Regional Economic

Integration
Learning Objectives
LO 1 Describe the different levels of regional
economic integration.
LO 2 Understand the economic and political
arguments for regional economic integration.
LO 3 Understand the economic and political
arguments against regional economic
integration.
LO 4 Explain the history, current scope, and
future prospects of the world’s most
important regional economic agreements.
LO 5 Understand the implications for
management practice that are inherent in
regional economic integration agreements.
 Introduction

• Past two decades brought in many regional trade blocs that promote
regional economic integration
• There is some concern that the world is moving toward a situation in
which a number of regional trade blocks compete against each other
• In this scenario, the gains from free trade within blocs could be
offset by a decline in trade between blocs
Levels of
Economic
Integration
 Free trade area
• All barriers to the trade of goods
and services among member
countries are removed, but
members determine their own
Levels of trade policies with regard to
nonmembers
Economic • The European Free Trade
Integration Association (between Norway,
Iceland, Liechtenstein, and
Switzerland)
• The North American Free Trade
Agreement (between the U.S.,
Canada, and Mexico)
 Customs union
• Eliminates trade barriers
between member countries
and adopts a common
Levels of external trade policy
• Most countries that enter a
Economic customs union desire further
Integration integration in the future
• The Andean Community
(between Bolivia, Columbia,
Ecuador, and Peru)
 Common market
• No barriers to trade between
member countries, a common
external trade policy, and the
free movement of the factors of
Levels of production
• Requires significant harmony
Economic among members in fiscal,
Integration monetary, and employment
policies
• Mercosur (between Brazil,
Argentina, Paraguay, and
Uruguay) hopes to achieve this
status
 Economic union
• Involves the free flow of products
and factors of production
between members, the adoption
Levels of of a common external trade
policy, and in addition, a
Economic common currency, harmonization
of the member countries’ tax
Integration rates, and a common monetary
and fiscal policy
• Involves sacrificing a significant
amount of national sovereignty
• The European Union (EU)
 Political union
• Independent states combined
into single union
• Requires that a central
political apparatus coordinate
Levels of economic, social, and foreign
Economic policy for member states
• The EU is headed toward at
Integration least partial political union
• The United States is an
example of even closer
political union
 The Economic Case for Integration
• Regional economic integration is
an attempt to achieve additional
gains from the free flow of trade
and investment between
The Case for countries beyond those
Regional attainable under international
agreements such as the WTO
Integration • Since it is easier to form an
agreement with a few countries
than across all nations, there
has been a push toward regional
economic integration
 The Political Case for Integration
• By linking countries together,
making them more dependent
on each other, and forming a
structure where they regularly
The Case for have to interact, the likelihood
Regional of violent conflict and war will
decrease
Integration • By linking countries together,
they have greater clout and
are politically much stronger
in dealing with other nations
 Impediments to Integration
1. It can be costly - while a
nation as a whole may
The Case for benefit from a regional
Regional free trade agreement,
certain groups may lose
Integration 2. It can result in a loss of
national sovereignty
 Regional economic integration only makes
sense when the amount of trade it creates
The Case exceeds the amount it diverts
• Trade creation occurs when low cost
Against producers within the free trade area
Regional replace high cost domestic producers
• Trade diversion occurs when higher
Integration cost suppliers within the free trade area
replace lower cost external suppliers
 Europe has two trade blocs
Regional • The European Union with 28 members
Economic (Britain has voted to exit)

Integration in • The European Free Trade Association

with 4 members
Europe The European Union is expected
to become a superpower of the
same order as the United States
 Evolution of the European Union
• The European Union (EU) is the result of
• The devastation of two world wars on
Western Europe and the desire for a

Regional lasting peace

• The desire by the European nations to

Economic
hold their own on the world’s political
and economic stage
• The forerunner of the EU was the
Integration in European Coal and Steel Community
(formed in 1951)
Europe • The Treaty of Rome established the
European Economic Community in 1957
• The name was changed to the EU in
1993
Map: Member States of the European Union in 2016

Source: European Union, 1995–2013.

 Political Structure of the European Union
1. The European Commission:
proposes EU legislation,
implements it, and monitors
compliance
Regional 2. The European Council: the ultimate
controlling authority within the EU
Economic 3. The European Parliament: debates
Integration in legislation proposed by the
commission and forwarded to it by
Europe the council
• Treaty of Lisbon increased
power
4. The Court of Justice: the supreme
appeals court for EU law
 The Single European Act
• Committed EC countries to work toward
establishment of a single market by 1992
• Objectives of the act

Regional • Remove all frontier controls between

EC countries

Economic • Apply the principle of mutual

recognition to product standards

Integration in • Institute open procurement to non-

national suppliers

Europe • Lift barriers to competition in retail

banking and insurance
• Remove all restrictions on foreign
exchange transactions between
member countries
• Abolish restrictions on cabotage
 The Establishment of the Euro
• Maastricht Treaty committed EU
members to adopt a single currency,
the euro
Regional • The euro is used by 19 of the 28
member states
Economic • Created the euro zone, the
second largest currency zone in
Integration in the world after that of the U.S.
Dollar
Europe • Countries that participate have
agreed to give up control of their
monetary policy
• Britain, Denmark and Sweden
are still on the sidelines
 Benefits of the Euro
• Handling one currency, rather
than many
• Easier to compare prices across
Regional Europe
Economic • Increased competition
promotes greater efficiencies in
Integration in production
Europe • The pan-European capital
market should further develop
• Range of investment options
open both to individuals and
institutions should increase
 Costs of the Euro
• Membership implies a loss of
control over monetary policy
• The EU is not an optimal
Regional currency area: an area where
similarities in the underlying
Economic structure of economic activities
Integration in make it feasible to adopt a single
currency and use a single
Europe exchange rate as an instrument of
macro-economic policy
• Countries may react
differently to changes in the
euro
 The Euro Experience
• Since its establishment, the
euro has had a volatile trading
Regional history with the U.S. dollar
• Initially, the euro was valued
Economic at $1.17, then fell in value
Integration in relative to the dollar, but
strengthened to an all-time
Europe high of $1.54 in March 2008
• In early 2016, the exchange
rate was €1=$1.11
 Enlargement of the European Union
• Many countries, particularly from
Eastern Europe, have applied for
membership
• Ten countries joined in 2004
Regional expanding the EU to 25 states,
with population of 450 million
Economic people, and a single continental
economy with a GDP of €11 trillion
Integration in • In 2007, Bulgaria and Romania
joined
Europe • Croatia joined in 2013 bringing
membership to 28
 Turkey has also applied for
membership, but it is not clear
whether it will be accepted
 British Exit from the European Union
• Voted to leave on June 23, 2016
• Have two years to negotiate exit with the
EU
• Haven’t been comfortable with loss of
Regional national sovereignty
• Immigration has become a key issue/want
Economic to “take back control” of immigration
• Britain is EU’s second largest economy and
Integration in is seen as a counterweight to Germany
• Britain will likely see significant short- to

Europe medium-term costs based on this decision

• Less likely to attract inward
investment from foreign
multinationals
• Exports to EU may fall
Map: Economic
Integration in
the Americas
Regional Economic Integration in the Americas

The North American Free Trade Agreement

• United States, Canada, and Mexico
• Abolished tariffs on 99% of goods traded
• Removed barriers on the cross-border flow of services
• Protects intellectual property rights
• Removal of most restrictions on FDI among members
• Application of national environmental standards
• Established two commissions to impose fines and remove trade privileges
when environmental standards or legislation involving health and safety,
minimum wages, or child labor are ignored
Regional Economic Integration in the Americas

The Case for NAFTA

• Mexico
• Increased jobs as low cost production moves south and
more rapid economic growth
• The U.S. and Canada
• Access to a large and increasingly prosperous market and
lower prices for consumers from goods produced in Mexico
• U.S. and Canadian firms with production sites in Mexico are
more competitive in world markets
Regional Economic Integration in the Americas

The Case against NAFTA

• Jobs could be lost and wage levels could decline in the U.S.
and Canada
• Mexican workers could emigrate north
• Pollution could increase due to Mexico's more lax standards
• Mexico would lose its sovereignty
Regional Economic Integration in the Americas

NAFTA: The Results

• Studies of NAFTA’s early impact suggest that both advocates
and detractors may have been guilty of exaggeration
• Trade between the three countries increased by 250%
• The members have become more integrated
• Productivity has increased in member nations
• Employment effects have been small
• Mexico and U.S. saw small welfare gains while Canada
suffered a welfare loss
Regional Economic Integration in the Americas

The Andean Community

• Based on the EU model
• The agreement had more or less failed by the mid-1980s
• In the late 1980s, Latin American governments began to adopt free
market economic policies
• In the 1990s, the Andean Pact was relaunched as the Andean
Community, and now operates as a customs union
• In 2003, it signed an agreement with Mercosur to restart negotiations
towards the creation of a free trade area
• Current members include Bolivia, Ecuador, Peru, and Columbia
Regional Economic Integration in the Americas

Mercosur
• Free trade pact (Brazil and Argentina)
• Expanded to include Paraguay and Uruguay in 1990
• Has been successful at reducing trade barriers between
member states
• Critics worry that Mercosur may be diverting trade rather
than creating trade, and local firms are investing in industries
that are not competitive on a worldwide basis
• Venezuela joined in 2006, but is not yet a full member
Regional Economic Integration in the Americas

Central American Common Market, CAFTA, and CARICOM

• Central American Common Market
• Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the
Dominican Republic
• The U.S. joined in 2004 to create the Central American Free Trade
Agreement (CAFTA)
• CARICOM (1973), a customs union between English-speaking Caribbean
countries
• Six members formed the Caribbean Single Market and Economy
(CSME) in 2006 to lower trade barriers and harmonize macro-
economic and monetary policy
 Regional Economic Integration Elsewhere

• There have been various attempts at regional economic

integration throughout Asia and Africa
• The success of these attempts have been limited
• The most significant efforts are the Association of Southeast
Asian Nations and the Asia-Pacific Economic Cooperation
 Regional Economic Integration Elsewhere

Association of Southeast Asian Nations (ASEAN)

• Fosters freer trade between member countries and cooperation in their industrial policies
• Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar,
Laos, and Cambodia
• An ASEAN Free Trade Area (AFTA) (2003) between the six original members of ASEAN
came into full effect to reduce import tariffs among members
• Vietnam, Laos, Myanmar, and Cambodia have all joined
• In 2010, ASEAN signed a free trade agreement with China to remove tariffs on 90% of
all traded goods
Map: ASEAN countries
 Regional Economic Integration Elsewhere

Regional Trade Blocs in Africa

• There are 17 trade blocs on the African continent
• However progress toward the establishment of meaningful trade blocs has been
slow
• Many countries believe that they need to protect their industries from unfair
foreign competition making it difficult to create free trade areas or customs unions
• In 2001, East African Community relaunched bloc
• In 2015, Tripartite Free Trade Area established
 Regional Economic Integration Elsewhere

Other Trade Agreements

• U.S. pursuing Trans Pacific Partnership with 11 other Pacific
Rim countries and Transatlantic Trade and Investment
Partnership (TTIP) with the European Union
 Focus on Managerial Implications

REGIONAL ECONOMIC INTEGRATION THREATS

Opportunities
• Formerly protected markets are now open to exports and
direct investment
• The free movement of goods across borders, the
harmonization of product standards, and the simplification
of tax regimes means that firms can realize potentially
enormous cost economies by centralizing production in
those locations where the mix of factor costs and skills is
optimal
 Focus on Managerial Implications

Threats
• Lower trade and investment barriers could lead to increased
price competition within the EU and NAFTA
• Increased competition within the EU is forcing EU firms
to become more efficient, and stronger global
competitors
• Firms outside the blocs risk being shut out of the single
market by the creation of a “trade fortress”
• Firms may be unable to pursue the strategy of their
choice if the EU intervenes and imposes conditions on
companies proposing mergers and acquisitions
 In this chapter we have:
• Described the different levels of regional economic
integration.
• Understood the economic and political arguments for
regional economic integration.
• Understood the economic and political arguments
Summary against economic integration.
• Explained the history, current scope, and future
prospects of the world’s most important regional
economic agreements.
• Understood the implications for business that are
inherent in regional economic integration agreements.