The European Union and Other Regional Trade Areas Chapter 14 © 2002 West/Thomson Learning

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

Impediments to Regional Integration Painful adjustments in certain segments of economy -- some “losers” low skilled, low tech jobs lost (US textiles) Threat to national sovereignty -- countries give up control of some key policies monetary policy, tax policy and trade policy Debate: Trade creation or trade diversion?

Economic Case for Regional Integration Stimulates economic growth in countries through FDI and free trade Countries specialize in those goods and services efficiently produced. Additional gains from free trade beyond international agreements such as GATT and WTO. 8-2

Political Case for Economic Integration Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation. Together, the countries have the economic clout to enhance trade with other countries or trading blocs. 8-3

Levels of Economic Integration Free Trade Area (FTA): removes tariffs among members members retain own trade policies toward others Customs Union (CU): FTA+ common trade policy toward others Common Market (CM): CU+ elimination of intra-market factor of production movements Economic Union (EU): CM+ full integration of member economies (common policy) Political Union: US political and economic integration

European Union European Coal and Steel Community (1952) Treaty of Rome (1957) created European Community Single European Act (1987) set 1992 deadline of achieving single market Maastricht Treaty (1991) European common currency adopted 1/1/99 Common foreign and defense policy Common citizenship EU parliament with “teeth” created European Union and set path for monetary union

European Union Treaty of Amsterdam: 1999 (incorporated the principle of freedom of movement from the Schengen Agreement) Treaty of Nice: 2000, voting rights in preparation for enlargement – target date of 2004

Euro Timetable January 1, 1999: Euro single currency is born 1999-2002: National currencies continue to exist and work in parallel; Euro as “virtual currency” 2002: switch to single currency; Euro in circulation

Benefits of the Euro Lower transaction costs for individuals / business Prices comparable across the continent; increased competition Rationalization of production across Europe to reduce cost Pan-European capital market Increase range of investment options available to both individuals and institutions

Costs of the Euro Loss of monetary policy control at national level ECB sets interest rates and determines monetary policy ECB is not under political control; issues instructions to national central banks EU is not an optimal currency area Not enough similarities in the underlying structure of economic activity (e.g., Finland vs Portugal) Interest rates may be too high in depressed regions or too low for economically booming regions May need to deal with this through fiscal transfers from prosperous to depressed regions Economic issues may come in conflict with political issues

Monetary Union Criteria Budget deficit no greater than 3% of GDP Public debt no greater than 60% GDP Price stability (inflation controlled) Long term interest rates within 2% of the best 3 countries Exchange rate stability

Members of the European Union Austria* Belgium* Denmark Finland* France* Germany* Greece* Ireland* Italy* Luxembourg* The Netherlands* Portugal* Spain* Sweden The United Kingdom Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia* Bulgaria Romania * Countries that have adopted the Euro as the common currency of the EU

Map

785 directly elected members EU Governance European Council European Commission 27 Commissioners appointed by members for 4 year terms Heads of State and Commission President Proposing, implementing, monitoring legislation. Resolves policy issues Sets policy direction. Council of Ministers 1 representative from each member Ultimate controlling authority. No EU laws w/o approval. European Parliament Court of Justice 785 directly elected members Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners. 1 judge from each country Hears appeals of EU Laws.

Law-making within the EU Regulations vs. directives Directive: Binding as to result, but left to members to choose form and methods Regulation: Binding in entirety, applies directly to all members Role of Council: Decides to adopt regulation or directive Commission: Proposes action to Commission Parliament: may amend or reject measures on single market, consumer protection, environment, health, education, culture Court of Justice: interprets and applies EU law; reviews member actions for compliance

Rewe-Zentral AG (Cassis de Dijon) (ECJ 1979) Facts: German law limits importation of spirits with less than 32% alcohol Germany defends law on basis of public health Issue: Does law amount to quantitative restriction on imports in violation of Art. 30 & 37 of the Treaty of Rome? Decision: Yes, Reasons: Germany’s arguments were not for “purpose in general interest sufficient to take precedence over the principle of free movement of goods

Commission of EC v. Fed. Rep. of Germany (ECJ 1987) Facts: German law prohibits additives in beer EC Commission claims law violates Arts. 30 and 36 Issue: Does law violate Treaty’s commitment to free movement of goods? Decision: Yes Reasons: law is not justified on the basis of health or protection of health (Art. 36) and violates Art. 30

Imperial Tobacco v. European Parliament (ECJ 2000) Facts: referral for preliminary ruling on validity of Directive 98/43/EC restricting tobacco advertising Issue: Does Directive have sufficient legal basis, and does it infringe right of free expression? Decision: Directive annulled Directive Reasons: Similar issue decided in Germany v. European Parliament Inadequate legal basis for Directive under Arts. 100a, 57(2), and 66 Because Directive annulled, no need to give preliminary ruling

Cotonou Agreement 2000 EU, African, Caribbean and Pacific countries EU had GSP program since 1971 and in effect until 2007 2007 new “partnerships” will begin

Andean PACT Map

ANCOM: Andean Pact Bolivia, Colombia, Ecuador, Peru; Chile is Associate Member Cartagana Agreement, 1969: One of oldest still in existence Population: 120 mm (14% of hemisphere) GDP: 2005: $745.3 billion (includes Venezuela) Changed from FTA to customs union in 1992

Mercosur Map

The Mercosur Accord 1988: Argentina, Brazil; 1990: Paraguay, Uruguay; 2006: Venezuela Associate Membership Granted to Andean Community Members 1995: Agreed to move toward a full customs union. Population: 220 mm GDP: $1 Trillion Trade doubled in first 3 years

Other Western Hemisphere Associations Central American Common Market CARICOM Free Trade Area of the Americas

ASEAN

Association of Southeast Asian Nations Created in 1967 400 million citizens Economic, political and social cooperation Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, Laos, Myanmar and Cambodia

Asia Pacific Economic Cooperation Founded in 1989 to ‘promote open trade and practical economic cooperation’. ‘Promote a sense of community’. 18 members GDP: $13 trillion (1995) 50% of total world income 40% of global trade

Other Trade Areas African trade areas (AEC, COMESA, SADC) Arab League Gulf Cooperation Council

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 Across-trading-block rivalry can increase barriers Improvement of competitiveness of many local firm within the blocks

Web Sites http://www.europa.eu.int/index.htm http://www.ita.doc.gov