In this chapter, you will explore regional economic integration.

You will also:

Learn about the five different levels of integration.

Understand the potential benefits and drawbacks of regional integration.

And examine the progress of various efforts at integration around the world.

Nestl is the worlds largest food company, earning only 2 percent of its sales
at home in Switzerland.

Food and dietary tradition is integral to every cultures social fabric. So, as
Nestl expands abroad, it monitors changing consumer attitudes resulting
from greater regional integration.

When Nestl and Coca-Cola announced a joint venture to develop coffee and
tea drinks, they first had to show the European Union (EU) Commission that
they would not stifle the competition.

And to abide by EU environmental protection laws, Nestl works with

Europes governments to develop and manage waste-recovery programs.

The goal of regional economic integration is higher living standards through

increased cross-border trade and investment.

Greater specialization is a byproduct of integration that increases

productivity, adds to product choices, and lowers prices.

A regional trading bloc is a group of nations in a geographic region that are

undertaking economic integration.

Nations can pursue five different levels of regional integration, with each one
incorporating the properties of the preceding one.

A free trade area removes all barriers to trade between members with each
nation determining its own barriers against nonmembers. Members may also
establish a process for resolving trade disputes.

A customs union adds the requirement that all members set a common trade
policy against nonmembers. Members may also negotiate as a group with
organizations like the World Trade Organization.

A common market adds the free movement of labor and capital and sets a
common trade policy against nonmembers.

An economic union requires members to harmonize their tax, monetary, and

fiscal policies, create a common currency, and concede some sovereignty to
the larger organization.

A political union requires members to coordinate their economic and political

policies against nonmembers, with a few exceptions.

Regional integration offers several benefits.

Integration should create new trade opportunities and deliver a wider

selection of goods and services at lower cost.

Building consensus may be easier among a small group of countries than it is

in larger groups, such as the World Trade Organization.

Political cooperation may reduce the potential for military conflict among
members.

And new employment opportunities can arise when people are allowed to relocate
internationally for work or higher wages.

But regional integration also has potential drawbacks.

Trade may be diverted away from nonmember nations and toward members
because of the lower tariffs levied on goods from members. Unfortunately,
this can reduce trade with a more efficient nonmember nation and boost
trade with a less efficient member.

In the absence of trade barriers, productivity decides where a good or service

is produced. So, a member nations unskilled, low-wage jobs may move to a
relatively lower-wage members economy.

And integration always means surrendering some degree of national sovereignty,

with political union demanding the most from member nations.

European integration began shortly after the Second World War when a small
group of countries began cooperating in a few key industries.

Today, the 27-member European Union has a population of 500 million people
and a gross domestic product of $15 trillion.

In 1951, six countries created the European Coal and Steel Community to
remove barriers to trade in coal, iron, and steel.

In 1957, those same countries expanded their cooperation and created a

common market, called the European Economic Community.

The Community broadened its scope in 1967 to include additional industries

and changed its name to the European Community.

The Single European ACT of 1987 removed remaining trade barriers,

increased harmonization of members policies, and enhanced the
competitiveness of EU companies.

The Maastricht Treaty of 1991 created a common currency, set monetary and
fiscal targets for countries in the monetary union, and proposed an eventual
political union.

In 1994, the group changed its name one final time to the European Union
(EU).

When doing business in the Czech Republic:

Remain formal in your relations unless your colleagues encourage informality.

Smooth the way for business by building close relationships and establishing
solid references.

Find a local partner to help you with the inevitable difficulties of cross-cultural
business.

Hire local professionals who understand U.S. and local business law.

And establish who is in charge so that people know who to turn to when
needed.

Candidates for membership in the European Union include Croatia, Turkey,

and the Former Yugoslav Republic of Macedonia.

Before these countries can become members they must satisfy what are
called the Copenhagen Criteria.

Five institutions play key roles in monitoring and enforcing integration in the
European Union.

The European Parliament debates and amends legislation proposed by the

European Commission.

The Council of the EU is the legislative body that votes proposed legislation
into law or rejects it with a no vote.

The European Commission is the executive body that can draft legislation,
manages and implements policy, and monitors compliance with EU law.

The Court of Justice is the EU court of appeals, which hears cases that
member nations bring before it.

And the Court of Auditors audits the EU accounts and implements its budget

Some nations wanted the benefits of a free trade area but did not desire a full
common market.

In 1960, these nations formed the European Free Trade Association to focus
on trade in industrial goods.

Today, the European Free Trade Association includes Iceland, Liechtenstein,

Norway, and Switzerland.

These nations and the European Union work together on the movement of
goods, people, services, and capital, and cooperate on the environment,
social policy, and education.

The North American Free Trade Agreement took effect in January 1994 and seeks to
eliminate trade barriers on most goods originating from North America.

The agreement calls for liberalized rules on government procurement

practices, the granting of subsidies, and the imposition of countervailing
duties.

Other provisions deal with trade in services, intellectual property rights, and
standards of health, safety, and the environment.

Products may qualify for tariff-free status if they meet regional content
requirements or if sufficient value was added to them within the NAFTA
region.

Members of the Central American Free Trade Agreement include the United States,
Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua, and the Dominican
Republic.

Central American nations have cut average tariffs from 45 percent in 1985 to
around 7 percent today.

The value of goods traded between the United States and the six other
countries is around $32 billion.

The agreement means greater competition and investment, better protection of

intellectual property rights, and enhanced regional peace and stability.

The Central American Free Trade Agreement has supporters and detractors.

Supporters say that the agreement encourages trade efficiency and promotes
investment that brings high-paying jobs to the poorer member nations.

Detractors fear that the agreement benefits large U.S. companies and
damages farmers and small businesses across Central America.

The Andean Community formed in 1969 and today includes Bolivia, Colombia,
Ecuador, and Peru.

It grew from the ashes of an earlier failed attempt at integration called the
Latin American Free Trade Association.

Objectives include internal tariff reduction, a common external tariff, and

common policies in transportation and other key industries.

The group has yet to create a complete customs union, in part, because each
member extends its own exceptions to nonmembers.

Members of the Southern Common Market include Argentina, Brazil, Paraguay,

Uruguay, and Venezuela.

Today, the group functions as a customs union and is busy liberalizing trade
and investment among its members.

It is emerging as the most powerful economic group throughout Latin

America.

One day, the group may expand to incorporate all of South America into a
single, massive free trade agreement.

Nations in Central America and the Caribbean are pursuing two modest efforts at
economic integration.
The Central American Common Market involves Costa Rica, El Salvador, Guatemala,
Honduras, and Nicaragua.

For years, progress was constrained by war.

The group has not yet formed a customs union, but officials say the goal is
greater integration, closer political ties, and a single currency.

The Caribbean Community and Common Market formed in 1973 and has 15
members.

Members are trying to establish a single market, but are hampered by the
fact that members trade more with nonmembers than with each other.

A future Free Trade Area of the Americas would stretch from the northern tip of
Alaska to the southern coast of Tierra del Fuego in South America.

The free trade area would include 34 nations and a population of at least 830
million consumers.

But the effort continues to face opposition from labor organizations,

environmentalists, and others opposed to globalization.

What is the objective of the Free Trade Area of the Americas and what are its
prospects for success?

Answer:
The Free Trade Area of the Americas would be a trading bloc stretching from Alaska
to Tierra del Fuego in South America. It would likely supersede all existing trading

blocs in North, Central, and South America. It faces opposition from labor
organizations, environmentalists, and others opposed to globalization.

The Association of Southeast Asian Nations represents a market of 560 million

consumers and a gross domestic product of $1.1 trillion.

Its stated objectives are to promote economic, social, and cultural

development; safeguard economic and political stability; and serve as a
forum to resolve disputes fairly and peacefully.

Adding members Cambodia, Laos, and Myanmar was an effort to counter

Chinas resources of cheap labor and abundant raw materials.

Altogether, members of the organization for Asia-Pacific Economic Cooperation

account for more than half of world trade.

Yet, the group is not designed as a free trade bloc.

The group tries to strengthen the multilateral trading system and expand the
global economy by simplifying and liberalizing trade and investment
procedures.

It hopes for completely free trade and investment throughout the region by
2020.

Australia and New Zealand created the Closer Economic Relations Agreement in
1983 to advance free trade and further integrate their economies.

They eliminated all tariffs and quotas in 1990, five years ahead of schedule.

Each nation allows goods and most services sold in the other nation to be
sold within its borders.

Each country also recognizes the professional certifications of people allowed

to practice in the other country.

Six countries in the Middle East banded together to cooperate with increasingly
powerful trading blocs in Europe.

The Gulf Cooperation Council members are Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia, and the United Arab Emirates.

The group allows citizens to travel freely among member nations; and it
allows citizens to own businesses and other property in other member
nations without local partners.

The group of 15 nations called the Economic Community of West African States
intends to form an eventual common market and monetary union.

It achieved some early progress but suffers from political instability, poor
governance, weak national economies, poor infrastructure, and poor
economic policies.

Another group of 53 nations joined forces in 2002 to create the African Union.

It aims to eliminate the vestiges of colonialism and apartheid, promote unity

and solidarity, intensify development cooperation, safeguard members
sovereignty, and promote international cooperation within the United Nations.

The correct answer is b. Asia-Pacific Economic Cooperation