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

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

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

4. 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

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Levels of Economic Integration Free Trade Area (FTA): –removes tariffs among members –members retain own trade policies toward others Customs Union (CU): FTA and … –common trade policy toward others Common Market (CM): CU and … –elimination of intra-market factor of production movements Economic Union (EU): CM and … –full integration of member economies (common policy) Political Union: EU and … –political integration Slide 7-2

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Regional Integration Economic enhancement of the member states –Free trade –Fee 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

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. European Union 15 member countries; 350mm people; GDP > US 1951 6 members of coal and steel community –France, Germany (W.), Italy, Belgium, Netherlands, Luxembourg 1957 Treaty of Rome: European Community –Common market –Elimination of internal trade barriers –Common external tariff –Free movement of factors of production 1973 1st enlargement: Britain, Ireland, Denmark Slide 7-4

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. European Union 1981 2nd enlargement: Greece 1983 3rd enlargement: Portugal, Spain 1992 single European act Remove all frontier controls Principle of mutual recognition to product standards Open public procurement to non-national suppliers Lift barriers of competition to banks and insurance Remove restrictions on foreign exchange transactions Abolish restriction on cabotage (trucking) 1994 Maastricht treaty: European Union 1996 4th enlargement: Austria, Finland, Sweden 2002 5th enlargement: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia conclude accession agreements. Slide 7-5

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Euro (€) Maastricht treaty: –European common currency adopted 1/1/99 –Common foreign and defense policy –Common citizenship –EU parliament with “teeth” € now used by 12 countries (x-Sweden, Denmark, Britain) Currency was issued 1/1/2002 and 12 national currencies were withdrawn by April 2002 Slide 7-6

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 Slide 7-7

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Costs of the Euro (€) Loss of monetary policy control at national level ECB sets interest rates and determines monetary policy (Frankfurt, Ger.) 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 against political ones Slide 7-8

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Enlargement of the EU Enlargement means more disparity and more difficult governance and control Norway opted out of the EU (1994) The EU plans to conclude accession negotiations by the end of the 2002 with: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia. US and Asian countries fear that EU will become protectionist (“fortress Europe”) Slide 7-9

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Americas North American Free Trade Agreement (NAFTA) –USA, Mexico, Canada The Andean Pact –Bolivia, Chile, Ecuador, Colombia, Peru MERCOSUR (FTA) –Brazil, Argentina, Paraguay, Uruguay Central American Common Market (CARICOM) –Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua Slide 7-10

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 –USA, Japan, China + 15 Pacific nations Slide 7-11

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. NAFTA USA, Canada, Mexico (FTA-1988) –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

16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. NAFTA - Key provisions General (effective 1/1/94) –Tariffs reduced across all sectors by 99% over 10 yrs –FDI unrestricted (x-oil and railways in Mexico, Culture in Canada, airlines-communications US) –No free movement of labor (x-white collar easement) –Protection of intellectual property rights –Cross-border flow of services unrestricted –Application of environmental standards –Two commissions have the right to impose penalties on issues of health/safety, child labor, minimum wages Slide 7-13

17. 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 –Across-trading-block rivalry can increase barriers –Improvement of competitiveness of many local firm within the blocks Slide 7-14