AE 221 – Section A | International Business | Charles W.L.

Hill
CHAPTER 9: Regional Economic Integration groups may lose people in some industries will lose
jobs while others gain
Regional Economic Integration  It can result in a loss of national sovereignty
Agreements between countries in a geographic region  Countries still want to protect certain goods
to reduce tariff and non-tariff barriers to the free flow of o Ex) Mexico and its oil
goods, services, and factors of production between each other.  Integration of monetary policies can be complex
o Ex) United Kingdom and the pound/euro
Question: Do regional trade agreements promote free trade?
III. THE CASE AGAINST REGIONAL
In theory, yes, but world may be moving toward a
INTEGRATION
situation in which a number of regional trade blocks compete
against each other. Regional economic integration only makes sense when the
amount of trade it creates exceeds the amount it diverts.

 TRADE CREATION occurs when low-cost producers

I. LEVELS OF ECONOMIC INTEGRATION
within the free trade area replace high-cost domestic
producers
1. FREE TRADE AREA - Eliminates all barriers to
 TRADE DIVERSION occurs when higher cost suppliers
the trade of goods and services among members.
within the free trade area replace lower cost external
2. CUSTOMS UNION – Eliminates trade barriers
suppliers
between members and adopts a common external
o ex) what if NAFTA forced us to get textiles from
trade policy.
3. COMMON MARKET – Has no trade barriers Mexico instead of even cheaper country.
between members, a common external trade policy,
and the free movement of the factors of production. IV. THE STATUS OF REGIONAL ECONOMIC
4. ECONOMIC UNION – Has the free flow of INTEGRATION IN EUROPE
products and factors of production between members, EUROPE has two blocs;
a common external trade policy, a common currency,
a harmonized tax rate, and a common monetary and 1. The European Union (EU) with twenty-eight (28)
fiscal policy. members
5. POLITICAL UNION – Involves a central political  Britain has voted to exit.
apparatus that coordinates the economic, social, and 2. The European Free Trade Area (EFTA) with four
foreign policy of member states. (4) members

The EU is seen as the world’s next economic and political

superpower.

II. THE CASE FOR REGIONAL INTEGRATION

ECONOMIC CASE

 Regional economic integration is an attempt to EVOLUTION OF THE EUROPEAN UNION

achieve additional gains from the free flow of trade
The European Union is the result of:
and investment between countries beyond those
attainable under international agreements such as the  the devastation of two world wars on Western Europe
WTO. and the desire for lasting peace
 Since it is easier to form an agreement with a few  the desire by the European nations to hold their own
countries than across all nations, there has been a on the world’s political and economic stage
push toward regional economic integration.
The forerunner of the EU was the European Coal and Steel
POLITICAL CASE Community
 By linking countries together, making them more  Formed in 1951.
dependent on each other, and forming a structure
where they regularly have to interact, the likelihood The Treaty of Rome established the European Economic
of violent conflict and war will decrease. Community in 1957
 By linking countries together, they have greater clout
 The name changed to the EU in 1993.
and are politically much stronger in dealing with
other nations.

IMPEDIMENTS TO INTEGRATION POLITICAL STRUCTURE OF THE EURPOEAN

UNION
 It can be costly- while a nation as a whole may
benefit from a regional free trade agreement, certain The main institutions in the EU include:

Prepared by: Baunto, S., Jamail, S.L., Manalao, F., & Jamel, H.
AE 221 – Section A | International Business | Charles W.L. Hill
1. THE EUROPEAN COUNCIL - the ultimate The Euro Experience
controlling authority within the EU.
2. THE EUROPEAN COMMISSION - proposes EU  Since its establishment, the euro has had a volatile
legislation, implements it, and monitors compliance. trading history with the U.S. dollar
3. THE EUROPEAN PARLIAMENT - debated  Initially, the euro was valued at $1.17, then fell in
legislation proposed by the commission and value relative to the dollar, but strengthened to an all-
forwarded to it by the council. time high of $1.54 in March ,2008
a. Treaty of Lisbon increased power; EU  Multiple bailout packages
became co-creator of all European laws; o Ireland, Greece, Portugal
b. created presidential position  In early 2016, the exchange rate was 1 euro to 1.11
(30-month term) dollar
 The weakened value of the euro against the dollar has
4. THE EUROPEAN JUSTICE - the supreme appeals
been a cause for concern among many nations
court for EU law.
a. power similar to FTC in US.
b. has blocked potential M&A’s that would ENLARGEMENT OF THE EUROPEAN UNION
become monopolies or fined companies for
monopoly power Many countries, particularly from Eastern Europe, have
i. ex) Intel, Microsoft applied for membership.

To qualify for EU membership, the applicants had to privatize

THE SINGLE EUROPEAN ACT state assets, deregulate markets, restructure industries, and
tame inflation.
Committed EC countries to work toward establishment of a
single market by 1992. They also had to enshrine complex EU laws into their own
systems, establish stable democratic governments, and respect
Objectives of the act; human rights.
 Remove all frontier controls between EC countries  10 countries joined in 2004, expanding the EU to 25
 Apply the principle of mutual recognition to product states, with population of 450 million people, and a
standards single continental economy with a GDP of 11 trillion
 Institute open procurement to non-national suppliers euros
 Lift barriers to competition in retail banking and  In 2007, Bulgaria and Romania joined
insurance  Croatia joined in 2013 bringing membership to 28
 Remove all restrictions on foreign exchange o Turkey has also applied for membership, but
transactions between member countries it is not clear whether it will be accepted.
 Abolish restrictions on cabotage The country has had a customs union with
o Cabotage: the right to operate sea, air, or the EU since 1995, and about half its
other transport services within a particular international trade is already with the EU.
territory However, full membership has been denied
because of concerns over human rights 
particularly Turkish policies towards is
THE ESTABLISHMENT OF THE EURO
Kurdish minority.
MAASTRICHT TREATY committed the EU to adopt a
single currency, the Euro.
BRITISH EXIT FROM THE EUROPEAN UNION
 The euro is used by 19 of the 28 member states (BREXIT)
 Created the euro zone, the second largest currency in
 Voted to leave on June 23, 2016
the world after that of the U.S. dollar
 The vote was also split by age and education
 Countries that participate have agreed to give up
 The younger and more educated voted to stay in the
control of their monetary policy
EU, while the older and less educated voted to leave
 Britain, Denmark, and Sweden are still on the
 same with the U.S. 2016 election
sidelines
 Have two years to negotiate exit with the EU
Benefits of the Euro:  Haven’t been comfortable with the loss of national
sovereignty
 Handling one currency rather than many  Immigration has become a key issue/want to “take back
 Easier to compare prices across Europe control” of immigration
 Increased competition promotes greater efficiencies  Britain is EU’s second largest economy and is seen as a
in production counterweight to Germany
 The pan-European capital market should further  Britain will likely see significant short-to-medium-term
develop costs based on this decision
 Range of investment options open both to individuals  Less likely to attract inward investment from foreign
and institutions should increase multinationals
Cost of the Euro:  Exports to EU may fall
 Britain’s future success depends on its ability to negotiate
 Membership implies a loss of control over monetary trade deals with other countries
policy
 The EU is not an optimal currency area: an area V. THE STATUS OF REGIONAL ECONOMIC
where similarities in the underlying structure of INTEGRATION IN AMERICAS
economic activities make it feasible to adopt a single
currency and use a single exchange rate as an There is a move toward greater regional economic integration
instrument of macro-economic policy in the Americas.
o Countries may react differently to changes The North American Free Trade Agreement
in the euro

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AE 221 – Section A | International Business | Charles W.L. Hill
 United States, Canada, and Mexico o Autos are protected product, but none of
 Abolished tariffs on 99% of goods traded these countries makes autos more efficiently
 Removed barriers on the cross-border flow of than other countries, so it promoted
services inefficient production
 Protects intellectual property rights o Venezuela joined in 2006, but is not yet a
 Removal of most restrictions on FDI among members full member
 Application of national environmental standards
 Established two commissions to impose fines and CENTRAL AMERICAN COMMON MARKET, CAFTA,
remove trade privileges when environmental AND CARICOM
standards or legislation involving health and safety,
Central American Common Market
minimum wages, or child labour are ignored
 Costa Rica, El Salvador, Guatemala, Honduras,
The Case in NAFTA
Nicaragua, and the Dominican Republic
 Increases in standard of living for all countries,  Started to fall apart then the U.S. joined to create the
increases in care for environment and human rights in Central American Free Trade Agreement
all countries o 2004
 Mexico
CARICOM (1973), a customs union between English-
o increased jobs as low-cost production moves
speaking Caribbean countries
south and more rapid economic growth
 The U.S. and Canada  Six members formed the Caribbean Single Market
o Access to a large and increasingly and Economy (CSME) in 2006 to lower trade barriers
prosperous market and lower prices for and harmonize macro-economic and monetary policy
consumers from goods produced in medico  Now has 15 full members, 5 associate members and 8
o U.S. and Canadian firms with production observers
sites in Mexico are more competitive in  Little progress
world markets

The Case against NAFTA

 Jobs could be lost, and wage levels could decline in

the U.S. and Canada
 Mexican workers could emigrate north
 Mexico would lose its sovereignty

The Results of NAFTA

 Studies of NAFTA’s early impact suggest that both

advocates and detractors may have been guilty of
exaggeration
 Trade between the three countries increased by 250%
 The members have become more integrated VI. THE STATUS OF REGIONAL ECONOMIC
productivity has increased in member nations INTEGRATION IN ELSEWHERE
o 50% in Mexico
 Employment effects have been small Mexico and  There have been various attempts at regional economic
U.S. saw small welfare gains while Canada suffered a integration throughout Asia and Africa
welfare loss  The success of these attempts has been limited
o 0.6% decrease in wages  The most significant efforts are the Association of
Southeast Asian Nations and the Asia Pacific Economic
The Andean Community Cooperation
 Based on the EU model Association of Southeast Asian Nations (ASEAN)
 The agreement had more or less failed by the mid-
1980s  Fosters free trade between member countries and
 In the late 1980s, Latin American governments began cooperation in their industrial policies
to adopt free market economic policies o Brunei, Indonesia, Malaysia, the Philippines,
 In the 1990s, the Andean Pact was relaunched as the Singapore, Thailand, Vietnam, Myanmar,
Andean Community, and now operates as a customs Laos, and Cambodia
union  An ASEAN free trade area (AFTA) between the six
 In 2003, it signed an agreement with Mercosur to original members of ASEAN came into full effect to
restart negotiations toward the creation of a free trade reduce import tariffs among members
area o 2003
 Current members include Bolivia, Ecuador, Peru, and o Vietnam, Laos, Myanmar, and Cambodia
Columbia have all joined
o In 2010, ASEAN signed a free trade
MERCOSUR agreement with China to remove tariffs on
 Free trade pact 90% of all traded goods
o Brazil and Argentina Other Trade Agreements
 expanded to include Paraguay and Uruguay in 1990
 has been successful at reducing trade barriers o U.S. pursuing Trans Pacific Partnership with
between member states 11 other Pacific Rim countries and
 Critics worry that Mercosur may be diverting trade Transatlantic Trade and Investment
rather than creating trade, and local firms are Partnership (TIPP) with the European Union
investing in industries that are not competitive on a
worldwide basis
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AE 221 – Section A | International Business | Charles W.L. Hill
VII. FOCUS ON MANAGERIAL IMPLICATIONS

Regional Economic Integration Opportunities

 Formerly protected markets are now open to exports

and direct investment
 The free movement of goods across borders, the
harmonization of product standards, and the
simplification of tax regimes means that firms can
realize potentially enormous cost economies by
centralizing production in those locations where the
mix of factors costs, and skills is optimal

Regional Economic Integration Threats

 Lower trade and investment barriers could lead to

increased price competition within the EU and
NAFTA
o Increased competition within the EU is
forcing EU firms to become more efficient,
and stronger global competitors
 Firms outside the blocs risk being shut out of the
single market by the creation of a “trade fortress”
o Firms may be unable to pursue the strategy
of their choice if the EU intervenes and
imposes conditions on companies proposing
mergers and acquisitions

GROUP PRESENTER 4

1. BAUNTO, SHAIRAH M.
2. MANALAO, FARHANNA A.
3. JAMAIL, SITTIE LYRA M.
4. JAMEL, HALEEMAH B.

Prepared by: Baunto, S., Jamail, S.L., Manalao, F., & Jamel, H.