Ch. 9: Regional Economic Integration

The European Union is expected to become a superpower of the same order as the __________.

U.S.

The North American Free Trade Agreement (NAFTA)

agreement signed by the United States, Canada, and Mexico in 1992 to remove barriers on the cross border flow of services b/w all three of them - abolished tariffs on 99% of goods traded - removal of most restrictions on FDI among members

free trade area (FTA)

all barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers

Initially, the euro was valued at $_______, then fell in value relative to the dollar, but strengthened to an all-time high of $_______ in March 2008. In early 2018, the exchange rate was 1 euro = $________.

- $1.17 - $1.54 - $1.23

Which countries have joined the European Union over the past 16 years?

- 2004: ten countries joined expanding the EU to 25 states - 2007: Bulgaria and Romania joined - 2013: Croatia joined expanding it to 28 states - Turkey has also applied for membership, but it is not clear whether it will be accepted

the political case for integration

- by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease - by linking countries together, they have greater clout and are politically much stronger in dealing with other nations

customs union

- eliminates trade barriers b/w member countries and adopts a common external trade policy - most countries that enter desire further integration in the future - the Andean Community (b/w Bolivia, Columbia, Ecuador, and Peru)

How does NAFTA benefit the U.S. and Canada?

- gave access to a large and increasingly prosperous market and lower prices for consumers from goods produced in Mexico - U.S. and Canadian firms with production sites in Mexico are more competitive in world markets

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

political union

- independent states combined into single union - requires that a central political apparatus coordinate economic, social, and foreign policy for member states - the U.S. is an even closer example of this

economic union

- involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries' tax rates, and a common monetary and fiscal policy - involves sacrificing a significant amount of national sovereignty - the European Union (EU)

What cases are made against NAFTA?

- jobs could be lost and wage levels could decline in the U.S. and Canada - pollution could increase due to Mexico's more lax standards - Mexico fears its loss of sovereignty

common market

- no barriers to trade b/w member countries, a common external trade policy, and the free movement of the factors of production - requires significant harmony among members in fiscal, monetary, and employment policies - Mercosur (b/w Brazil, Argentina, Paraguay, and Uruguay) hopes to achieve this status

Why did Britain leave the European Union?

- not comfortable with loss of national sovereignty - immigration has become a key issue

Single European Act objectives

- remove all frontier controls b/w 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 b/w member countries - abolish restrictions on cabotage

examples of the major free trade areas:

- the European free trade association (incl. Norway, Iceland, Liechtenstein, and Switzerland) - the North American free trade agreement (incl. the U.S., Canada, and Mexico)

The European Union is the result of:

- the devastation of two world wars on Western Europe and the desire for a lasting peace - the desire by the European nations to hold their own on the world's political and economic stage

political structure of the European Union

1. European Commission 2. Council of the European Union 3. European Parliament 4. Court of Justice

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 results in a loss of national sovereignty

Europe's two trade blocs

1. the European Union with 28 members (Britain has voted to exit) 2. the European Free Trade Associated with 4 members

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 - the EU is not this - countries may react differently to changes in the euro

Establishment of the euro

in 1992, the Maastricht Treaty committed EU members to adopt a single currency, the euro - the euro is used by 19 of the 28 member states - created the euro zone, the 2nd 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 opted out

How does NAFTA benefit Mexico?

increased jobs as low-cost production moves south and more rapid economic growth

What does NAFTA protect?

intellectual property rights

the case against regional economic integration

it only makes sense when the amount of trade it creates exceeds the amount it diverts - trade creation - trade diversion

Membership implies a loss of control over ___________ ___________.

monetary policy

trade diversion

occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

trade creation

occurs when low cost producers within the free trade area replace high cost domestic producers

What did NAFTA do to implement a punishment when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored?

they established two commissions to impose fines and remove trade privileges

Since its establishment, the euro has had a volatile __________ ___________ with the U.S. dollar.

trading history

How will leaving the EU affect Britain?

Britain will likely see significant short- to medium-term costs - less likely to attract inward investment from foreign multinationals - exports to EU may fall - some MNCs may move operations to other EU countries

Brexit

British exit from the European Union - voted to leave on June 23, 2016; two years to negotiate

Britain is the EU's 2nd largest economy, and is seen as a counterweight to which country?

Germany

Levels of Economic Integration

Less integrated to more integrated: 1. Free Trade Area (FTA) 2. Customs Union (CU) 3. Common Market (CM) 4. Economic Union (EU) 5. Political Union (PU)

Treaty of Rome

established the European Economic Community in 1957 - the name was changed to the EU in 1993

Single European Act

committed EC countries to work toward establishment of a single market by 1992

European parliament

debates legislation proposed by the commission and forwarded to it by the council - treaty of lisbon increased power

NAFTA led to the application of what type of national standards?

environmental

European commission

proposes EU legislation, implements it, and monitors compliance

Past two decades brought in many regional trade blocks that promote _____________ ______________ _________________.

regional economic integration

the economic case for regional integration

regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment b/w countries beyond those attainable under international agreements such as the WTO - since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration

What was the forerunner of the EU?

the European Economic Community (1957)

Court of Justice

the supreme appeals court for EU

European council

the ultimate controlling authority w/in the EU