McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Regional Economic Integration

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Issues different levels of economic integration among nations political and economic arguments for and against regional integration the world’s most important regional economic agreements implications for business from regional economic integration Slide 7-1

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Regional Economic Integration Agreements among geographically proximate countries to reduce/remove tariff and non-tariff barriers to free flow of –Goods –Services –Factors of production Slide 7-1

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Levels of Economic Integration

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Free Trade Area (FTA): A c B -Common reduction of trade barriers between member countries -Countries negotiate individually with non- members A B C D

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Customs Union (CU): FTA and … –common trade policy toward others A B C

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Common Market (CM): CU and … free movement of factors of production

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Economic Union (EU): CM and … –full integration of member economies (common policy)

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Political Union –EU and … political integration Slide 7-2

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Regional Integration Economic enhancement of the member states –Free trade –Free FDI Political Reasons –Linked economies create interdependencies that reduce the potential for armed conflict –Grouping gives countries more political clout world-wide Impediments –Painful adjustments in certain segments of economy –Threat to national sovereignty Slide 7-3

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. III - THE CASE FOR/AGAINST REGIONAL INTEGRATION A - TRADE CREATION Occurs when high-cost domestic producers are replaced by low- cost external suppliers within the free trade area. B - TRADE DIVERSION Occurs when lower-cost external suppliers are replaced by higher- cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of trade exceeds the amount it diverts. In theory, GATT and WTO rules should ensure that a free trade agreement does not result in trade diversion.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. European Union 27 Member Countries 503 million people Eurozone—17 Countries

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The European Union is a unique economic and political association…… It has delivered half a century of peace, stability, and prosperity, helped raise living standards, launched a single European currency, and is progressively building a single Europe-wide market in which people, goods, services, and capital move among Member States as freely as within one country.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. NAFTA USA, Canada, Mexico USA-Canada is world’s largest trading relationship –USA is Mexico’s largest trading partner –Mexico, USA’s third largest trading partner Continuation of opening process through elimination of tariffs Slide 7-12

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Arguments against NAFTA: - mass exodus of jobs from the US and Canada (Perot’s “Sucking Sound”) - Expose Mexican firms to highly efficient Canadian and American firms. - Painful Economic Restructuring and Unemployment in Mexico - Loss of National Sovereignty

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The ANDEAN PACT Bolivia, Ecuador, Colombia, Peru + (Chile) MERCOSUR Brazil, Argentina, Paraguay, Uruguay, Venezuela UNASUR=Mercosur+Andean Pact Union of South American Nations

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Central American Common Market : CACM Guatemala, Honduras, Nicaragua, and El Salvador + (Panama) Carribean Community and Common Market : Caricom –Antigua and Barbuda, Belize, Grenada, Montserrat, St. Vincent and the Grenadines, Turks and Caicos Islands, The Bahamas, British Virgin Islands,Guyana, St. Kitts and Nevis, Suriname, Barbados, Dominica, Jamaica, Saint Lucia, Trinidad and Tobago.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. FTAA: Free Trade Area of the Americas ?? Enlargement of NAFTA or the creation of two major trading blocks in the Americas SAFTA and NAFTA?

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Implications for Business Opportunities –Less protectionism; higher economic growth –Lower cost of doing business (fewer borders) Threats –Cultural differences persist –Increased price competition within blocks –Improvement of competitiveness of many local firms within the blocks –Across-trading-block rivalry can increase barriers Slide 7-14

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Elsewhere Association of Southeast Asian Nations (ASEAN) –Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam Asia Pacific Economic Cooperation (APEC) –USA, Japan, China + 15 Pacific nations Slide 7-11

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. BBC guide to trading blocs