Regional Economic Integration CHAPTER 9 Regional Economic Integration

Learning Objectives What are the advantages & disadvantages of creating a single market for a business firm? Illustrate with reference to EU or ASEAN? Course overview and current events

Chapter Focus Examine the trend toward regional economic integration. By end 2001, all 136 WTO members reported participation in at least one regional trade agreement. Explore the economic and political debate surrounding integration. Review the progress, worldwide, toward integration. Map the implications for business.

Regional Trade Agreements Notified to GATT and the WTO, 1948-1999 Figure 8.1 1963 1973 1993

Level of Economic Integration Political Union Free Trade Area NAFTA EU 1992 Level of Integration Economic Union Common Market Customs Union Figure 8.2

Economic Integration Free Trade Area All barriers to trade among members removed. Each country can determine own trade policies toward nonmembers. Customs Union Eliminates barriers among members and has a common external trade policy. Economic Union No barriers among members, common external policy, common monetary and fiscal policy, harmonized tax rates and common currency. Political Union Has a coordinating bureaucracy accountable to all citizens.

Case for Regional Integration Economic Allow countries to specialize in products they produce efficiently. Easier to gain agreement than GATT/WTO. Role of FDI is enhanced. Exploit gains from free flow of goods and services and investment. Political Creates incentive for political cooperation. Reduces potential for violent confrontation. Enhanced clout to deal with ‘superpowers’.

Impediments to Integration Although a nation may benefit, groups within a nation may be hurt. Concerns about national sovereignty. Debate: Trade creation. Trade diversion. Global Integration

U.S. Mexican Trade in Textiles, 1993-2000 Figure 8.3

EU Evolution Product of two political factors: Devastation of WWI and WWII and desire for peace. Desire for European nations to hold their own, politically and economically, on the world stage. 1951 - European Coal and Steel Community. 1957- Treaty of Rome establishes the European Community. 1994 - Treaty of Maastricht changes name to the European Union.

European Union GDP

US Top European Trading Partners $ Billions

Hears appeals of EU Laws. EU Governance 1 judge from each country Heads of State and Commission President 630 directly elected members 1 representative from each member 20 Commissioners appointed by members for 4 year terms European Council Resolves policy issues sets policy direction. European Commission Proposing, implementing, monitoring legislation. Council of Ministers Ultimate controlling authority. No EU laws w/o approval. European Parliament Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners. Court of Justice Hears appeals of EU Laws.

The Single European Act 1987- EC agrees to work toward establishing a single market by December 31, 1992. Stimulus: Disharmony among the EC member countries: Trade policy. Technical standards. Led to establishing the Delors Commission in 1985. Basis for Single European Act. Objectives: Remove frontier controls. “Mutual recognition” of product standards. Open public procurement to nonnationals. Lift barriers to banking and insurance competition. Remove restrictions on foreign exchange transactions. Abolish cabotage restrictions. The Act can lead to gains in trade and investment and increased competition when barriers are removed.

The Euro Treaty of Maastricht: Benefits: 11 of 15 member states. Jan. 1, 1999 - Exchange rates locked in. Jan. 1, 2002 - Euro notes and coins issued. National currencies taken out of circulation. Benefits: Savings from using only one currency. Easy to compare prices, resulting in lower prices. Forces companies to be more efficient and cut costs. Creates liquid pan-Europe capital market. Increases range of investments for individuals and institutions.

Costs of the Euro Countries lose monetary policy control. European Central Bank controls policy for the “Euro zone”. EU is not an”optimal currency area”. Country economies are different. Early experience has seen a slump (approximately 20% through 2001) against the dollar. Too early to judge whether the Euro is/is not a success.

EU Issues Enlargement. Fortress Europe? Create European barriers to trade from the outside? EU promises to support GATT and the WTO. No guarantees, however.

NAFTA Jan. 1, 1994 Remove cross-border Abolish flow of tariffs Apply national environmental standards Protect intellectual property Abolish tariffs Two commissions to enforce treaty Jan. 1, 1994 Remove cross-border flow of services Remove FDI restrictions NAFTA

Small trade and jobs gain NAFTA: For/Against Against For 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. 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. Impact of NAFTA has been muted. Small trade and jobs gain for US.

ASEAN

Association of Southeast Asian Nations Created in 1967. Economic, political and social cooperation. Little has been accomplished. Brunei, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand and Vietnam.

Asian Trade Flows 8-30 Inter ASEAN Europe China Destination of Exports Source of Imports Aust./N.Zealand % 8-30

Asian Trade Flows Destination of Exports Source of Imports

Asia Pacific Economic Cooperation Founded in 1990 to ‘promote open trade and practical economic cooperation’. ‘Promote a sense of community.’ 18 members. 50% of world’s GNP. 40% of global trade. Brookings Institution: APEC “is in danger of shrinking into irrelevance as a serious forum.”

Impact on Business Positive: Protected markets, now open. Lower costs doing business in single market. Negative: Differences in culture and competitive practices make realizing economies of scale difficult. Threats: More price competition. Firms become more competitive. Outside firms shut out of market. EU intervention in M and A activity.