Part Three The Global Trade and Investment Environment

Regional Economic
Integration
Chapter
Nine
 Regional Economic Integration

 Involves organizing individual countries into a

group and then abolishing restrictions on the
trade of goods and services with member
countries

 Economic integration is not synonymous with

free trade.

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 Why Regional Integration Prevails?
 To exploit gains from free trade and investment
(positive-sum game)
 GATT/WTO not fast enough

 Agreement & coordination is easier between a few

countries than many
 Threat of being left out: Creation of “Economic
Fortresses”

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 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+
 free flow of factors of production (labor, capital, technology)
within market
 Economic Union (EU): CM+
 full integration of members’ economies (common currency,
taxes, monetary policy, etc.)

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 Figure 9.1 Levels of Economic Integration

Political integration

Complete economic integration/Economic union

Common market
X
Customs union

EU
2003 Free trade
area

NAFTA

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 Reasons for Regional Integration

 Economic enhancement of the member states

 Free trade / Free FDI
 Expanded market
 Economies of scale
 Fewer restrictions

 Political Reasons
 Linkages of economies create interdependencies that
reduce the potential for violent conflict (e.g., EU)
 Grouping gives countries more political clout world-
wide

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 Barriers to Integration
 Painful adjustments in certain segments of economy
 Although majority wins, there are losers
 Displaced workers can protest and lobby

 Threat to national sovereignty

 commitment to less government involvement
 key industries may lose protection

 loss of trade, tax, and monetary policy control

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 Other Objections to Trade Blocks

 Trade diversion effects (cf. trade creation effects)

 Many countries are excluded
 Undermines multilateral efforts
 Increases likelihood of trade warfare

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 Trade Creation vs. Trade Diversion
Germany France Chile

Cost of Wine 18 14 13
(Absolute Adv.)
50% Tariff Charged 18 21 19.5
by Germany
Post-Economic 18 (1) 14 (2) 19.5
Integration

(1): Trade creation (2): Trade diversion

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 European Union
 28member countries; 6.9% of world population;
GDP (€14.6 trillion in 2015)
 1951 6 members of coal and steel community
 France, Germany (W.), Italy, Belgium, Luxembourg, the
Netherlands
 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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 European Union
 1981 2nd enlargement: Greece
 1986 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

 1995 4th enlargement: Austria, Finland, Sweden
 2004 Another 10 nations joined
 2007 Bulgaria, Romania; 2013 Croatia
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 The Euro
 In December 1991, adopted by the Maastricht
Treaty as a new European common currency by
1/1/1999
 Actual currency was issued after 1/1/2002

 The euro now used by 19 member countries and

created the euro zone: not circulated yet in
Britain, Denmark and Sweden

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 The Americas
 North American Free Trade Agreement (NAFTA) in 1989
 USA, Mexico, Canada
 The Andean Pact in 1969
 Bolivia, Chile, Ecuador, Colombia, Peru  Venezuela
joined in 1976, but Chile & Venezuela withdrew
 MERCOSUR in 1988
 Argentina, Brazil, Paraguay, Uruguay

 Central American Common Market: Collapsed in 1969

 Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

 CARICOM & CSME: Caribbean countries

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 NAFTA
 USA, Canada, Mexico: Became law in 1994
 USA-Canada is world’s largest trading relationship
 USA is Mexico’s largest trading partner

 Mexico, USA’s third largest trading partner

 Continuation of integration process through

elimination of tariffs and trade barriers
 Companies in Maquiladoras (special economic
zones on the US-Mexican border) enjoyed their
duty-free and tariff-free status

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 Elsewhere
 Associationof Southeast Asian Nations
(ASEAN) in 1967: 10 member countries
 Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand, Vietnam

 Asia Pacific Economic Cooperation (APEC)

 USA, Japan, China, Korea + 17 Pacific nations
 Total trade has increased more than 6.7 times to $20
trillion between 1989 and 2015

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 Implications for Firms: Opportunities
 Formerly restricted markets are now open
 Less protectionism, higher economic growth
 Outsiders must set up subsidiaries to become insiders

 Costs of doing business are lower

1 single market consisting 28 nations
 rationalization and integration of operations is

possible and required

 Outsiders may be shut out = less competition

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 Implications for Firms: Threats

 Barriers to integration: national/cultural differences

persist
 Increased price competition within blocks

 Threats to outside firms: Long-term improvement of

competitiveness of many EU firms within the block:
Transforming into global players through
rationalization of operations 
 Across-trading-block rivalry can increase barriers

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 Points to Remember
 European Union is the most advanced block,
followed by NAFTA
 Free Trade Agreements do not take effect
immediately
 Usually a long “phase-in” period
 Trade regions may harm global free trade
 Fortress Europe? Fortress America? Fortress Asia?

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