International Business Chapter 9
Economic Case for Regional integration
- an attempt to achieve gains from the free flow of trade and investment Beyond those attainable under international agreements - such as the WTO Easier to form an agreement with a few countries than across all nations There has been a push toward regional economic integration
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
Regional Economic Integration Threats
A return to economic nationalism, mercantilist and/or unilateral approaches to trade MNE's outside the trade blocs risk being shut out of the single market
Regional Economic Integration Threats
A return to economic nationalism, mercantilist and/or unilateral approaches to trade MNE's outside the trade blocs risk being shut out of the single market Firms may be unable to pursue the strategy of their choice if the EU or other entity intervenes (e.g., M&A:taxes) Lower trade and investment barriers could lead to increased price competition and lower margins
Association of Southeast Asian Nations ASEAN
AFTA/ (1967) fosters freer trade and cooperation between members _________(2003) expanded __________from the original members to its current level* *Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia ASEAN (2010) signed a free trade agreement with China to remove tariffs
The North American Free Trade Agreement - NAFTA
Abolished tariffs on 99% of goods traded Removed barriers on the cross-border flow of services Protects intellectual property rights Removal of most restrictions on FDI among members Application of national environmental standards
U.S. and Canada's Case for NAFTA
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
Single European Act Further Objectives
Apply the principle of mutual recognition to product standards Institute open procurement to non-national suppliers to open competition Lift barriers to competition in retail banking and insurance opening markets Remove all restrictions on foreign exchange transactions between member countries Abolish restrictions on cabotage (transport of goods or passengers)
'Regional Economic Integration
Arrangement between different regions that often includes the reduction or elimination of trade barriers, and the coordination of monetary and fiscal policies.
Regional Economic Integration of Asia
Association of Southeast Asian Nations (ASEAN):The ASEAN Free Trade Area (AFTA)
Free Trade Area
Barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers Examples: The European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland) The North American Free Trade Agreement (between the U.S., Canada, and Mexico)
The Political case for Regional Integration
By linking countries together they are more interdependent Forming a structure where they regularly have to interact The likelihood of violent conflict and war will decrease Politically much stronger in dealing with other nations as a group
Results of NAFTA
Combined $1.0 trillion in trilateral trade has increased by 258.5% since 1993 in nominal terms. The real, inflation-adjusted increase was 125.2%. U.S.'s real GDP grew 39.3% to $51,638. Canada's per-capita GDP grew 40.3% to $50,001, and Mexico's grew 24.1% to $9,511. U.S has had a loss in manufacturing jobs, but a gain overall (some contend despite NAFTA), with unemployment lower—6.5% in 1993 versus 4.1% today.
European Union
Created in the aftermath of the Second World War. First steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict
Customs Union
Eliminates trade barriers between member countries and adopts a common external trade policy Most countries that enter a customs union desire further integration in the future The Andean Community (between Bolivia, Columbia, Ecuador, and Peru)
Regional Economic Integration Opportunities
Firms can capitalize on opportunities for growth in regions outside the home country, and be closer to customer base Firms can realize economies by producing in regions where the mix of factor costs and skills is optimal
Regional Economic Integration Threats
Firms may be unable to pursue the strategy of their choice if the EU or other entity intervenes (e.g., M&A: taxes) Lower trade and investment barriers could lead to increased price competition and lower margins
Expansion of the European union
From 6 to 28 members (in 1951 the precursor European Coal and Steel Community consisted of Belgium, Germany, France, Italy, Luxembourg and the Netherlands). is a unique economic and political partnership between 28 European countries that together cover much of the continent.
Free Trade Area, a customs union, a common market, an economic union, and finally, a full political union
From Least to Most integrated they are
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
British Exit from the European Union(Brexit)
In 2016, in a EU referendum, the UK voted to leave the EU 51.9% to 48.1% Departure date is set for 11pm UK time on Friday, March 29, 2019 Has until that time to negotiate withdraw which will have significance (EU's second largest economy next to Germany) Britain will see significant costs based on this decision (e.g., less free trade, inward investment, labor costs)
The Andean Community
In the late 1980s, Latin American governments began to adopt free market economic policies In the 1990s, the Andean Pact was relaunched as the Andean Community, and now operates as a customs union In 2003, it signed an agreement with Mercosur to restart negotiations towards the creation of a free trade area Current members include Bolivia, Ecuador, Peru, and Columbia
Economic Union
Involves common currency, harmonization of the member countries' tax rates, common monetary and fiscal policy
Economic Union
Involves sacrificing a significant amount of national sovereignty (The European Union (EU) is an example of economic union)
Economic Union
Involves the free flow of products and factors of production between members, and adoption of a common external trade policy
U.S. and Canada's Case against NAFTA
Jobs could be lost Wage levels could decline
Costs of the Euro
Membership implies a loss of control over monetary policy Countries may react differently to changes in the euro Common currency may blunt a country's ability to conduct fiscal policy
Common Market
No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production
Mercosur
Pros - has been successful increasing trade among member states. Cons - critics call it a 'trade-diverter' favoring malinvestment in non-competitive industries.
Regional Economic Integration Opportunities
Regional economic integration has provided opportunities in the EU, the Americas, Southeast Asia, and Africa Open markets in these regions has provided opportunity for exports and foreign direct investment
Regional Economic Integration Opportunities
Regional economic integration has provided opportunities in the EU, the Americas, Southeast Asia, and Africa Open markets in these regions has provided opportunity for exports and foreign direct investment Firms can capitalize on opportunities for growth in regions outside the home country, and be closer to customer base Firms can realize economies by producing in regions where the mix of factor costs and skills is optimal
Free Trade Area
Regions in which a group of countries have signed a free trade agreement, and invoke little or no price control in the form of tariffs or quotas between each other.
Common Market
Requires significant harmony among members in fiscal, monetary, and employment policies Mercosur (between Brazil, Argentina, Paraguay, and Uruguay) hopes to achieve this status
Political Union Requires
Requires that a central political apparatus coordinate economic, social, and foreign policy for member states The EU is headed toward at least partial political union (U.S is example of closer political union)
The Euro Experience
Since its establishment, the euro has had a volatile trading history with the U.S. dollar Currently € 1 = $1.18 The current account is at a rolling high (Eurozone exports up:with a surplus trade in goods and services on BoP) Euro affected by many variables within the EU and external factors - can you think of some?
Effects of Regional Economic integration
Some say that the world is moving toward a situation in which regional trade blocks compete against each other In this scenario, the gains from free trade within blocs could be offset by a decline in trade between blocs
Political Union
State which is composed of, or created out of smaller states (a process called unification) States that used to be together and are reuniting is referred to as reunification
Regional Economic Integration of Europe
The European Union (EU) and the European Free Trade Association
Europe has two main trading blocs we will discuss next
The European Union with 28 members (Britain has voted to exit i.e., Brexit) The European Free Trade Association with 4 members These are significant for international business growth
Regional Economic Integration of the Americas
The North American Free Trade Agreement (NAFTA)
no common external tariff imposed
The major difference between a customs union and a free trade area is that in a free trade area there is.
Regional Economic Integration Elsewhere
There have been various attempts at regional economic integration throughout Asia and Africa The success of these attempts has been limited The most significant efforts are the Association of Southeast Asian Nations and the Asia-Pacific Economic Cooperation
Euro
Volatile Currency that has surpassed the U.S dollar since 2003
Mexico's Case Against NAFTA
Workers would emigrate north of the border Environmental degradation
Optimal currency area (OCA)
a geographic area in which a single currency would create the greatest economic benefit
Free trade areas
allow the agreeing nations to focus on their competitive advantage and to freely trade, increasing the efficiency and profitability of each country.
a common currency
allows for closer integration of capital markets and facilitates trade
Maastricht Treaty
committed EU members to adopt a single currency, the euro (introduced in 1999) 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
CAFTA-DR
constitutes the first free trade agreement between the United States and the small group of developing countries Central American exports to the United States had already been mostly tariff-free thanks to the 1984 Caribbean Basin Initiative
The European Parliament
debates legislation proposed by the commission and forwarded to it by the council
Mexico(the case for NAFTA)
increased jobs as low cost production moves south and more rapid economic growth
Mercosur
is a South American trade bloc established by the Treaty of Asunción in 1991 and Protocol of Ouro Preto in 1994. Its full members are Argentina, Brazil, Paraguay and Uruguay. Venezuela is a full member but has been suspended since December 1, 2016.
The Andean Community (Spanish: Comunidad Andina, CAN)
is a customs union comprising the South American countries Not Formerly enacted until 1996, came into existence when the Cartagena Agreement was signed in 1969 Based on the EU model, the agreement had more or less failed by the mid-1980s
Transatlantic Trade and Investment Partnership (TTIP)
is a proposed trade agreement between the U.S. and EU TTIP would include the world's two regions with the largest economies (U.S. $19.4T: the EU $19.9T)
Trans Pacific Partnership (TPP)
is a trade agreement between the U.S. with 11 other Pacific Rim countries The agreement was not ratified when the U.S. withdrew, and the remaining countries signed a new agreement
The EU
is a unique economic and political partnership between 28 European countries that together cover much of the continent.
The Central America Free Trade Agreement (CAFTA)
is an expansion of NAFTA : opening markets, eliminating tariffs, reducing barriers to services Five Central American nations (Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua), and the Dominican Republic
A customs union
is made up of a free trade area and includes the introduction of the same import quotas, custom duties which apply to imports within the region
National sovereignty
is the idea that independent nations, which have declared their independence, have an organized government and are self-contained, have a right to exist without other nations interfering.
The Court of Justice
is the supreme appeals court for EU law
The aim of economic integration
is to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement.
The European Commission
proposes EU legislation, implements it, and monitors compliance
North American Free Trade Agreement NAFTA's
purpose is to encourage economic activity between North America's three major economic powers.
Most evidence, however, indicates that
regional trade blocs have promoted trade instead of hindering it
Nevertheless, a common currency
results in a loss of each country's ability to direct fiscal and monetary policy interventions to stabilize individual economies
cabotage
the right of foreign truckers to pick up and deliver goods within another member state's borders
The European Council
the ultimate controlling authority within the EU
The European Central Bank (ECB)
was established to manage monetary policy, but some question its ability to act independently.
The Single European Act (SEA)
was the first major revision of the 1957 Treaty of Rome. The Act set the European Community an objective of establishing a single market by 1992. It was signed in 1986, and came into effect in 1987, under the Delors Commission. intended to remove barriers and to increase harmonization and competitiveness.
North American Free Trade Agreement (NAFTA)
which eliminated most tariffs on trade between Mexico, Canada and the United States, went into effect in 1994. Numerous tariffs, particularly those related to agriculture, textiles and automobiles, were gradually phased out between 1994 and 2008.