Regional Economic Integration

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• Regional Economic Integration

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Regional Economic Integration

• Levels of economic integration among nations
• Economic and political arguments for/against
• History/scope, scope and future prospects for
• EU
• NAFTA
• MERCOSUR, and
• APEC
• Implications for business

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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

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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
• eliminates intra-market factor of production
  movements
• Economic Union (EU) CM
• full integration of member economies (common
  policy)
• Political Union EU
• political and economic integration

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Reasons for Regional Integration

• Economic enhancement of the member states
• Free trade
• Fee FDI
• Political Reasons
• Linkages of economies create interdependencies
  that reduce the potential for violent conflict
• Grouping gives countries more political clout
  world-wide
• Impediments
• Painful adjustments in certain segments of
  economy
• Threat to national sovereignty

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European Union

• 25 member countries 450mm people GDP gt 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

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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
• 2003 5th enlargement Poland, Hungary, Czech
  Republic, Lithuania, Estonia, Latvia, Slovenia,
  Cyprus, Malta, Slovakia

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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 (since 1/1/02)
• Sweden, Denmark, Britain opted out
• 10 new countries have to qualify

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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

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Costs of the Euro ()

• ECB has monetary policy control not nations
• Sets interest rates, monetary policy (Frankfurt,
  Ger.)
• Is independent instructs national central banks
• EU is not an optimal currency area
• Few similarities in structure of economic
  activity (e.g., Finland vs Portugal)
• Interest rates too high in depressed regions or
  too low for economically booming regions
• May need fiscal transfers from prosperous to
  depressed regions
• Economic and political issues may conflict

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Early Experience of the Euro ()

• Volatile trading history
• 1999 -- 1 US1.17
• 10/2000 -- 1 US0.83
• 10/2004 -- 1 US1.24
• EU enlargement will complicate Euro adoption new
  members with weaker economies
• Major members ignoring monetary union rules to
  retain control over their fiscal and monetary
  policies

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Enlargement of the EU

• More member disparity, more difficult governance
• Norway opted out of the EU (1994)
• Membership applications pending Turkey,
  Bulgaria, Rumania, Croatia
• Turkish application controversial (economic
  development, religion, labor movement problems)
• Other non-European countries will seek membership
• US and Asian countries fear that EU will become
  protectionist (fortress Europe)

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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 Free Trade Agreement (CAFTA)
  Costa Rica, Dominican Republic, El Salvador,
  Guatemala, Honduras, Nicaragua

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The Americas
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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

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NAFTA

• USA, Canada, Mexico (FTA-1988)
• USA-Canada is worlds largest trading
  relationship
• USA is Mexicos largest trading partner
• Mexico, USAs third largest trading partner
• Trade opening process through tariff elimination

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NAFTA - Key provisions

• General (effective 1/1/94)
• Tariffs of all sectors reduced 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

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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