1. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–18–1 Chapter 8 Regional economic integration F T A A NAFTA EU (25) APEC A F T A Australia– New Zealand MERCOSUR

2. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–28–2 Lecture plan Why regionalism? Definition of regional economic integration Five levels of regional economic integration –industrial free trade area; full free trade area; customs union; common market; economic union Trade effects of regional integration Regional groups: EU, NAFTA, AFTA, MERCOSUR Bilateral free trade agreements Is regionalism the path to globalism?

3. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–38–3 Regional economic integration Agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services and factors of production among each other. It is estimated that currently there are about 220 regional trade arrangements!

4. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–48–4 Regional trade arrangements Exception to MFN (Most Favoured Nation) rule in GATT/WTO; allows regional agreements to provide higher preferential treatment to members than to non- members. Five levels of regional economic integration – industrial free trade area – full free trade area – customs union – common market – economic union

5. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–58–5 Regional economic integration Free Trade Area (FTA) No tariffs and quotas among members National tariffs against non-members Partial (industrial) FTA and full FTA Australia’s bilateral FTAs with New Zealand, Singapore, USA, Thailand Pluri-lateral FTA: EFTA, NAFTA, AFTA Free Trade Area

6. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–68–6 Regional economic integration customs union No tariffs and quotas among members. Common tariffs operate against non-members. Examples: European Community EC (1968) MERCOSUR (South American Union) Customs Union Free Trade Area

7. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–78–7 Regional economic integration common market Abolition of restrictions on factor movements Example: The European ‘Single Market’ (1992) Customs Union Free Trade Area Common Market © Copyright J. Gionea RMIT 2003

8. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–88–8 Regional economic integration economic union Customs Union Free Trade Area Common Market Economic Union Characterised by harmonisation and unification of economic policies common currency Example: European Union

9. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–98–9 Trade effects of integration Trade creation – trade up through lower-cost goods and services (e.g. European Union: industrial sector) Trade diversion – less efficient producers inside the area replace more efficient external producers (e.g. EU: common agricultural policy)

10. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–10 Intra-regional trade under major regional trade agreements, 2002, $US billion, % Regional Trade Agreements Intra-regional trade ($US billion) Share of World exports (%) EU (15)1,50924.1 NAFTA (3) 62610.0 AFTA (10) 97 1.6 CEFTA (7) 19 0.3 MERCOSUR (4) 10 0.2 ANDEAN (5) 5 0.1

11. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–11 Intra-exports as % of total merchandise exports of selected regional trading blocs

12. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–12 Intra-imports as % of total merchandise imports of selected regional trading blocs

13. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–13 European economic integration 1957 European Communities (6): France, Western Germany, Italy, Belgium, Luxemburg, Netherlands 1968 Customs union 1973UK, Ireland, Denmark, Greece (1981), Spain and Portugal (1986) 1992European single market 1996 Austria, Finland, Sweden 2002European Monetary Union (currently 12 members) 200410 new members: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic and Slovenia (500 million people).

14. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–14 North American Free Trade Agreement (NAFTA) US, Canada, Mexico Became law 1/1/1994 Over 15 year period – tariffs reduced (99% of goods traded) – non-tariff barriers reduced – investment opportunities increased Protects intellectual property Three-side agreements – environmental protocols – labour protocols – snap-back provision Special treatment for many industries

15. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–15 MERCOSUR (Southern Common Market) Originated in 1988 as a free trade pact between Brazil and Argentina Expanded in March 1990 to include Paraguay and Uruguay Combined population of 200 million 1995: 5-year plan to move to full customs union Objective: South American Free Trade Area (SAFTA)

16. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–16 The Free Trade Area of the Americas (FTAA) Old plan of ex-US president George Bush, pursued now by his son. FTAA = 34 nations (including NAFTA and MERCOSUR members) with population of 880 million; world’s largest free trade area. The Quebec 34-country Summit of March 2001 agreed on an FTAA to be launched in 2005. President Bush obtained fast-track authority (now renamed Trade Promotion Authority).

17. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–17 ASEAN (10) AFTA = ASEAN Free Trade Area; launched in 1992 Members: Singapore, Indonesia, Thailand, Malaysia, Philippines, Brunei, Vietnam, Burma, Laos, Cambodia (550 million people). On the Common Effective Preferential Tariff (CEPT) of AFTA, the 6 founding members agreed (individually) to achieve a minimum of 85% of the tariff lines on their inclusion lists in the 0-5 % range by 2000, covering 90% of intra-ASEAN trade. They also brought forward from 2003 to 2002 the date of implementation of the CEPT; few extensions (e.g cars). ASEAN + 3 (China, Japan, South Korea). ASEAN–China FTA: >1.7 billion people; GDP: US$1.65 trill.

18. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–18 MFN simple mean tariffs 1999 vs CEP tariff rates 1999, 2003, % in selected ASEAN countries MFN 1999 CEPT 1999 (%) CEPT 2003 (%) Indonesia10.95.853.71 Malaysia7.13.172.06 Philippines 10.04.452.06 Thailand21.69.754.64 MFN = Most Favoured Nation: non-discrimination. (All WTO signatories have MFN status.) CEPT = Common Effective Preferential Tariff: a comprehensive timetable for gradual phase out of intra-ASEAN tariffs on nominated goods.

19. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–19 Automotive MFN tariffs in selected ASEAN countries, % CountryCKD* Tariff (MFN) CBU** Tariff (MFN) Malaysia42–80140–300 Thailand3380 Indonesia35–5065–80 Philippines1030 Malaysia42–80140–300 *CKD: Completely Knocked Down car kits * **CBU: Completely Built Units

20. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–20 Three-way balance (E. Asia, EU, US) output, trade with the ROW*, reserves * ROW = Rest of the World Based on Fred Bergsten’ s Economist article

21. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–21 Why the push for East-Asian integration? East Asian financial crisis Failures of WTO and APEC to make headway on trade liberalisation Positive inspiration provided by European integration (especially the euro) Broad disquiet with behaviour of both the US and EU Based on Bergsten, 2000. (See References.)

22. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–22 Bilateral Free Trade Agreements (FTAs) Singapore’s free trade agreements with –US, Japan, Australia, New Zealand, Mexico Mexico-European Union Australia’s FTAs with –New Zealand, Singapore, Thailand, USA (under Australian Senate approval) Australian discussions for FTAs with China and Malaysia

23. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–23 The share of regional trading blocs in Australia’s merchandise exports 1974, 1989, 2002 Regional Bloc197419892002 European Union16.514.412.4 NAFTA12.412.511.5 ASEAN 8.0 9.612.2 MERCOSUR 0.2 0.5 0.6 New Zealand 6.6 5.4 6.6 SAARC 3.4 1.8 3.1 Source: adapted from DFAT, Direction of Trade Time Series, 1974 to 1994 and Composition of Trade, 2003

24. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–24 Is regionalism a path to globalism? Two key questions: 1.Does regional integration increase or decrease global economic welfare? 2.Will regional trading blocs lead to global trade more quickly than the multilateral process? Two views regional trading blocs = ‘stumbling’ blocs regional trading blocs = building blocs Hopefully, the latter view will prevail.

25. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–25 References Bergsten, F. 2000, ‘Towards a tripartite world’, The Economist,15 July. Gionea, J. 2003, International Trade and Investment, McGraw-Hill, Sydney. Hill, C. 2003, International Business, Competing in the Global Marketplace, McGraw-Hill, New York.

26. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–26 Australia’s trade with ASEAN in passenger motor vehicles, A$ million, 1999–2003 Source: adapted from DFAT, Composition of Trade, 2003

27. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–27 Australia’s trade with NAFTA in passenger motor vehicles (PMV), A$ million, 1999–2003

28. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–28 Australia’s trade with NAFTA in motor vehicle parts (MVP), $A million, 1999–2003

29. Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.. 8–29 Australia’s cumulative trade (PMV + MVP) with NAFTA, A$ million, 1999–2003 Source: adapted from DFAT, Composition of Trade, 2003