MNGT 375 Chapter9

Opportunities from REI

- Formerly protected markets now open to exports and FDI -Free movement of gods, harmonization of product standards, and simplification of tax regimes means firms can centralize production where mix of production factors and skills are optimal to realize cost economies

True or False: The ultimate controlling authority within European Union is the European Commission.

False

Benefits of NAFTA

-Mexico: --increased jobs as low cost production moves south and more rapid economic growth -The U.S. and Canada: --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

Is NAFTA successful?

-Trade between members increased 250% -Members have become more integrated -Productivity increased for all members -Employment effects have been small -Mexico has become more politically stable -Other Latin American countries want to join (US/Canada - wait and see attitude)

Potential Drawbacks of NAFTA

-US/Canadian job loss/wage declines -Mexican workers emigrate north -Pollution increases due to Mexico's lax standards -Mexico could lose sovereignty

How many main institutions in the EU?

Four

Political Union (Level 5)

Independent states combine into a single union. Requires central political apparatus to coordinate economic, social, and foreign policy for member states. EU is headed this way. EX: United States

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

Maastricht Treaty (1991)

1. Created the Euro Zone, world's second largest currency zone (US is 1st) 2. Created a central bank for the European Union - members gave up control of monetary policy

Political reasons for REI

1. Decreases the likelihood of international conflict and war 2. Gives them greater clout and makes them politically stronger in dealing with other nations.

EU is the result of

1. Devastation of two WWS and desire for lasting peace 2. Desire of European nations to hold their own in world political and economic stages 3. Forerunner of EU was European Coal and Steal Community (1957) 4. Treaty of Rome established European economic community in 1957 and changed name to European Union in 1994

European Trade Blocs

1. EU - 27 members 2. European Free Trade Union - 4 members

Economic reasons for REI

1. Easier to form an agreement with fewer countries. 2. It is an attempt to achieve additional gains from the free flow of trade and investments beyond international agreements like WTO

Benefits of Euro

1. Handling one currency 2. Easier to compare prices across Europe 3. Increase competition promotes greater production efficiency 4. Pan-European capital markets should develop further 5. Range of investments to both individuals and orgs should increase

Arguments against REI

1. Integration is not easy - Cost and loss of national sovereignty 2. Only makes sense if amount of trade created exceeds the amount of trade diverted 3. Trade creation occurs when low-lost producers in a free trade area are replaced 4. Trade diversion occurs when higher cost suppliers within free trade areas replace lower cost external suppliers

Costs of Euro

1. Membership implies loss of control over monetary policy (job of European Central Bank) 2. EU is not an optimal currency area

Single European Act proposed to:

1. Remove all frontier controls between EC countries 2. Mutual recognition of product standards 3. Open procurement to non-national suppliers 4. Lift barriers to competition in retail banking and insurance 5. Remove all restrictions on foreign exchange transactions between member nations

Expansion of EU

10 members joined in 2004 2 members joined in 2007 1 member joined in 2013 1 member left January 2020 (Brexit) Candidate members: Iceland, Montenegro, Turkey, Serbia, Macedonia

NAFTA (1994)

Abolished 99% tariffs on goods traded Removed barriers on cross-border flow of services Protects intellectual property rights Allows each country to dictate environmental standards Establishes two commissions to impose fines and remove trade privileges when environmental or employment policies are ignored

Regional Economic Integration

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. Benefits all in theory

Free Trade Area (Level 1)

All barriers to trade are removed but members determine their own external trade policy. Most popular form of REI. EX: NAFTA and European Free Trade Association (Norway, Iceland, Switzerland, Lichtenstein)

Asia-Pacific Economic Cooperation (APEC) 1990

An alliance that promotes open trade and economic and technical cooperation among 21 member nations (including US, Japan, and China)

Which feature of an economic union differentiates it from a common market? A. Removal of barriers to the trade of goods and services among member countries B. Adoption of a common external trade policy C. Mobility of factors of production among member countries D. Harmonization of tax rates of member countries E. Removal of barriers to cross-border flow of capital

D. Harmonization of tax rates among member countries

European Parliament

Debates legislation proposed by the commission and forwarded to it by the council

Customs Union (Level 2)

Eliminates all trade barriers AND adopts a common external trade policy. Most nations that want this level desire further integration. EX: Andean Pact (Bolivia, Columbia, Ecuador, Peru, and formerly, Venezuela)

Single European Act of 1986

Laid down a detailed legal framework for establishing a single market, which would add the free movement of labor, capital, and services to the existing free trade in goods

Threats from REI

Lower trade and investment barriers could lead to increased price competition Firms outside the blocks risk being shut out of the single market by creation of "trade fortress"

The creation of a single market through regional economic integration offers significant opportunities because markets that were formerly protected from foreign competition are increasingly open. Opportunities arise from the inherently lower costs of doing business in a single market. Even after the removal of barriers to trade and investment, differences in culture and competitive practices often limit the ability of companies to centralize production. A major threat to businesses is that with lowered trade barriers, the business environment can become even more competitive. Firms can also be shut out of markets if they do not have a local presence. Determine which box describes the regional agreement and the appropriate members, then drag the box to the correct location. Roll over the box for details. Organizations: NAFTA MERCOSUR FTAA Andean Community CAFTA

NAFTA Description: Overall impact was small but positive Members: US, Canada, and Mexico MERCOSUR Description: Started well then slumped but hopes for revival (with additional of Venezuala) Members: Originally Brazil and Argentina FTAA Description: Work in progress Members: 34 nations represented Andean Community Description: Based on EU model but with little success Members: Bolivia, Chile, Ecuador, Columbia, and Peru. Venezuela withdrew to join MERCOSUR CAFTA Description: Proposed common market Members: Five Central American countries plus Dominican Republic and US

Regional economic integration is an agreement among countries in a geographic area to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. There are costs and benefits associated with regional economic integration. According to economists, the amount of benefits versus costs can be measured by whether the integration leads to trade creation versus trade diversion. Roll over each product listed and after reviewing the related hint, click and drop them under either trade creation or trade diversion. Products: Textiles - made cheaply in Mexico Sugar - purchase from Canada because NAFTA Computer Chips - buy more expensive from Spain than China because EU Solar Panels - buy from more expensive place because of an REI

Trade Creation: Textiles, Sugar Trade Diversion: Computer chips, Solar panels

Identify the correct sequence of economic integration starting from the least integrated to the most integrated. A. Free trade area, customs union, economic union, political union, and common market B. Free trade area, customs union, common market, economic union, and political union C. Common market, free trade area, customs union, economic union, and political union D. Free trade area, common market, customs union, economic union, and political union E. Common market, free trade area, customs union, political union, and economic union

B. Free trade area, customs union, common market, economic union, and political union

Which of the following is an argument against economic integration? A. It benefits only certain minority groups, not the nation as a whole. B. It results in forced political integration among the member countries. C. It reduces the degree of control over certain issues such as monetary and fiscal policy. D. It never leads to specialization of production of goods and services. E. It requires a large number of countries in the arrangement to make it economically viable.

C. It reduces the degree of control over certain issues such as monetary and fiscal policy.

Common Market (Level 3)

No barriers to trade, common external trade policy, AND free movement of production factors. Can be difficult as it requires harmony among members in fiscal, monetary, and employment policies. EX: MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay. Venezuela has applied for admittance)

Economic Union (Level 4)

No barriers to trade, common external trade policy, free movement of production factors, AND common currency, harmonization of tax rates, and common monetary and fiscal policy. Involves sacrificing significant amount of national sovereignty. EX: European Union

European Commission

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

Court of Justice

Supreme appeals court for EU law

European Council

The ultimate decision-making body of the EU, it passes legislation from the commission into law and is comprised of one representative from each member state's government