REGIONAL ECONOMIC INTEGRATION Chapter 9 Bus 301 – International Business Section 3 Unit Lecturer: Ms Reem Q.

Regional Economic Integration Agreements among countries in a geographical region to reduce and ultimately remove, tariff and nontariff barriers to the free flow of goods, services and factors of production between each other ( capital, labor etc.)

World Trade Organization (WTO) ◦ Members are required to notify the WTO of any regional trade agreements in which they participate ◦ 159 member states are involved ◦ Basically, WTO deals with the rules of trade between nations.

Relationships between various Asian Regional Organizations South Asian Association for Regional Cooperation (SAARC) Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Association of Southeast Asian Nations (ASEAN) Mekong – Ganga Cooperation (MGC) Cooperation Council for the Arab States of the Gulf (GCC) Economic Cooperation Organization (ECO) Cooperation Council of Turkic-Speaking States (TC) Shanghai Cooperation Organization (SOC)

Member states [ Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

Regional Organization of Bangladesh Common wealth Asia Pacific Trade Agreement World Trade Organization Organization of Islamic Cooperation Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation Developing 8 Countries United Nations

Trade Bloc Around the World NAFTA – North American Free Trade Agreement ◦ Canada, America & Mexico MERCOSUR – ◦ Argentina, Brazil, Paraguay, Uruguay and Venezuela ASEAN – Association of South East Asian Nations ◦ Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam

Levels OF Economic Integration  Least Integration ◦ Free Trade Area (FTA) = Removal of Tariffs among members ◦ Customs Union = FTA + Common External Tariffs  The EU began as a customs union  Imposing a common tariff of 5 – 20% on products imported from outside ◦ Common Market = Customs Union + Free Flow of Other Factors of Production (Capital, Labour as there is no restrictions on immigration)  EU functioned as a common market for years  To establish a common market a degree of harmony and cooperation is needed on fiscal, monetary and employment policies ◦ Economic Union = Common Market + Harmonization of Economic Policies  Requires a common currency, monetary and fiscal policies  Example: The EU, although an imperfect one as not all EU memebrs have adopted the euro ◦ Political Union = Economic Union + Political Integration  The EU on the way to become a political union  There is a central political body to coordinate bureaucracy accountable to the citizens of member nations  The Council of Ministers of EU is composed of governmental ministers from each EU member.  Most Integration

Economic Case for Integration In a world of many nations and many political ideologies its very difficult to get all the countries to agree to a common set of rules Regional economic integration allows countries to benefit from free flow of trade and investment between countries which wouldn’t have been possible under global agreements such as the WTO It is easier to manage and coordinate establishments of free trade and investment among a limited number of nearby countries rather than with the whole world. The greater the number of countries involved the more different perspectives and opinions must be reconciled thus making it harder to reach an agreement as coordination and policy harmonization are the main objective

Political Case for Integration By forming alliances with neighboring countries and increasingly dependent on each other create incentives for political cooperation and also reduces conflicts By grouping the economies of several countries, it enhances their bargaining power against other countries in the world and their political strength.

Limitations of Regional Integration Due to the establishment of trade blocs, certain groups may lose ◦ Due to the formation of NAFTA, low skilled, low cost labors in the textile industry in Canada and US have lost their jobs as production facilities moved to Mexico Questions the national sovereignty of a country ◦ Mexico excluded its oil industry from being under the liberalization of foreign investment regulations under NAFTA. ◦ Countries have to give up some degree of control over key issues such as monetary policies and fiscal policies and trade which The EU is now facing

The European Union

The 4 Main Institutions of EU European Commission: Responsible for proposing EU legislation, implementation and monitoring compliance with EU laws by member states. 27 commissioners, one appointed from each member state for five-year renewable terms. European Council: Represents the interest of member states. The ultimate controlling authority within the EU since draft legislation from the commission can become EU law only if the council agrees. European Parliament: 732 members, is directly elected by the populations of the member states. Debates legislation proposed by the commission and forwarded to it by the council. It has the right to vote on the appointment of commissioners as well as veto some laws. Court of Justice: comprised of one judge from each country, is the supreme appeals court for EU law.

The EURO Maastricht treaty: ◦ European common currency adopted 01/01/1999 ◦ Common foreign and defense policy ◦ Common citizenship ◦ EU parliament € is now being used by 18 countries (x-Sweden, Denmark, Britain)

Economic Purpose of The Euro A high degree of price stability A sound fiscal situation Stable exchange rates Converged long term interest rates

Benefits of Euro Lower transaction costs for individuals/business come from lower foreign exchange and hedging cost. Prices comparable across the continent; increased competition Rationalization of production across Europe to reduce cost Increase range of investment options available to both individuals and institutions

Costs of Euro Loss of monetary policy control at national level  ECB sets interest rates and determines monetary policy (Frankfurt, Germany)  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

NAFTA General (effective 01/01/1994) ◦ 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

Pros & Cons of NAFTA PROS Enlarged and productive regional base Labor-intensive industries move to Mexico Mexico gets investment and employment Increased Mexican income to buy US/Canada goods Demand for goods increases jobs Consumers get lower prices CONS Loss of jobs to Mexico Mexican firms have to compete against efficient US/Canada firms Mexican firms become more efficient Environmental degradation Loss of national sovereignty

Implications for Businesses Pros ◦ Less protectionism; higher economic growth ◦ Lower cost of doing business (fewer borders) Cons ◦ 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