Ch. 9 Regional Economic Integration

Benefits/Drawbacks of Regional Integration

+ trade creation - trade generated within the bloc - trade diversion - member countries discontinue some trade with nonmember countries - aggregate effect - national trade patterns are deferred - bloc can become an "economic fortress" (reducing between-bloc trade and overall, global free trade) - loss of national identity - sacrifice of autonomy - in later stages, a central authority is set up to manage the bloc's affairs; members must sacrifice some autonomy to the central authority (such a control over their own economy)

Reasons Why Nations Pursue Economic Integration

-expand market size -enhance productivity/economies of scale -attract investment from outside the bloc -acquire strong defensive and political posture

European Monetary Union

-the EU plan that established its own central bank and currency (the euro) in January of 1999 Mgmt Implications of the Euro: -removes financial obstacles created by using multiple currencies -eliminates exchange-rate risk for business deals between member nations using the euro -reduces transaction costs by eliminating the cost of converting from one currency to another -makes prices between markets more transparent

4 Factors that Help Regional Integration Succeed

1. Economic Similarity - i.e., most EU countries 2. Political Similarity - key success factor for EU (willing to surrender national autonomy) 3. Similarity of Culture/Language - i.e., MERCOSUR 4. Geographic Proximity - facilities intra-bloc movement of products, labor, etc

Political Union

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

Economic Bloc

A geographic area consisting of 2+ countries that agree to pursue economic integration by reducing tariffs and other barriers to the cross-border flow of goods/services, capital, etc. (examples include EU, NAFTA, MERCOSUR, ASEAN, Pacific Alliance)

NAFTA

-free trade between Canada, Mexico and the U.S. -abolished tariffs of 99% of goods -removed barriers on the cross-border flow of services -application of national environmental standards -2 commissions to impose fines and barriers when environmental standards or legislation (i.e., wages) when ignored

Drawbacks of NAFTA

-potential job loss/wage level decline -Mexican workers could emigrate North -pollution could increase due to Mexico's more lax standards -Mexico would lose its sovereignty

4 Main Institutions in the Political Structure of the EU

1) European Commission: body responsible for proposing EU legislation, implementing it, and monitoring compliance 2) European Council: the ultimate controlling authority within the EU 3) European Parliament: elected EU body that consults on issues proposed by the European Commission 4) Court of Justice: supreme appeals court for EU law

3 Approaches to Economic Integration

1. Bilateral - 2 countries cooperate closely, usually in the form of tariff reductions 2. Regional - a group of countries located in the same geographic proximity decide to cooperate (i.e., EU) 3. Global - countries worldwide cooperate through the WTO or other international institutions

2 Reasons why Integration is Difficult

1. Costly 2. Concerns about national sovereignty (losing control)

5 Levels of Economic Integration

1. Free Trade Area 2. Customs Union 3. Common Market 4. Economic Union 5. Political Union

Treaty of Rome

1957; European Community was established

Andean Pact

1969; An agreement between Bolivia, Chile, Ecuador, Colombia and Peru to establish a customs union

Single European Act

1987; adopted by the members of the European community, that committed member countries to establishing an economic union; goal is to have one market place by '92

Treaty of Lisbon

2007; made the European Parliament the co-equal legislator for almost all European laws and also created the position of the president of the European Council

Regional Economic Integration

Agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods/services and factors of production between each other; cooperating nations obtain increase product choices, productivity, living standards, lower prices, etc.

Free Trade Area

All barriers among member countries are removed

APEC

Asia-Pacific Economic Cooperation; made up of 21 member states whose goal is to increase multilateral cooperation in view of the economic rise of the Pacific Nations

ASEAN

Association of Southeast Asian Nations; 1967 an attempt to establish a free trade area within Southeast Asian countries

CARICOM

Caribbean Community and Common Market; an association of English-speaking Caribbean states that are attempting to establish a customs union

CACM

Central American Common Market; trade pact between Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua; began in 1960's but collapsed due to war

CAFTA

Central American Free Trade Agreement; aim is to lower trade barriers between the U.S. and the six countries from the CACM/plus Dominican Republic for more goods/services

Maastricht Treaty

Committed the 12 member states of the European Community to adopt a common currency

Customs Union

Eliminates trade barriers, adopts a common external trade policy

European Free Trade Association

Free trade association between Norway, Ireland Liechtenstein, and Switzerland; emphasizes on trade of industrial goods

European Union

Group of 28 European nations; established as a customs union but is moving toward an economic and political union Product of 2 Factors: 1) Devastation of Western Europe during 2 world wars/desire for peace 2) The European nations' desire to hold their own on the world's political/economic stage

Benefits of NAFTA

Mexico: increased jobs as low cost production moves south, more rapid economic growth U.S./Canada: access to large 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

Economic Union

No barriers, has common external policy, allows factors of production to move freely, AND has common currency as well as a harmonization of tax rates

Common Market

No barriers, has common external policy, allows factors of production to move freely; difficult to achieve

Trade Creation

Occurs when high-cost domestic producers are replaced by low-cost foreign producers in a free trade area

Trade Diversion

Occurs when low-cost foreign suppliers outside a free trade area are replaced with a higher-cost foreign supplier in a free trade area

Optimal Currency Area

One where similarities in the underlying structure of economic activity make it feasible to adopt a single currency

MERCOSUR

The Southern Common Market; pact between Argentina, Brazil, Paraguay and Uruguay to establish a free trade area

Caribbean Single Market & Economy

Unites 6 CARICOM members in agreeing to lower trade barriers and harmonize macroeconomic and monetary policies