2. Chapter 8 Regional Economic Integration

3. 8 - 3 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Regional Economic Integration Levels of economic integration among nations Economic and political arguments for/against History/scope, scope and future prospects for -EU -NAFTA -MERCOSUR, and -APEC Implications for business

4. 8 - 4 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

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6. 8 - 6 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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+ -eliminates intra-market factor of production movements Economic Union (EU): CM+ -full integration of member economies (common policy) Political Union: EU+ -political and economic integration

7. 8 - 7 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Regional Integration Economic enhancement of the member states -Free trade -Fee FDI Political Reasons -Linkages of economies create interdependencies that reduce the potential for violent conflict -Grouping gives countries more political clout world- wide Impediments -Painful adjustments in certain segments of economy -Threat to national sovereignty

8. 8 - 8 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. European Union 25 member countries; 450mm people; GDP > US 1951 6 members of coal and steel community -France, Germany (W.), Italy, Belgium, Netherlands, Luxembourg 1957 Treaty of Rome: European Community -Common market -Elimination of internal trade barriers -Common external tariff -Free movement of factors of production 1973 1st enlargement: Britain, Ireland, Denmark

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10. 8 - 10 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. European Union 1981 2nd enlargement: Greece 1983 3rd enlargement: Portugal, Spain 1992 single European act Remove all frontier controls Principle of mutual recognition to product standards Open public procurement to non-national suppliers Lift barriers of competition to banks and insurance Remove restrictions on foreign exchange transactions Abolish restriction on cabotage (trucking) 1994 Maastricht treaty: European Union 1996 4th enlargement: Austria, Finland, Sweden 2003 5th enlargement: Poland, Hungary, Czech Republic, Lithuania, Estonia, Latvia, Slovenia, Cyprus, Malta, Slovakia

11. 8 - 11 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Euro (€) Maastricht treaty: -European common currency adopted 1/1/99 -Common foreign and defense policy -Common citizenship -EU parliament with “teeth” € now used by 12 countries (since 1/1/02) -Sweden, Denmark, Britain opted out -10 new countries have to qualify

12. 8 - 12 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

13. 8 - 13 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Costs of the Euro (€) ECB has monetary policy control not nations Sets interest rates, monetary policy (Frankfurt, Ger.) Is independent; instructs national central banks EU is not an optimal currency area Few similarities in structure of economic activity (e.g., Finland vs Portugal) Interest rates too high in depressed regions or too low for economically booming regions May need fiscal transfers from prosperous to depressed regions Economic issues may conflict with political ones

14. 8 - 14 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Early Experience of the Euro (€) Volatile trading history -1999 -- €1 = US$1.17 -10/2000 -- €1 = US$0.83 -10/2004 -- €1 = US$1.24 EU enlargement will complicate Euro adoption; -New members with weaker economies Major members ignoring monetary union rules to retain control over their fiscal and monetary policies

15. 8 - 15 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Enlargement of the EU More member disparity, more difficult governance Norway opted out of the EU (1994) Membership applications pending: Turkey, Bulgaria, Rumania, Croatia -Turkish application controversial (economic development, religion, labor movement problems) Other non-European countries will seek membership US and Asian countries fear that EU will become protectionist (“fortress Europe”)

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17. 8 - 17 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Americas North American Free Trade Agreement (NAFTA) -USA, Mexico, Canada The Andean Pact -Bolivia, Chile, Ecuador, Colombia, Peru MERCOSUR (FTA) -Brazil, Argentina, Paraguay, Uruguay Central American Common Market (CARICOM) -Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

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19. 8 - 19 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Elsewhere Association of Southeast Asian Nations (ASEAN) -Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam Asia Pacific Economic Cooperation -USA, Japan, China + 15 Pacific nations

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21. 8 - 21 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

22. 8 - 22 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. NAFTA USA, Canada, Mexico (FTA-1988) -USA-Canada is world’s largest trading relationship -USA is Mexico’s largest trading partner -Mexico, USA’s third largest trading partner Trade opening process through tariff elimination

23. 8 - 23 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. NAFTA - Key provisions General (effective 1/1/94) -Tariffs of all sectors reduced 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

24. 8 - 24 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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