IB 320F UT Froehls Chapter 9

Decades of integration

- It all started in 1957 (Treaty of Rome), but only about 30 years later EC countries committed to work toward establishment of a single market by 1992 (Maastricht Treaty) - Objectives of the act - Create a true Single Market, e.g., Remove all frontier controls between EC countries Apply the principle of mutual recognition to product standards Institute open procurement to non-national suppliers Lift barriers to competition in retail banking and insurance Remove all restrictions on foreign exchange transactions between member countries Abolish restrictions on cabotage

Integration in the Americas

- Regional economic integration is on the rise in the Americas The most significant attempt is the North American Free Trade Agreement - works, but under threat The Andean Community - pretty inactive Mercosur - stop and go, stop and go Pacific Alliance - the future is bright There are also attempts to form a Free Trade Area of the Americas (FTAA) pp28

The European SME

99.8% of EU businesses, but often neglected Seen as core source of change in EU EU has uneven entrepreneurship culture (but it's gaining traction, e.g., Berlin, Lisbon, Barcelona...and even Greece now) SME can't escape high taxation in most countries while MNCs, especially US MCNs can (see controversy around Apple, Starbucks, Amazon) Fun question - Where would you start you SME in the EU? What would it be? Why? What the EU can do for your SME...and what is an SME anyway? Want to invest in them?

Andean Community

A 1969 agreement among Bolivia, Chile, Ecuador, Colombia, and Peru to establish a customs union

Treaty of Lisbon

A European Union- sanctioned treaty that will allow the European Parliament to becomes the co-equal legislator for almost all European laws

Political Union

A central political apparatus coordinates economic, social, and foreign policy

European Free Trade Association (EFTA)

A free trade association including Norway, Iceland, Liechtenstein, and Switzerland

Customs Union

A group of countries commited to 1. removing all barriers to the free flow of goods and services between each other 2. the pursuit of a common external trade policy

Economic Union

A group of countries committed to 1. removing all barriers to the free flow of goods, services, and factors of production between each other 2. the adoption of a common currency 3. the harmonization of tax rates 4. the pursuit of a common external trade policy

Common Market

A group of countries committed to 1. removing all barriers to the free flow of goods, services, and factors of production between each other 2. the pursuit of a common external trade policy

Free ttrade Area

A group of countries committed to removing all barriers to the free flow of goods and services between each other but pursuing independent external trade policies

Central American Common Market

A trade pact among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, which began in the early 1960s but collapsed in 1969 due to war

Regional Economic Integration

Agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services, and factors or production between each other

Economic Integration (largely regional)

Agreements regarding: Tariffs Quotas Mobility of capital and labor Economic issues Political issues Growing participation - Currently 250+ RTAs in force - Currently ~40 RTAs announced to be either signed and not yet in force or still under negotiations (Spring 2016)

CARICOM

An association of English- speaking Caribbean states that are attempting to establish a customs union

European Union (EU)

An economic and political union of 28 countries (2015) that are located in Europe

Asia-Pacific Economic Cooperation

Asian Pacific Economic Cooperation (APEC) was founded in (1990) to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region APEC currently has 21 members including the United States, Japan, and China

Common Market (Single Market)

Common Market = a FTA w/ no trade barriers for factors of production (i.e., land, labor, and capital) Example - European Economic Area (EEA) = EU, Lichtenstein, Norway, & Iceland Single Market = a Common Market w/ common policies on product regulation Simply a more advanced Common Market Example - European Economic Community (EEC) = predecessor to the EU

Well-integrated Trade Blocs

Customs & Monetary Union = a Customs Union w/ a Monetary Union Switzerland & Lichtenstein Economic & Monetary Union (EMU) = an Economic Union w/ a Monetary Union - Eurozone - The Union State (of Russia & Belarus)

Customs Union

Customs Union = An FTA w/ common external trade barriers, i.e., an FTA w/ a common external trade policy Examples Mercosur - Argentina, Brazil, Paraguay, & Uruguay [1991]; Venezuela [31 Jul 2012]; & Bolivia [Accessing Member - 7 Dec 2012] Andean Community (Comunidad Andina - CAN) - Bolivia, Colombia, Ecuador, and Peru [1996]

Regional Economic Integration

Definition: Agreements by states to reduce/remove trade barriers between countries to increase the free flow of factors of production (e.g., goods, services, capital) Bilateral vs. Multilateral Agreements Results in Regional Trade Blocs/Agreements (RTAs) i.e. groupings of states/countries where trade barriers have been reduced/eliminated by the participating states to increase the free flow of factor(s) of production Need to be in synch with WTO rules (e.g., notification

The European MNCs

Despite relative decline vis-à-vis new MNCs from Emerging Markets- EU MNCs still key global players Little by way of new economy MNCs (few exceptions, e.g., Rocket Internet) Ranking of European MNCs by revenues

Where do new member states fit in?

Differences but all have reconfigured their economic, political and social systems in last 15 years Performance varied, corruption varies, state of development varies In general - accepted economic liberalism Baltic States - flat taxes and conservative budgets Bigger new members, not so aggressively liberal Visegrad group (Poland, Hungary, Czech Republic, Slovakia) with one voice re migrant crisis Baltic States survived population losses of up to 25% Fun fact: How Estonia rebuffed (WSJ, 4:36 min) Professor Krugman's ideology and trashing with facts and tweets

National economic differences

Different organisational structures Legal and finance structure Ownership Family firms, Mittelstand (Germany, Austria) Each country has its own strengths, e.g., Germany: machinery/equipment, motor, chemicals UK: food and beverages, publishing/printing, chemicals France: food and beverages, chemicals, metal prods Sweden: Motor, machinery/equip, pulp/paper Spain: global firms with strong LATAM ties Etc...

Europe - unity and diversity

Diversity within broad general parameters Diversity from interaction of: Economics Politics History Social preferences and culture Diversity leads to difference in emphasis for policy and business

Economic Union

Economic Union = a Customs Union w/ a Single Market (it corresponds politically to a Confederation) Example - European Union

European Parliament

Elected EU body that provides consultation on issues proposed by the European Commission

Europe 2020 priority targets: a response to a perceived competitiveness problem

Employment: 75% of 20-64 year olds to be employed R&D: 3% of GDP to be invested in R&D (on average)* Climate change and energy Greenhouse gas emissions to be 20% below 1990 levels 30% energy from renewables 20% increase in energy efficiency Education Early school leavers below 10% 40% of 30-34 year olds with tertiary education Fighting poverty and social exclusion - 20 million fewer to be at risk of poverty and social exclusion

Subject to similar domestic and international challenges

Environment Employment Demography Increased competition from Asia Technology changes International economic cycles Increased capital mobility Economic interdependence Economic and political integration

European competitiveness at the heart of most underlying EU policies

European Competitiveness shows North- South split These lie at heart of problems of Euro crisis This is supported by 'ease of doing business' index Issue is lack of reform Almost every EU goal, plan, directive, or policy references the issue of raising competitiveness Global Competitiveness Index (2015/16)

Free Trade Areas (FTAs)

FTA = a trade bloc that has eliminated (or is committed to eliminating) all internal trade barriers for goods and services - Each state determines its trade policy w/ re to external states - Account for ~90% of all trade blocs Examples NAFTA ASEAN (Association of Southeast Asian) Nations) - Brunei, Indonesia, Malaysia, Philippines, Singapore, & Thailand [1992]; Vietnam [1995]; Laos & Myanmar [1997]; & Cambodia [1999]

Reasons for increase in bilateral and regional trade agreements

Failure / limits of GATT / WTO Fewer countries Common economic objectives Often considerable trade activity Often cultural similarities Regional political objectives (e.g., making war unthinkable) Easier agreements

Fiscal Union

Fiscal Union = A Monetary Union w/ a common fiscal policy (i.e., policy of taxing, borrowing, and spending) Currently, a big issue for the Eurozone (e.g., discussion about Greece, Ireland)

North American Free Trade Agreement (NAFTA)

Free trade area among Canada, Mexico, and the United States

Key challenges for WTO andglobal trade agreements

Getting to consensus "North/South" tensions and disputes - Agricultural policy - Intellectual property (including pharmaceuticals) - Market access/tariff rates - Labor access Transparency Anti-dumping Negotiation stalemate/economic tensions

Benefits of the Euro

Handling one currency, rather than many Easier to compare prices across Europe Increased competition promotes greater efficiencies in production The pan-European capital market should further develop Range of investment options open both to individuals and institutions should increase

The 7 flagship initiatives at EU and state level to get to Europe 2020

Innovative Union Youth on the move A Digital Agenda for Europe Resource-efficient Europe An industrial policy for the globalization era An agenda for new skills and jobs European platform against property What does this list remind you of in a corporation?

Impediments to integration

Integration is not easy to achieve or maintain - complexity of administration, finding compromise, getting majorities, etc. There are three main impediments to integration: 1. It can be costly - while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose 2. It can result in a loss of national sovereignty 3. The risk of Trade Diversion

Why the Pacific Alliance might have a bright future (unlike Mercosur et al.)

Like-minded countries - free markets and trade All countries with strong growth rates Stable democracies, same languages (?) Step-by-step liberalization of labor movements and preferential treatment of each other Partially shared consulates / embassies Joined interest in strong trade with Asia (e.g., in TPP or successor) Reached more in 5 years than Mercosur in 25 Invited free market & stable Uruguay to sign FTAs Simple governing structure with rotating leadership

Growth / Enlargement of the EU

Many countries, particularly from Eastern Europe, have applied for membership Ten countries joined in 2004 expanding the EU to 25 states, with population of 450 million people, and a single continental economy with a GDP of €11 trillion In 2007, Bulgaria and Romania joined Croatia joined in 2013 bringing membership to 28 Turkey has also applied for membership, but given the last two years under Erdogan, highly unlikely it will be accepted; higher chance for Serbia, Montenegro and others Applicants have to fulfill Copenhagen Criteria

Cost of the Euro

Membership implies a loss of control over monetary policy The EU is not an optimal currency area: an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy Countries may react differently to changes in the euro How do you reconcile one currency with different fiscal regimes? The European Central Bank (ECB) was established to manage monetary policy, but some question its ability to act independently.

Perceived benefits of NAFTA

Mexico - Increased jobs as low cost production moves south, more rapid economic growth, industrialization and new skills The U.S. and Canada - Access to a large and increasingly prosperous market and lower prices for consumers from goods produced in Mexico Seamless integrated production chains lower costs and raise efficiency U.S. and Canadian firms with production sites in Mexico more competitive in world markets

Common characteristics of European economies

Mixed (social market) economies - details vary (Sapir's Model) Similar trends in economic structure Decline of primary and secondary sectors (i.e. agriculture and industry) - began earlier in Western Europe Shift to service economy away from agriculture and manufacturing 1960s: services c. 45% GDP in most countries Early 2010s:70-80% the norm

Monetary Union (I/II)

Monetary Union - A grouping of states that share the same currency, i.e., Currency Union Formal = Adoption of common currency by 2 or more states. Examples CFP Franc [XPF]- French Pacific Banking Agreement - former French pacific colonies of French Polynesia, New Caledonia, Wallis & Futuna CFA Franc [XAF & XOF] - used in 14 former French African colonies Informal = Unilateral adoption of foreign currency by a state Example - Dollar [$/USD] is used exclusively in Panama, Palau, British Virgin Islands, East Timor, Ecuador, El Salvador, Marshall Islands, Micronesia, Turks & Caicos, Islands, & Caribbean Netherlands

Broad European characteristics

Most of Europe within EU (exceptions) Member state populations vary from 0.4 million (Malta) to 87 million (Germany) GDP per head (indexed) varies widely - 45 (Bulgaria) to 257 (Luxembourg) (EU28 - 100) Social provision - 14% GDP in Latvia to 34.6 % in Denmark A combination of common culture and history with key differences All remember well the bloody 20th century (and before), and they never want to see it repeated again

Pacific Alliance

Notes: Costa Rica and Panama have asked to join the Pacific Alliance as full members and are candidates to join once they meet the requirements. pp 34

Pros and Cons of Economic Integration

PROS Increased trade Increased capital flows Production efficiencies Price reductions Change in job market CONS Loss of national sovereignty Labor dislocation (domestic) Labor dislocation (foreign invasion?) Potential trade diversion

Preferential Trade Areas (PTAs)

PTA = a trade bloc that has reduced the internal trade barriers for certain goods and services - Essentially the first step in integration - Generally exist prior to FTAs Examples - Bilateral = Agreements between U.S. & Canada and U.S. and Mexico prior to NAFTA - Multilateral = Agreements between EU and former colonies

Mercosur

Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade

Complete Economic Integration

Political Union = Economic & Fiscal Union Generally results in a federal or single state Examples The United States of America USSR UK Federal Republic of Germany

Types of Trade Blocs

Preferential Trade Area Free Trade Area (FTA) Customs Union Common Market Single Market Economic Union Monetary Union Fiscal Union Customs and Monetary Union Economic and Monetary Union Political Union

Agenda - Regional Economic Integration

Recognize the limits of (seeking) global agreements Describe the different levels of regional economic integration Understand the economic and political arguments for and against regional economic integration Explain the history, current scope, and future prospects of the world's most important regional economic agreements Understand the implications for business that are inherent in regional economic integration agreements

optimal currency area

Region in which similarities in economic activity make a single currency and exchange rate feasible instruments of macroeconomic policy

Regional vs. Global Integration

Regional PROS Comparable mkts Manageability CONS Comparable mkts, thus more limited potential "Fortress" / trade diversion WTO PROS Global forum Efficiency potential "North/South" exchange CONS Consensus difficult Cultural/political gaps

Potential issue - Trade diversion

Regional economic integration only makes sense when the amount of trade it creates exceeds the amount it diverts Good: Trade creation occurs when low cost producers within the free trade area replace high cost domestic producers Bad: Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

Main elements of Global Europe

Revitalised Market Access Strategy - begun 1990s Strong commitment to WTO's liberalisation agenda New generation of bilateral agreements in markets with greatest potential - to extend way beyond trade A stronger relationship with China Focus on intellectual property Initiatives to open 3rd country procurement markets Review of use of trade defence instruments such as anti-dumping duties Ensure Global Europe and internal EU policies are consistent and reinforce competitiveness and reform agenda

Perceived drawbacks of NAFTA

Some jobs lost and wage levels could decline in the U.S. and Canada Mexican workers could emigrate north Pollution could increase due to Mexico's more lax standards Mexico would lose its sovereignty Hollowing out of US or Canadian industrial production, if Mexico "too" successful

Renegotiating NAFTA?!

Some samples of recent statements and views on the trade pact, its overall impact, and the future of it The US President on NAFTA, and a reply from an economist (2:19 min; 2:51 min ) The Canadian government on NAFTA, TPP, and China - advancing trade everywhere(5:25 min) The Mexican government on NAFTA and Mexican interests and strategies (16:22 min) Here is the latest - a 5 year sunset provision? (2:14 min)...but "talks are going well" (2:12)

Court of Justice

Supreme appeals court for EU law

ASEAN and AFTA

The Association of Southeast Asian Nations (ASEAN) (1967) - fosters freer trade between member countries and cooperation in their industrial policies (Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia An ASEAN Free Trade Area (AFTA) (2003) between the six original members of ASEAN came into full effect to reduce import tariffs among members - Vietnam, Laos, and Myanmar have all joined - In 2010, ASEAN signed a free trade agreement with China to remove tariffs on 90% of all traded goods

Maastricht: The establishment of the Euro

The Euro is used by 19 of the 28 member states Created the euro zone, the second largest currency zone in the world after that of the U.S. Dollar Countries that participate have agreed to give up control of their monetary policy Britain, Denmark and Sweden are still on the sidelines No desire of Poland or the Czech Republic to join the Eurozone

How the EU works (abridged)...

The European Commission: proposes EU legislation, implements it, and monitors compliance The European Council: the ultimate controlling authority within the EU The European Parliament: debates legislation proposed by the commission and forwarded to it by the council The Court of Justice: the supreme appeals court for EU law

NAFTA - The basics

The North American Free Trade Agreement (NAFTA) 1994 (the U.S., Canada, and Mexico) Abolished tariffs on 99% of goods traded Removed barriers on the cross-border flow of services Protects intellectual property rights Application of national environmental standards Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored

Central America Free Trade Agreement (CAFTA)

The agreement of the member states of the Central American Common Market joined by the Dominican Republic to trade freely with the US

European Council

The heads of state of EU members and the president of the European Commission

EU - Key points

The main reason for the EC, EU, and the whole project... Some key statistics and how the EU works Understand that's an ongoing, multi-decade process with many players on different levels - from Treaty of Rome to Maastricht to the Euro to Europe 2020 and beyond Unity >= diversity Sapir's matrix of socio-economic models Enhancing competitiveness of states and businesses at the core of EU legislation Brexit issue EU- 28 is world's biggest trading bloc - dwarfs the size of major emerging markets Great variation in size of European economies

Caribbean Single Market and Economy (CSME)

The six CARICOM members that agreed to lower trade barriers and harmonize macroeconomic and monetary policies

Europe's growth problem

Three decades of low growth Financial Crisis and slow recovery in many countries "Europe faces a competitiveness problem" Where competitiveness is ..."the state of being competitive in a context of global markets ... reflecting the capability of the state (and of the economic agents within it) to gain and sustain market share." Europe 2020 launched in 2010 to restore competitiveness and deal with structural issues Smart Growth Sustainable Growth Inclusive Growth

Results of NAFTA

Trade between the three countries increased (only?) by 250% (1993-2005) The members have become more integrated Productivity has increased in member nations Employment effects have been small (!?) Mexico initially became more politically stable, but drug related violence remains a problem Still no true FTA as each country has protected industries (e.g., airlines in US, energy in Mexico) Now viewed by new US Administration of being "unfair" and "bad for the US"

Trade Creation

Trade created due to regional economic integration; occurs when high-cost domestic producers are replaced by low cost foreign producers within a free trade area

Potential new trade pacts to follow

Trans Pacific Partnership (TPP) between 12 nations, both Asian and from the Americas Would cover 40% of world output Almost ready to go (ratified my many states) before US admin. declared its pull-out Remaining countries might continue discussions China longing for leadership position and / or alternative trade pact US pull-out seen by many as huge geo-political strategic blunder vis-à-vis its Asian military allies

Maastricht Treaty

Treaty agreed to in 1992, but not ratified until January 1, 1994 that committed the 12 member states of the European Community to a closer economic and political union

Brexit...but how?

UK voted to leave on June 23, 2016 Have two years to negotiate exit with the EU Haven't been comfortable with loss of national sovereignty Immigration has become a key issue/want to "take back control" of immigration (strong division between countryside and major cities, in particular London Britain is EU's second largest economy and is seen as a counterweight to Germany Britain will likely see significant short- to medium-term costs based on this decision (...or not...?) Less likely to attract inward investment from foreign multinationals Exports to EU may fall

Lots of bilateral/regional agreements

WTO plus - improve terms on which EU companies compete abroad FTAs with EFTA, Mexico, Chile, South Africa, Israel, Korea, Japan, ... Customs Unions with Turkey, Andorra and San Marino Partnership and co-operation agreements with Russia and Ukraine (...but now sanctions against Russia...) CETA (4:00 min) - Canadian European Trade Agreement Will cut 98% of tariffs; ratified by the European Parliament Benefits beyond trade On 21 September 2017 CETA entered into force provisionally. As such most of the agreement will apply; some national parliaments still need to ratify it The Transatlantic Trade Investment Partnership (TTIP) between the EU and US- Probably dead due to massive critique on both sides / Trump

Convergence in economic ideology

Western Europe - Keynesianism displaced by more neo-classical/economic liberal policies to varying degrees Spain, Portugal, Greece - former political dictatorship/economic isolationism - converged to Western Europe Central and Eastern Europe - 45 years as Soviet satellite and command economy - 15 years transition - convergence with Western Europe Left and right policies sometimes confounding expectations, pundits, and critics (e.g., Portugal)

Sapir's matrix of socio-economic models*

chart pp 49 Nordic model (Denmark, Finland, Sweden, Netherlands) Highest level of social protection and welfare Active labour market policy (to offset relative high labour market flexibility) Strong unions and compressed wage structures Consensus Highest level of taxation with tax returns being publicly accessible (e.g., in Finland) ------- Anglo-Saxon (UK and Ireland) Social assistance of 'last resort' Weak unions, wide and increasing wage dispersion High incidence of low paid work Most market-oriented and little employment protection Still differences to US where little insurance against labour market risk Parallels US and UK (e.g., cities vs. countryside divide)? ------ Continental model (Austria, Belgium, France, Germany and Luxembourg) The old social market model - Market to be regulated for socially acceptable outcome and equity Heavy reliance on insurance-based, non-employment benefits and pensions Declining but still strong unions The "old" are protected, the "young" less so Wide swings in performance between countries Germany's outperformance of France due to labour market reforms in the early 2000s? ---- Mediterranean (Spain, Portugal, Greece and Italy) Much of social spending to pensions Social welfare systems dominated by early retirement Collective bargaining - strong compression Strict employment protection Corruption higher in in other socio-economic models Part of the PIIGS group / history of financial crises over last 10 years Uneven economic policies and successes post-crisis (Portugal/Spain vs. Italy/Greece) Protection of the "old" at the expense of the "young" common ("split labour markets")

Global Competitiveness Index

chart pp 69

Treaty of Rome

in 1957 treaty that established the European Community

Levels of Economic Integration

pp 10

Regional Economic Integration - (Potential evolution of a Trade Bloc)

pp 22

European commission

responsible for proposing EU legislation, implementing it, and monitoring compliance

Trade Diversion

trade diverted due to regional economic integration; occurs when low-cost foreign suppliers outside a free trade area are replaced by higher-cost suppliers with a free trade area