Chapter 9 International Business

countries opted out of the euro

Britain, Denmark, and Sweden

The Single European Act

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

After leaving the EU most experts predict Great Britain will see

significant short- to medium-term costs based on exit

European Commission:

proposes EU legislation, implements it, and monitors compliance.

ASEAN Free Trade Area (AFTA) (2003) between the six original members of ASEAN came into full effect to

reduce import tariffs among members • In 2010, ASEAN signed a free trade agreement with China to remove tariffs on 90 percent of all traded goods

Mercosur has been successful at

reducing trade barriers between member states

NAFTA

North American Free Trade Agreement

Initially, the euro was valued at

$1.17, then fell in value relative to the dollar, but strengthened to an all-time high of $1.54 in March 2008.

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. - Andean Community established free trade between Bolivia, Columbia, Ecuador, and Peru.

Political Structure of the European Union

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

Free Trade Area

-All barriers to the trade of goods and services among member countries are removed, but members determine own trade policies with nonmembers. -Accounts for almost 90 percent of regional agreements.

Impediments to Integration

1. It can be costly—while a nation may benefit from a regional free trade agreement, certain groups may lose. 2. It results in a loss of national sovereignty. • This was the major concern of Great Britain, leading to a referendum on membership in the EU, and its subsequent withdrawal.

The euro is used by

19 of the member states

Central American Common Market collapsed in

1969. • Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Dominican Republic.

As of 2020, there were _______________________ in force.

303 regional trade agreements

NAFTA Abolished tariffs on

99 percent of goods traded among Mexico, Canada, and United States

Countries in ASEAN

Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. • Laos, Myanmar, Vietnam, and Cambodia joined recently.

Six members formed the _______________________________ in 2006 to lower trade barriers and harmonize macro-economic and monetary policy.

Caribbean Single Market and Economy (CSME)

In 2004, U.S. joined to create new agreement:

Central American Free Trade Agreement (CAFTA).

The World's Largest Trade Deal

Comprehensive Economic Partnership (RCEP) may soon become world's largest trade deal. • Involves 10 ASEAN counties plus Australia, China, Japan, New Zealand, and South Korea. • Will involve one-third of global population and GDP. RCEP designed to reduce tariffs between member countries and more easily sell the same goods within the bloc. China will be dominant economy of the RCEP

Forerunner of EU was the

European Coal and Steel Community (formed in 1951)

Most ambitious movement toward integration has been in the

European Union

NAFTA Removed most restrictions on

FDI among members

Association of Southeast Asian Nations (ASEAN)

Fosters freer trade between member countries and cooperation in their industrial policies.

The Case for NAFTA Mexico:

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

United States-Mexico-Canada Agreement (USMCA) has replaced

NAFTA

Mercosur

Originated as free trade pact between Brazil and Argentina. • Expanded to include Paraguay and Uruguay in 1990. • Venezuela joined in 2012 but was suspended in 2016 for human rights violations.

Regional Economic Integration

Past two decades brought in many regional trade blocs, whose goal is to reduce or remove tariff and nontariff barriers for goods, services, and factors of production.

close to being finalized by 15 nations

Regional Comprehensive Economic Partnership (RCEP)

The Economic Case for Integration

Regional economic integration attempts to achieve additional gains from the free flow of trade and investment between 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. • The more countries involved, the more perspectives that must be reconciled, and the harder it is to reach agreement.

Attempts at integration in

South America and Africa

British Exit from the European Union (Brexit)

Voted to leave on June 23, 2016; officially left January 31, 2020. • Great Britain was uncomfortable with loss of national sovereignty; immigration also became a key issue.

Maastricht Treaty

committed EU members to adopt a single currency, the euro in 1992

In 1973, CARICOM established

a customs union between Englishspeaking Caribbean countries

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.

European Free Trade Association (EFTA)

between Norway, Iceland, Liechtenstein, and Switzerland began in 1960

Britain was EU's second largest economy and seen as a

counterweight to Germany

European Parliament

debates legislation proposed by the commission and forwarded to it by the council. • Treaty of Lisbon increased power

Created the euro zone

encompassing 330 million EU citizens

NAFTA Applied national

environmental standards

Treaty of Rome

established the European Economic Community in 1957. • Name changed to the EU in 1993. • Number of members fell to 27 in early 2020 when Britain exited the EU

NAFTA 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.

NAFTA Protected

intellectual property rights

Critics worry that Mercosur

may be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis.

Countries that participate in the euro have agreed to give up control of their

monetary policy

NAFTA was renegotiated under Trump administration:

now the United States-Mexico-Canada Agreement (USMCA) • Changes made to automobile trade, dairy industry, intellectual property rights.

NAFTA Removed barriers on

the cross-border flow of services

By early 2020

the exchange rate was €1 = $1.12

Court of Justice

the supreme appeals court for EU

European Council

the ultimate controlling authority within the EU

Critics see results of USMCA in

trade diversion rather than trade creation, and consequences may include higher costs to North American automobile producers and higher prices for consumers.

Since its establishment, the euro has had a _________ trading history with the U.S. dollar

volatile

The Case for NAFTA 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.

Regional Economic Integration Threats continued Threats.

• Lower trade and investment barriers could lead to increased price competition within the EU and NAFTA. • Firms outside the blocs risk being shut out of the single market by the creation of a "trade fortress." • Limits in mergers and acquisition abilities. • Growing opposition to free trade areas.

Costs of the euro

• Membership implies a loss of control over monetary policy. • The EU is not an optimal currency area • Countries may react differently to changes in the euro.

The Political Case for Integration

• By linking countries together, making them more dependent on each other, and forming a structure where they regularly 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.

Studies of NAFTA's early impact suggest that both advocates and detractors may have f exaggerated.

• Canada and Mexico now among top three trading partners of U.S. • Productivity has increased in member nations. • Employment effects have been moderate to small. • Mexico and U.S. saw small welfare gains while Canada suffered a welfare loss.

Economic Union

• Countries committed to the free flow of products and factors of production between members, adoption of a common currency, harmonization of tax rates, and pursuit of a common external trade policy. • Involves sacrificing a significant amount of national sovereignty. • European Union (EU).

European Union (EU) is the result of:

• Devastation of western Europe during two world wars and desire for lasting peace. • Desire by European nations to hold their own on the world's political and economic stage.

Europe Has Two Trade Blocs

• European Union with 27 members (Britain has exited). • European Free Trade Association with 4 members. • European Union is expected to become a superpower like the United States.

Regional Economic Integration Threats Opportunities

• Formerly protected markets are now open to exports and direct investment. • The free movement of goods across borders, harmonization of product standards, and simplification of tax regimes means firms can realize potentially enormous cost economies. • Enduring differences in culture and competitive practices might limit companies.

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.

Impact of the Single European Act

• Helped restructure large segments of European industry via production and distribution systems. • Faster economic growth: raised GDP by between 2 and 5 percent in its first 15 years

Political Union

• Independent states combined into single union. • 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. • The United States is an example of even closer political union.

The Case against NAFTA U.S. and Canada

• Job loss and wage levels could decline

The Andean Community

• Largely based on EU model; failed by mid-1980s. • In late 1980s, Latin American governments began to adopt free market economic policies. • In 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. • Andean Community now operates as a partial customs union.

Common Market

• No barriers to trade between 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 (between Brazil, Argentina, Paraguay, and Uruguay) hopes to achieve this status.

Regional Trade Blocs in Africa

• Now 19 trade blocs in Africa. • Progress toward establishing meaningful trade blocs has been slow. • Many countries believe they need to protect their industries from unfair foreign competition, making it difficult to create free trade areas or customs unions. • In 2001, East African Community (EAC) relaunched bloc. • In 2015, Tripartite Free Trade Area (TFTA) was established. • In 2018, Continental Free Trade Area (CAFTA) was established.

Regional Economic Integration

• Only makes sense when the amount of trade it creates exceeds the amount it diverts, according to some economists. • Trade creation occurs when low-cost producers within the free trade area replace high-cost domestic producers. • Trade diversion occurs when higher-cost suppliers within the free trade area replace lower-cost external suppliers.

The Case against NAFTA Mexico

• Pollution may increase due to Mexico's more lax standards. • Mexico feared its loss of sovereignty.

Objectives of the Single European Act

• Remove all frontier controls between EC countries. • Apply the principle of mutual recognition to product standards. • Institute open procurement to nonnational suppliers. • Lift barriers to competition in retail banking and insurance. • Remove all restrictions on foreign exchange transactions between member countries. • Abolish restrictions on cabotage

Many countries, particularly from eastern Europe, have applied for membership of EU

• Ten countries joined in 2004, expanding the EU to 25 states. • In 2007, Bulgaria and Romania joined. • Croatia joined in 2013, bringing membership to 28. • Turkey has also applied for membership, but it is not clear whether it will be accepted.

Other Regional Agreements

• There have been various attempts at regional economic integration throughout Asia and Africa. • Success has been limited. • Most significant efforts are the Association of Southeast Asian Nations and regional trade blocs in Africa