Chapter 9: Regional Economic Integration

North American Free Trade Agreement (NAFTA)

U.S., Canada, Mexico

North American Free Trade Agreement (1994)

(1) Abolished tariffs on 99% of the goods traded between members, (2) Removed barriers on the cross-border flow of services, (3) Protects intellectual property rights, (4) Removes most restrictions on FDI between members, (5) Allows each country to apply environmental standards, (6) 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

Political Structure of the European Union

(1) European Commission, (2) European Council, (3) European Parliament, (2) Court of Justice

Levels of Economic Integration

(1) Free trade area, (2) Customs union, (3) Common Market, (4) Economic Union, (5) Political Union, (6)

The Case against NAFTA

(1) Jobs would be lost and wage levels would decline in the U.S. and Canada, (2) Pollution would increase due to Mexico's more lax standards, (3) Mexico would lose its sovereignty

Costs of the Euro

(1) Loss of control over national monetary policy, (2) EU is not an optimal currency area

Benefits of the Euro

(1) Savings from having to handle one currency, rather than many, (2) Makes it easier to compare prices across Europe, (3) Producers forced to look for ways to reduce production costs, (4) Boosts development of highly liquid pan-European capital market, (5) Will open investment options to individuals and institutions

Regional Economic Integration is Only Beneficial if the Amount of Trade it Creates Exceeds the Amount it Diverts:

(1) Trade creation, (2) Trade diversion; WTO rules should ensure that a free trade agreement does not result in trade diversion, but they do not cover some nontariff barriers

The Euro Experience

(1) Volatile trading history since establishment in 1999, (2) the Euro has weakened since 2008, (3) faces Slow economic growth and large budget deficits among EU member states, (4) Bailout package to rescue Greece in 2010, (5) Some nations have put plans to adopt euro on hold

The Political Case for Integration has Two Main Points:

(1) 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, and (2) by linking countries together, they have greater clout and are politically much stronger in dealing with other nations

There are Two Trade Blocks in Europe:

(1) the European Union (EU) - 27 members (Britain voted out of the EU) and (2) the European Free Trade Association The EU is by far the more significant, not just in terms of membership, but also in terms of economic and political influence in the world economy.

Regional Trade Blocs in Africa

17 trade blocs on the African continent; Since many countries support the use of trade barriers to protect their economies from foreign competition, meaningful progress is slow; The East African Community (EAC) re-launched in 2001, established a common market in 2010 and is moving toward the goal of a monetary union; Plans for Tripartite Free Trade Area (TFTA) began in 2015; Many of these groups have been dormant for years. Significant political turmoil in several African nations has persistently impeded any meaningful progress. Also, deep suspicion of free trade exists in several African countries; The argument most frequently heard is that because these countries have less developed and less diversified economies, they need to be "protected" by tariff barriers from unfair foreign competition. Given the prevalence of this argument, it has been hard to establish free trade areas or customs unions

The Andean Community

A 1969 agreement among Bolivia, Chile, Ecuador, Colombia, and Peru to establish a customs union using the EU model; had more or less failed by the mid-1980s; was re-launched in 1990, and now operates as a customs union and was renamed the Andean Community in 1997; signed an agreement in 2003 with Mercosur to restart negotiations towards the creation of a free trade area

Political Union

A central political apparatus coordinates economic, social, and foreign policy; EU headed toward at least partial political union, and the U.S. is an even closer example of political union

Customs Union

A group of countries committed to 1) removing all barriers to the free flow of goods and services between each other, and 2) the pursuit of a common external trade policy; The EU began as a customs union; Andean Community (formerly the Andean Pact) (Bolivia, Colombia, Ecuador, Peru)

Common Market

A group of countries committed to 1) removing all barriers to the free flow of goods and services, and factors of production between each other, and 2) the pursuit of a common external trade policy; No restrictions on immigration, emigration, or cross-border flows of capital among member countries; Requires harmony and cooperation on fiscal, monetary, and employment policies; Mercosur (Argentina, Brazil, Paraguay, Uruguay) is hoping to establish a common market (Venezuela accepted for membership but awaiting ratification by Paraguay)

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 (Definition)

Agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other

Impediments to Integration

Although a nation as a whole may benefit significantly from a regional free trade agreement, certain groups and governments may lose concerns over national sovereignty

CARICOM

An association of English-speaking Caribbean states that are attempting to establish a customs union in 1973

European Union (EU)

An economic union, although an imperfect one since not all members of the EU have adopted the euro, and differences in tax rates across countries still remain

British Exit from the European Union (Brexit)

British electorate voted to leave in 2016 (Based on loss of national sovereignty, and immigration issues); Treaty of Lisbon: Britain has two years to negotiate terms of exit; Britain's exit is a concern (seen as a counterweight to economic power of Germany)

Regional Economic Integration

By entering into regional trade agreements, groups of countries aim to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO; (1) WTO must be notified, (2) Economists believe free trade agreements produce gains from trade for all member countries, (3) GATT and WTO seek to reduce trade barriers but has been less successful, (4) EU has been the most ambitious move toward regional economic integration, (5) NAFTA 1994 - Free trade area Canada, US, and Mexico, (6) Mercosur 1991 - Argentina, Brazil, Paraguay, and Uruguay

Various efforts at integration have been attempted in Asia, Africa, and elsewhere:

China's "One Belt One Road" strategy and the TPP (Trans Pacific Partnerships); Trade agreements: Obama pursued joining the TTP - 11 pacific rim countries along with Australia, New Zealand, Japan, North Korea, Malaysia and Chile; And the TTIP Transatlantic Trade and Investment Partnership with the EU; However, President Trump pulled the US out of the TPP and the TTIP is still under negotiation

The Future of NAFTA

Continually a target of politically-motivated criticism; Donald Trump wants to renegotiate NAFTA

European Parliament

Elected EU body that provides consultation on issues proposed by the European Commission; 751 members elected by the member states; Debates legislation proposed by the commission and forwarded to it by the council; Treaty of Lisbon increased power of the parliament

Free trade area

Eliminates all barriers to the trade of goods and services among member countries; Each country is allowed to determine its own trade policies with regard to nonmembers

Enlargement of the European Union

Expansion into eastern Europe; 13 countries applied by end of the 1990s (Had to establish stable democratic governments and Show respect for human rights); New members had to wait to adopt euro; Eastern European countries only account for 5 percent of the GDP of current EU members; Turkey has been denied entry because of human rights concerns; The new members included the Baltic countries, the Czech Republic, and the larger nations of Hungary and Poland; The only new members not in eastern Europe were the Mediterranean island nations of Malta and Cyprus

Association of Southeast Asian Nations (ASEAN)

Formed in 1967 as an attempt to establish a free trade area among Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam; Currently includes Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia; Fosters freer trade between member countries and to achieve cooperation in their industrial policies; ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in 2003; ASEAN and AFTA are moving towards establishing a free trade zone

Do regional trade agreements promote free trade?

In theory, yes, but the world may be moving toward a situation in which a number of regional trade blocks compete against each other

The Establishment of the Euro

Maastricht Treaty; Treaty agreed to in 1991, but not ratified until January 1, 1994, that committed the 12 member states of the European Community to a closer economic and political union; Since its establishment in January 1, 1999, the euro has had a volatile trading history with the U.S. dollar; it is the second most widely-traded currency after dollar; Britain (when a member of the EU), Denmark, and Sweden don't use the euro

The Case for NAFTA

Mexico would benefit from: Increased jobs as low cost production moves south and will see more rapid economic growth as a result; U.S. and Canada would benefit from: (1) Access to a large and increasingly prosperous market, (2) The lower prices for consumers from goods produced in Mexico, (3) Low cost labor and ability to be competitive in world markets, (4) Increased imports by Mexico

NAFTA: The Results

NAFTA's early impact was subtle, and both advocates and detractors may have been guilty of exaggeration; Overall impact small, but positive

European Free Trade Association (EFTA)

Norway, Iceland, Liechtenstein, Switzerland

Focus on Managerial Implications

Opportunities: (1) Opens new markets, (2) Allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal; Threats: (1) Business environment becomes competitive, (2) There is a risk of being shut out of the single market by the creation of a "trade fortress", (3) Growing opposition to free trade areas

Mercosur

Originated in 1988 as a free trade pact between Brazil and Argentina; Expanded in 1990 to include Paraguay and Uruguay and in 2005 with the addition of Venezuela; May be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis; Efforts stalled on reducing trade barriers between member states

Evolution of the European Union

Product of two political factors: (1) The devastation of western Europe during two world wars and the desire for a lasting peace, and (2) The European nations' desire to hold their own on the world's political and economic stage; The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951; The EC (European Community) was formed in 1957 at the Treaty of Rome. While the original goal was for a common market, progress was generally very slow

Optimal Currency Area

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

Other Trade Agreements

Renewed emphasis on bilateral and multilateral trade agreements since collapse of Doha Round talks; Trans Pacific Partnership (TPP), and Transatlantic Trade and Investment Partnership (TTIP)

Economic Union

Requires a high degree of integration, a coordinating bureaucracy, and the sacrifice of national sovereignty to the bureaucracy; A group of countries committed to: (1) removing all barriers to the free flow of goods and services, and factors of production between each other, (2) the adoption of a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy, (3) the pursuit of a common external trade policy

European Commission

Responsible for proposing EU legislation, implementing it, and monitoring compliance; Run by commissioners appointed by member countries and approved by the European parliament

Central America Free Trade Agreement (CAFTA)

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

There is a move toward greater regional economic integration in the Americas

The biggest effort made toward an attempt at economic integration in the Americas is the North American Free Trade Agreement (NAFTA); Other efforts include the Andean Community and Mercosur; In addition, there are plans to establish a hemisphere wide Free Trade Area of the Americas (FTAA)

The Single European Act of 1987

The objectives of the Act: (1) Remove all frontier controls among EC countries, (2) Apply the principle of "mutual recognition" to product standards, (3) Institute open public procurement to nonnational suppliers, (4) Lift barriers to competition in the retail banking and insurance businesses, (5) Remove all restrictions on foreign exchange transactions between member countries by the end of 1992, (6) Abolish restrictions on cabotage (the right to operate sea, air, or other transport services within a particular territory) by the end of 1992

Caribbean Single Market and Economy (CSME)

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

Court of Justice

The supreme appeals court for EU law; A European Union-sanctioned treaty that will allow the European Parliament to become the co-equal legislator for almost all European laws

European Council

The ultimate controlling authority within the EU One representative from the government of each member state; The heads of state of EU members and the president of the European Commission (ultimate controlling authority within the EU)

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

Trade Diversion

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