Find a Czech partner
Hire local professionals
Establish who’s in charge
When doing business in the Czech Republic:
Remain formal in your relations unless your colleagues encourage informality.
Smooth the way for business by building close relationships and establishing solid references.
Find a local partner to help you with the inevitable difficulties of cross-cultural business.
Hire local professionals who understand U.S. and local business law.
And establish who is in charge so that people know who to turn to when needed.
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13. European Union Enlargement
Stable institutions of human rights, democracy, and law
Functioning and capable
market economy
Assume economic, monetary, and political obligations
Adopt rules of the Community, Court of Justice, and Treaties
Future EU members must meet the four Copenhagen Criteria   
Candidates for membership in the European Union include Croatia, Turkey, and the Former Yugoslav Republic of Macedonia.
Before these countries can become members they must satisfy what are called the Copenhagen Criteria.
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14. Five Key EU Institutions
European Parliament
Court of Justice
Court of Auditors
Five institutions play key roles in monitoring and enforcing integration in the European Union.
The European Parliament debates and amends legislation proposed by the European Commission.
The Council of the EU is the legislative body that votes proposed legislation into law or rejects it with a no vote.
The European Commission is the executive body that can draft legislation, manages and implements policy, and monitors compliance with EU law.
The Court of Justice is the EU court of appeals, which hears cases that member nations bring before it.
And the Court of Auditors audits the EU accounts and implements its budget.
Council of the European Union
European Commission
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15. European Free Trade Association
Iceland, Liechtenstein, Norway, Switzerland
Feared lost sovereignty
Feared destructive rivalry
Desired free-trade gains
Cooperates with EU
Some nations wanted the benefits of a free trade area but did not desire a full common market.
In 1960, these nations formed the European Free Trade Association to focus on trade in industrial goods.
Today, the European Free Trade Association includes Iceland, Liechtenstein, Norway, and Switzerland.
These nations and the European Union work together on the movement of goods, people, services, and capital, and cooperate on the environment, social policy, and education.
Pop: 12.5 million
GDP: $707 billion
Members: 4
Free-Trade Area
Began: 1960
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16. Discussion Question
All future members of the European Union must meet what are called the __________ criteria, which demonstrate a country’s readiness for membership.
a. European
b. Maastricht
c. Copenhagen
All future members of the European Union must meet what are called the __________ criteria, which demonstrate a country’s readiness for membership.
a. European
b. Maastricht
c. Copenhagen
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17. Answer to Discussion Question
All future members of the European Union must meet what are called the __________ criteria, which demonstrate a country’s readiness for membership.
a. European
b. Maastricht
c. Copenhagen
The correct answer is c. Copenhagen
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18. North American Free Trade Agreement
Pop: 445 million
GDP: $16 trillion
Members: 3
Free-Trade Area
Began: 1994
The North American Free Trade Agreement took effect in January 1994 and seeks to eliminate trade barriers on most goods originating from North America.
The agreement calls for liberalized rules on government procurement practices, the granting of subsidies, and the imposition of countervailing duties.
Other provisions deal with trade in services, intellectual property rights, and standards of health, safety, and the environment.
Products may qualify for tariff-free status if they meet regional content requirements or if sufficient value was added to them within the NAFTA region.
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19. NAFTA Effects Three-nation trade flows Jobs and wages “Fast track”
Authority
Since NAFTA began, trade among Canada, Mexico, and the United States has grown from $297 billion in 1993 to around $1.6 trillion.
Mexico’s exports to the United States rose to around $230 billion, and U.S. exports to Mexico grew to more than $163 billion.
Canada’s exports to the United States more than doubled to $277 billion, and U.S. exports to Canada grew to $248 billion.
Canada’s exports to Mexico nearly tripled to $2.7 billion.
But some groups question whether NAFTA has had positive effects on employment and wages.
The chances of NAFTA’s future expansion would improve if U.S. presidents were to receive “trade promotion authority.”
If enlargement of NAFTA does proceed, some will raise the larger issue of whether a single currency is helpful.
Future
expansion?
Single
currency?
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20. Central American Free Trade Agreement
Established in 2006 to
include 7 countries
U.S., Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua, & Dominican Rep.
Combined value of goods traded is around $32 billion
Should create regional investment, peace, and stability
Members of the Central American Free Trade Agreement include the United States, Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua, and the Dominican Republic.
Central American nations have cut average tariffs from 45 percent in 1985 to around 7 percent today.
The value of goods traded between the United States and the six other countries is around $32 billion.
The agreement means greater competition and investment, better protection of intellectual property rights, and enhanced regional peace and stability.
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21. CAFTA-DR Effects? More trade and better-paying jobs
Poorer farms and small businesses OR
The Central American Free Trade Agreement has supporters and detractors.
Supporters say that the agreement encourages trade efficiency and promotes investment that brings high-paying jobs to the poorer member nations.
Detractors fear that the agreement benefits large U.S. companies and damages farmers and small businesses across Central America.
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22. Andean Community Internal tariff reduction Common external tariff
Common transport policies
Ideological conflict
Pop: 97 million
GDP: $220 billion
Members: 4
Customs Union
Began: 1969
The Andean Community formed in 1969 and today includes Bolivia, Colombia, Ecuador, and Peru.
It grew from the ashes of an earlier failed attempt at integration called the Latin American Free Trade Association.
Objectives include internal tariff reduction, a common external tariff, and common policies in transportation and other key industries.
The group has yet to create a complete customs union, in part, because each member extends its own exceptions to nonmembers.
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23. Southern Common Market
Also called MERCOSUR
Very successful early
Impaired by ideology and economic hardships
Future “SAFTA”?
Pop: 266 million
GDP: $2.8 trillion
Members: 5
Customs Union
Began: 1988
Members of the Southern Common Market include Argentina, Brazil, Paraguay, Uruguay, and Venezuela.
Today, the group functions as a customs union and is busy liberalizing trade and investment among its members.
It is emerging as the most powerful economic group throughout Latin America.
One day, the group may expand to incorporate all of South America into a single, massive free trade agreement.
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24. Central America / Caribbean
Peace driving tentative optimism
Members offer each other little
Pop: 33 million
GDP: $120 billion
Members: 5
+/- Common Market
Began: 1961
Pop: 6 million
GDP: $30 billion
Members: 15
Common Market
Began: 1973
Nations in Central America and the Caribbean are pursuing two modest efforts at economic integration.
The Central American Common Market involves Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.
For years, progress was constrained by war.
The group has not yet formed a customs union, but officials say the goal is greater integration, closer political ties, and a single currency.
The Caribbean Community and Common Market formed in 1973 and has 15 members.
Members are trying to establish a single market, but are hampered by the fact that members trade more with nonmembers than with each other.
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25. Free Trade Area of the Americas
Would be the largest free- trade area on the planet
From northern tip of Alaska to southern tip of Tierra del Fuego in South America
Could mean enormous cost savings for business
Protests by many groups is slowing progress
Pop: 830 million
GDP: $ trillions
Members: 34
Free-Trade Area
A future Free Trade Area of the Americas would stretch from the northern tip of Alaska to the southern coast of Tierra del Fuego in South America.
The free trade area would include 34 nations and a population of at least 830 million consumers.
But the effort continues to face opposition from labor organizations, environmentalists, and others opposed to globalization.
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26. Discussion Question
What is the objective of the Free Trade Area of the Americas and what are its prospects for success?
What is the objective of the Free Trade Area of the Americas and what are its prospects for success?
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27. Answer to Discussion Question
The Free Trade Area of the Americas would be a trading bloc stretching from Alaska to Tierra del Fuego in South America. It would likely supersede all existing trading blocs in North, Central, and South America.
It faces opposition from labor organizations, environmentalists, and others opposed to globalization.
Answer:
The Free Trade Area of the Americas would be a trading bloc stretching from Alaska to Tierra del Fuego in South America. It would likely supersede all existing trading blocs in North, Central, and South America. It faces opposition from labor organizations, environmentalists, and others opposed to globalization.
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28. Association of Southeast Asian Nations
GOALS:
Promote economic, social, and cultural development
Safeguard economic and political stability
Serve as a forum to resolve disputes
The Association of Southeast Asian Nations represents a market of 560 million consumers and a gross domestic product of $1.1 trillion.
Its stated objectives are to promote economic, social, and cultural development; safeguard economic and political stability; and serve as a forum to resolve disputes fairly and peacefully.
Adding members Cambodia, Laos, and Myanmar was an effort to counter China’s resources of cheap labor and abundant raw materials.
Pop: 560 million
GDP: $1.1 trillion
Members: 10
General Cooperation
Began: 1967
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29. Asia-Pacific Economic Cooperation
Group of 21 nations ringing the Pacific Ocean that accounts for over half of world trade
1. Not designed as a free-trade bloc
2. Strengthen multilateral trade system
Altogether, members of the organization for Asia-Pacific Economic Cooperation account for more than half of world trade.
Yet, the group is not designed as a free trade bloc.
The group tries to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade and investment procedures.
It hopes for completely free trade and investment throughout the region by 2020.
3. Liberalize trade and investment rules
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30. Closer Economic Relations Agreement
Key Points:
Australia and New Zealand
Eliminated trade barriers 5 years early
Recognize each other’s qualified professionals
Australia and New Zealand created the Closer Economic Relations Agreement in 1983 to advance free trade and further integrate their economies.
They eliminated all tariffs and quotas in 1990, five years ahead of schedule.
Each nation allows goods and most services sold in the other nation to be sold within its borders.
Each country also recognizes the professional certifications of people allowed to practice in the other country.
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31. Middle East Gulf Cooperation Council Six Arab nations (1980)
Economic and political aims
Travel freely without visas
Cooperation on property rights
Six countries in the Middle East banded together to cooperate with increasingly powerful trading blocs in Europe.
The Gulf Cooperation Council members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
The group allows citizens to travel freely among member nations; and it allows citizens to own businesses and other property in other member nations without local partners.
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32. Africa African Union Economic Community of West African States
Some progress on migration, roads, and telecoms
Impaired by instability, poverty, and bad policies
African Union
Joined 53 nations in 2002
Want united and strong Africa
Seek peace, security, stability
The group of 15 nations called the Economic Community of West African States intends to form an eventual common market and monetary union.
It achieved some early progress but suffers from political instability, poor governance, weak national economies, poor infrastructure, and poor economic policies.
Another group of 53 nations joined forces in 2002 to create the African Union.
It aims to eliminate the vestiges of colonialism and apartheid, promote unity and solidarity, intensify development cooperation, safeguard members’ sovereignty, and promote international cooperation within the United Nations.
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33. Discussion Question
a. Pacific Cooperation Council
b. Asia-Pacific Economic Cooperation
c. Association of Southeast Asian Nations
What is the name of the group of 21 nations that ring the Pacific Ocean whose stated aims do not include formation of a formal free trade bloc?
What is the name of the group of 21 nations that ring the Pacific Ocean whose stated aims do not include formation of a formal free trade bloc?
a. Pacific Cooperation Council
b. Asia-Pacific Economic Cooperation
c. Association of Southeast Asian Nations
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34. Answer to Discussion Question
a. Pacific Cooperation Council
b. Asia-Pacific Economic Cooperation
c. Association of Southeast Asian Nations
What is the name of the group of 21 nations that ring the Pacific Ocean whose stated aims do not include formation of a formal free trade bloc?
The correct answer is b. Asia-Pacific Economic Cooperation
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35. Copyright © 2014 Pearson Education, Inc.
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