1. The European Union and Other Regional Trade Areas
Chapter 14
© West/Thomson Learning

2. 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

3. Impediments to Regional Integration
Painful adjustments in certain segments of economy -- some “losers”
low skilled, low tech jobs lost (US textiles)
Threat to national sovereignty --
countries give up control of some key policies
monetary policy, tax policy and trade policy
Debate:
Trade creation or trade diversion?

4. Economic Case for Regional Integration
Stimulates economic growth in countries through FDI and free trade
Countries specialize in those goods and services efficiently produced.
Additional gains from free trade beyond international agreements such as GATT and WTO.
8-2

5. Political Case for Economic Integration
Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation.
Together, the countries have the economic clout to enhance trade with other countries or trading blocs.
8-3

6. 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+
elimination of intra-market factor of production movements
Economic Union (EU): CM+
full integration of member economies (common policy)
Political Union: US
political and economic integration

7. European Union European Coal and Steel Community (1952)
Treaty of Rome (1957) created European Community
Single European Act (1987) set 1992 deadline of achieving single market
Maastricht Treaty (1991) European common currency adopted 1/1/99
Common foreign and defense policy
Common citizenship
EU parliament with “teeth” created European Union and set path for monetary union

8. European Union
Treaty of Amsterdam: 1999 (incorporated the principle of freedom of movement from the Schengen Agreement)
Treaty of Nice: 2000, voting rights in preparation for enlargement – target date of 2004

9. Euro Timetable January 1, 1999: Euro single currency is born
: National currencies continue to exist and work in parallel; Euro as “virtual currency”
2002: switch to single currency; Euro in circulation

10. 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

11. Costs of the Euro Loss of monetary policy control at national level
ECB sets interest rates and determines monetary policy
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 in conflict with political issues

12. Monetary Union Criteria
Budget deficit no greater than 3% of GDP
Public debt no greater than 60% GDP
Price stability (inflation controlled)
Long term interest rates within 2% of the best 3 countries
Exchange rate stability

13. Members of the European Union
Austria*
Belgium*
Denmark
Finland*
France*
Germany*
Greece*
Ireland*
Italy*
Luxembourg*
The Netherlands*
Portugal*
Spain*
Sweden
The United Kingdom
Cyprus
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia*
Bulgaria
Romania
* Countries that have adopted the Euro as the common currency of the EU

14. Map

15. 785 directly elected members
EU Governance
European Council
European Commission
27 Commissioners
appointed by
members for
4 year terms
Heads of State
and
Commission
President
Proposing,
implementing,
monitoring legislation.
Resolves policy issues
Sets policy direction.
Council of Ministers 1
representative
from each
member
Ultimate controlling authority. No EU laws w/o approval.
European Parliament
Court of Justice
785 directly elected members
Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners.
1 judge from each country
Hears appeals of EU Laws.

16. Law-making within the EU
Regulations vs. directives
Directive: Binding as to result, but left to members to choose form and methods
Regulation: Binding in entirety, applies directly to all members
Role of
Council: Decides to adopt regulation or directive
Commission: Proposes action to Commission
Parliament: may amend or reject measures on single market, consumer protection, environment, health, education, culture
Court of Justice: interprets and applies EU law; reviews member actions for compliance

17. Rewe-Zentral AG (Cassis de Dijon) (ECJ 1979)
Facts: German law limits importation of spirits with less than 32% alcohol
Germany defends law on basis of public health
Issue: Does law amount to quantitative restriction on imports in violation of Art. 30 & 37 of the Treaty of Rome?
Decision: Yes,
Reasons: Germany’s arguments were not for “purpose in general interest sufficient to take precedence over the principle of free movement of goods

18. Commission of EC v. Fed. Rep. of Germany (ECJ 1987)
Facts: German law prohibits additives in beer
EC Commission claims law violates Arts. 30 and 36
Issue: Does law violate Treaty’s commitment to free movement of goods?
Decision: Yes
Reasons: law is not justified on the basis of health or protection of health (Art. 36) and violates Art. 30

19. Imperial Tobacco v. European Parliament (ECJ 2000)
Facts: referral for preliminary ruling on validity of Directive 98/43/EC restricting tobacco advertising
Issue: Does Directive have sufficient legal basis, and does it infringe right of free expression?
Decision: Directive annulled Directive
Reasons: Similar issue decided in Germany v. European Parliament
Inadequate legal basis for Directive under Arts. 100a, 57(2), and 66
Because Directive annulled, no need to give preliminary ruling

20. Cotonou Agreement 2000 EU, African, Caribbean and Pacific countries
EU had GSP program since 1971 and in effect until 2007
2007 new “partnerships” will begin

21. Andean PACT
Map

22. ANCOM: Andean Pact
Bolivia, Colombia, Ecuador, Peru; Chile is Associate Member
Cartagana Agreement, 1969: One of oldest still in existence
Population: 120 mm (14% of hemisphere)
GDP: 2005: $745.3 billion (includes Venezuela)
Changed from FTA to customs union in 1992

23. Mercosur
Map

24. The Mercosur Accord
1988: Argentina, Brazil; 1990: Paraguay, Uruguay; 2006: Venezuela
Associate Membership Granted to Andean Community Members
1995: Agreed to move toward a full customs union.
Population: 220 mm
GDP: $1 Trillion
Trade doubled in first 3 years

25. Other Western Hemisphere Associations
Central American Common Market
CARICOM
Free Trade Area of the Americas

26. ASEAN

27. Association of Southeast Asian Nations
Created in 1967
400 million citizens
Economic, political and social cooperation
Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, Laos, Myanmar and Cambodia

29. Asia Pacific Economic Cooperation
Founded in 1989 to ‘promote open trade and practical economic cooperation’. ‘Promote a sense of community’.
18 members
GDP: $13 trillion (1995)
50% of total world income
40% of global trade

30. Other Trade Areas African trade areas (AEC, COMESA, SADC) Arab League
Gulf Cooperation Council

31. 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

32. Web Sites