1. Regional Economic Integration
chapter 8
Regional Economic Integration

2. Chapter Objectives
Explain the different levels of regional economic integration
Understand the economic and political arguments for regional economic integration.
Understand the economic and political arguments against regional economic integration.
Understand the history, current scope, and future of the world most important regional economic integration.
Implications for business that are inherent in regional economic integration agreements
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3. Regional Economic Integration
What is regional economic integration?
Agreements among countries in certain region to reduce and or remove tariff and nontariff barriers to the flow of goods, services, and factors of production between each other.
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4. Regional Economic Integration
The EU and the euro
WTO must be notified of any agreement.
155 states are members of the WTO
KSA 11/12/2005
Jordan 11/4/2000
Kuwait 1/1/1995
USA 1/1/1995
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5. Regional Economic Integration
EU= 27 states
NAFTA= 3 states Canada, Mexico and the US.
MERCOSUR= Argentina, Brazil, Paraguay, and Uruguay
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6. First section Levels of Economic Integration
Check figure 8.1 page 267
1- free trade area like NAFTA
2- the customs union; the same as above but with common external policy- like the EU.
3- Common market: the same as the custom union but allows factors of production to move freely between members to the extent that no restrictions on immigration. EU
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7. Levels of Economic Integration
4- Economic union: EU the same as number 3 but adds a common currency and labour policies. Common tax rates and fiscal and monetary policies.
5- Political Union: for economic, social, and foreign policy of the member states like the EU with EU parliament. 10

8. Second section The Case of Regional Integration
The economic case for integration: this is for economic growth and stability.
The political case for integration: economic power and unity leads to political power- look what happened to the Soviet Union after the collapse of the communisis.
GCC and the Union for security.
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9. The political case for integration
Political stability means economic stability.
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10. Impediments (obstacles) to Integration
Employees issue
Sovereignty issue
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11. General Agreement on Tariffs and Trade
Representatives of the leading trading nations met in Cuba to create International Trade Organization(ITO) to promote international trade.
Disagreement about the degree of power that organization would have led to failure.
Instead the ITO planned mission was taken over by GATT.
Developed as part of the Havana, Cuba, conference in 1947.
To ensure that the post-World War II international peace would not be threatened by such trade wars, representatives of the leading trading nations met in Havana, Cuba, in 1947 to create the International Trade Organization (ITO). The ITO’s mission was to promote international trade; however, the organization never came into being because of a controversy over how extensive its powers should be. Instead the ITO’s planned mission was taken over by the General Agreement on Tariffs and Trade (GATT), which had been developed as part of the preparations for the Havana conference. From 1947 to 1994, the signatories to the GATT (the GATT was technically an agreement, not an organization) fought to reduce barriers to international trade. The GATT provided a forum for trade ministers to discuss policies and problems of common concern. In January 1995, it was replaced by the World Trade Organization, which adopted the GATT’s mission.
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12. The Role of the GATT
The GATT’s goal was to promote a free and competitive international trading environment benefiting efficient producers by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers.
The GATT’s goal was to promote a free and competitive international trading environment benefiting efficient producers, an objective supported by many multinational corporations (MNCs). The GATT accomplished this by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers. Because high tariffs were initially the most serious impediment to world trade, the GATT first focused on reducing the general level of tariff protection. It sponsored a series of eight negotiating “rounds,” generally named after the location where each round of negotiations began during its lifetime. The cumulative effect of the GATT’s eight rounds was a substantial reduction in tariffs. Tariffs imposed by the developed countries fell from an average of more than 40 percent in 1948 to approximately 3 percent in 2005.
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13. Table 10.1 GATT Negotiating Rounds
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14. Most Favored Nation (MFN) Principle
To help international business the most favored nation principle was followed. This principle requires that any preferential treatment granted to one country must be extended to all countries.
For instance, if a country gives tariff reductions to import from a country it should give the same treatment to all members.
To help international businesses compete in world markets regardless of their nationality, the GATT sought to ensure that international trade was conducted on a nondiscriminatory basis. This was accomplished through use of the most favored nation (MFN) principle, Under GATT rules, all members were required to utilize the MFN principle in dealing with other members. For example, if the United States cut the tariff on imports of British trucks to 20 percent, it also had to reduce its tariffs on imported trucks from all other members to 20 percent. Because of the MFN principle, multilateral, rather than bilateral, trade negotiations were encouraged, thereby strengthening the GATT’s role.
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15. Exceptions to the MFN Principle
Members permitted to lower tariffs to developing countries without lowering them for more developed countries
Regional arrangements promote economic integration (e.g., EU and NAFTA)
There are two important exceptions to the MFN principle:
To assist poorer countries in their economic development efforts, the GATT permitted members to lower tariffs to developing countries without lowering them for more developed countries. In the U.S. tariff code, such reduced rates offered to developing countries are known as the generalized system of preferences.
The second exemption is for regional arrangements that promote economic integration, such as the EU and NAFTA.
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16. Goals of the World Trade Organization (WTO)
Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies
Reduce remaining trade barriers through multilateral negotiations
Establish impartial procedures for resolving trade disputes among members
The eighth and final round of GATT negotiations began in Uruguay in The participants agreed to create the WTO. The World Trade Organization came into being on January 1, Headquartered in Geneva, Switzerland, as of May 2006 the WTO includes 149 member and 32 observer countries. Members are required to open their markets to international trade and to follow the WTO’s rules. The three primary goals of the WTO are listed in the slide.
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17. Differences between WTO and GATT
GATT focused on promoting trade in goods; WTO’s mandate includes
trade in goods
trade in services
international intellectual property protection
trade-related investment
WTO’s enforcement powers are stronger
The WTO was clearly designed to build on and expand the successes of the GATT; indeed, the GATT agreement was incorporated into the WTO agreement. The WTO differs from the GATT in two important dimensions. First, the GATT focused on promoting trade in goods, whereas the WTO’s mandate is much broader: It is responsible for trade in goods, trade in services, international intellectual property protection, and trade-related investment. Second, the WTO’s enforcement powers are much stronger than those possessed by the GATT.
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18. Economic Integration
Integration can be defined as the political and economic agreements among countries that give preference to member countries in the agreement.
Three ways to approach integration: Global through WTO, bilateral where two countries decide to integrate, and regional.

19. Economic Integration 2
Regional Integration: Where a group of countries located in the same geographic proximity decide to cooperate.
Why do we need to understand the nature of these agreements?
These agreements have influence on MNCS. They can define size of the market, how MNCs operate.

20. Forms of Economic Integration
Free Trade Area
Customs Union
Common Market
Regional trading blocs differ significantly in form and function. The characteristic of most importance to international businesses is the extent of economic integration among a bloc’s members. This is of utmost importance because it affects exporting and investment opportunities available to firms from member and nonmember countries. There are five different forms of regional economic integration: free trade area, customs union, common market, economic union, and political union.
Economic Union
Political Union
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21. Free Trade Area
An agreement between two or more countries to reduce or eliminate customs duties and nontariff trade barriers among partner countries while members maintain individual tariff schedules for external countries.
Examples: North Atlantic Free Trade Area (NAFTA), and Arab Free Trade Area(AFTA).
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22. Customs Union
In addition to eliminating tariffs member countries have a common trade policy with nonmembers on products imported from countries outside the union.
Example:
- Mercosure (Argentina, Brazil, Paraguay, Uruguay).
- Gulf countries.
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23. Common Market
Eliminates all tariffs and other restrictions on internal trade, adopts a set of common external tariffs, and removes all restrictions on the free flow of capital, labor, and technology among member nations.
- Example: European Economic Area
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24. Economic Union
A full integration of the economies of two or more countries
In addition to eliminating internal trade barriers, adopting common external policies, and removing restrictions on mobility of factors of production among members, it also requires members to coordinate economic policies (monetary, fiscal, taxation, and social welfare)
- Example: EU adopting the Euro
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25. Political Union
Involves complete political and economic integration, either voluntary or enforced.
Example: USA 13 colonies
Commonwealth – a voluntary organization providing for the loosest possible relationship that can be classified as economic integration.
Two new political unions came into existence in the 1990s:
The Commonwealth of Independent States (CIS)
The European Union (EU)
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26. The impact of economic integration on firms
Lower average production and distribution cost.
Enable firms Compete internationally outside the bloc.
Attract FDI from nonmember countries, as firms outside the bloc seek the benefits of insider.
May threaten established firm in the bloc
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27. Figure 10.2 Forms of Economic Integration
A free trade area encourages trade among its members by eliminating trade barriers (tariffs, quotas, and other nontariff barriers [NTBs]) among them. An example of such an arrangement is NAFTA, which reduces tariff and NTBs to trade among Canada, Mexico, and the United States.
A customs union combines the elimination of internal trade barriers among its members with the adoption of common external trade policies toward nonmembers. Because of the uniform treatment of products from nonmember countries, a customs union avoids the trade deflection problem. A firm from a nonmember country pays the same tariff rate on exports to any member of the customs union.
Members of a common market eliminate internal trade barriers among themselves, adopt a common external trade policy toward nonmembers, and eliminate barriers that inhibit the movement of factors of production—labor, capital, and technology—among its members.
An economic union represents full integration of the economies of two or more countries. In addition to eliminating internal trade barriers, adopting common external trade policies, and abolishing restrictions on the mobility of factors of production among members, an economic union requires its members to coordinate their economic policies (monetary policy, fiscal policy, taxation, and social welfare programs) in order to blend their economies into a single entity.
A political union is the complete political as well as economic integration of two or more countries, thereby effectively making them one country.
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28. European Union (EU) Most important regional trading bloc
27 member countries
455.3 million population
Combined GDP of $12.7 trillion
Like the IMF, the World Bank, and the GATT, the creation of the EU was motivated by the desires of war-weary Europeans to promote peace and prosperity through economic and political cooperation. To further this objective, six European nations—France, West Germany, Italy, and the Benelux nations (Belgium, the Netherlands, and Luxembourg)—signed the Treaty of Rome in The Treaty of Rome established the European Economic Community (EEC) and called for the development of a common market among the six member states. Over the ensuing five decades, the EEC changed its name twice and expanded its membership to 25 countries. During the 1970s, the United Kingdom, Denmark, and Ireland joined the EEC, which became commonly referred to as the European Community (EC). During the 1980s, Greece, Portugal, and Spain entered the EC, bringing its membership to 12 countries. In 1993, the 12 EC members signed the Treaty of Maastricht; as a result of this agreement, the EC became known as the EU. In 1995, Austria, Finland, and Sweden joined the EU. Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia became EU members in Norway and Switzerland are the only major Western European nations that do not belong to the EU. Although they were invited to join, both declined for domestic political reasons.
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29. Map 10.1 The European Union
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30. Governing Organizations of the EU
The Council of the European Union
The European Commission
The European Parliament
The European Court of Justice
The EU’s members are sovereign nations that have agreed to cede certain of their powers to the EU. The EU can be characterized both as an “intergovernmental government” (because it is a government of national governments) and as a “supranational government” (because it exercises power above the national level). The EU is governed by four organizations that perform its executive, administrative, legislative, and judicial functions:
• The Council of the European Union (headquartered in Brussels, Belgium)
• The European Commission (also based in Brussels)
• The European Parliament (normally meets in Strasbourg, France)
• The European Court of Justice (sitting in Luxembourg) .
The Council of the European Union is composed of 25 representatives, each selected directly by and responsible to his or her home government. The European Commission is composed of 25 people, one from each member state, selected for five-year terms. The Commission’s primary mandate is to be the “guardian of the Treaties.” The Commission also acts as the EU’s administrative branch and manages the EU’s $130 billion annual budget. The European Parliament currently comprises 732 representatives elected in national elections to serve five-year terms. The European Court of Justice consists of 25 judges who serve six-year terms. The judges are selected jointly by the governments of the member states. The Court interprets EU law and ensures that members follow EU regulations and policies
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31. The Council of European Union
Previously called the council of ministers.
Composed of 27 representatives.
The representative sent depends on the council’s agenda.
It is the most powerful decision making body.

32. The European Commission
It consists of 27 people. One from each country. They act on behalf of the Union not on behalf of their own countries.
Main duties:
Initiate proposals for legislation.
Serving as guardian of the treaties.

33. The European Parliament
Consists of representatives elected in national elections to serve for five years.
Representatives reflect the country population. Representatives of Germany, Uk are greater in number than those from small countries.

34. The European Court of Justice, Economic and Social Committee..etc.
Other Institutions
The European Court of Justice, Economic and Social Committee..etc.

35. Map 10.2 Free Trade Agreements in Central and South America and the Caribbean
In 1983 the United States established the Caribbean Basin Initiative to facilitate the economic development of the countries of Central America and the Caribbean Sea. The Caribbean Basin Initiative (CBI) overlaps two regional free trade areas: the Central American Common Market and the Caribbean Community and Common Market (their members are listed in Table 10.4 and shown in Map 10.2). The CBI, which acts as a unidirectional free trade agreement, permits duty-free import into the United States of a wide range of goods that originate in Caribbean Basin countries, or that have been assembled there from U.S.-produced parts.
The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). This agreement among the United States, the five nations constituting Central America (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic was signed in 2004.
The Mercosur Accord.  In 1991, the governments of Argentina, Brazil, Paraguay, and Uruguay signed the Mercosur Accord, an agreement to create a customs union among themselves. They agreed to establish common external tariffs and to cut, over four years, their internal tariffs on goods that account for 85 percent of intra-Mercosur trade.
Andean Community.  The Andean Community resulted from a 1969 agreement to promote free trade among five small South American countries—Bolivia, Chile, Colombia, Ecuador, and Peru—to make them more competitive with the continent’s larger countries.
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36. Map 10.3 The ASEAN Members
The Association of Southeast Asian Nations (ASEAN) was established in August 1967 to promote regional political and economic cooperation (see Map 10.3). Its founding members were Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Cambodia, Laos, Myanmar, and Vietnam joined during the 1990s.
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37. Map 10.4 Asia-Pacific Economic Cooperation Initiative (APEC)
Asia-Pacific Economic Cooperation (APEC) includes 21 countries from both sides of the Pacific Ocean (see Map 10.4). It was founded in 1989 in response to the growing interdependence of the Asia-Pacific economies. A 1994 APEC meeting in Indonesia led to a declaration committing members to achieve free trade in goods, services, and investment among members by 2010 for developed economies and by 2020 for developing economies. This objective was furthered at APEC’s 1996 meeting in Manila, where many countries made explicit pledges to reduce barriers to Asia-Pacific trade. In 2004, merchandise exports from APEC members were valued at more than $4.0 trillion and represented about 44 percent of total world merchandise exports.
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38. Map 10.5 Free Trade Agreements in Africa
Many African countries have also established regional trading blocs. The most important of these groups are the Southern African Development Community (SADC), the Monetary and Economic Community of Central Africa (CEMAC), and the Economic Community of West African States (ECOWAS). Although these groups were established during the 1970s and early 1980s, they have not had a major impact on regional trade. This is due to inadequate intraregional transportation facilities and the failure of most domestic governments to create economic and political systems that encourage significant regional trade. Intra-Africa trade to date accounts for less than 10 percent of the continent’s total exports.
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