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Fourth Edition

International Business. Fourth Edition. CHAPTER 8. Regional Economic Integration. Chapter Focus. Exam the trend toward regional economic integration. By end 2001, all 136 WTO members reported participation in at least one regional trade agreement.

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Fourth Edition

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  1. International Business Fourth Edition

  2. CHAPTER 8 Regional Economic Integration

  3. Chapter Focus • Exam the trend toward regional economic integration. • By end 2001, all 136 WTO members reported participation in at least one regional trade agreement. • Explore the economic and political debate surrounding integration. • Review the progress, worldwide, toward integration. • Map the implications for business.

  4. Regional Trade Agreements Notified to GATT and the WTO, 1948-1999 Figure 8.1 1973 1993 1963

  5. Free Trade Area EU 1992 Level of Integration NAFTA Level of Economic Integration Political Union Economic Union Common Market Customs Union Figure 8.2

  6. Economic Integration • Free Trade Area • All barriers to trade among members removed. • Each country can determine own trade policies toward nonmembers. • Customs Union • Eliminates barriers among members and has a common external trade policy. • Economic Union • No barriers among members, common external policy, common monetary and fiscal policy, harmonized tax rates and common currency. • Political Union • Has a coordinating bureaucracy accountable to all citizens.

  7. Economic Allow countries to specialize in products they produce efficiently. Easier to gain agreement than GATT/WTO. Role of FDI is enhanced. Exploit gains from free flow of goods and services and investment. Political Creates incentive for political cooperation. Reduces potential for violent confrontation. Enhanced clout to deal with ‘superpowers’. Case for Regional Integration

  8. Global Integration Impediments to Integration • Although a nation may benefit, groups within a nation may be hurt. • Concerns about national sovereignty. • Debate: • Trade creation. • Trade diversion.

  9. U.S. Mexican Trade in Textiles, 1993-2000 Figure 8.3

  10. EU Evolution • Product of two political factors: • Devastation of WWI and WWII and desire for peace. • Desire for European nations to hold their own, politically and economically, on the world stage. • 1951 - European Coal and Steel Community. • 1957- Treaty of Rome establishes the European Community. • 1994 - Treaty of Maastricht changes name to the European Union.

  11. European Union GDP

  12. US Top European Trading Partners $ Billions

  13. European Commission European Council 20 Commissioners appointed by members for 4 year terms Heads of State and Commission President Proposing, implementing, monitoring legislation. Resolves policy issues sets policy direction. Council of Ministers 1 representative from each member Ultimate controlling authority. No EU laws w/o approval. European Parliament 630 directly elected members Court of Justice 1 judge from each country Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners. Hears appeals of EU Laws. EU Governance

  14. Stimulus: Disharmony among the EC member countries: Trade policy. Technical standards. Led to establishing the Delors Commission in 1985. Basis for Single European Act. Objectives: Remove frontier controls. “Mutual recognition” of product standards. Open public procurement to nonnationals. Lift barriers to banking and insurance competition. Remove restrictions on foreign exchange transactions. Abolish cabotage restrictions. 1987- EC agrees to work toward establishing a single market by December 31, 1992. The Single European Act The Act can lead to gains in trade and investment and increased competition when barriers are removed.

  15. Treaty of Maastricht: 11 of 15 member states. Jan. 1, 1999 - Exchange rates locked in. Jan. 1, 2002 - Euro notes and coins issued. National currencies taken out of circulation. Benefits: Savings from using only one currency. Easy to compare prices, resulting in lower prices. Forces companies to be more efficient and cut costs. Creates liquid pan-Europe capital market. Increases range of investments for individuals and institutions. The Euro

  16. Costs of the Euro • Countries lose monetary policy control. • European Central Bank controls policy for the “Euro zone”. • EU is not an”optimal currency area”. • Country economies are different. • Early experience has seen a slump (approximately 20% through 2001) against the dollar. • Too early to judge whether the Euro is/is not a success.

  17. EU Issues • Enlargement. • Fortress Europe? • Create European barriers to trade from the outside? • EU promises to support GATT and the WTO. • No guarantees, however.

  18. Jan. 1, 1994 Remove cross-border flow of services Abolish tariffs Protect intellectual property Remove FDI restrictions Apply national environmental standards Two commissions to enforce treaty NAFTA

  19. Loss of jobs to Mexico. Mexican firms have to compete against efficient US/Canada firms. Mexican firms become more efficient. Environmental degradation. Loss of national sovereignty. Enlarged and productive regional base. Labor-intensive industries move to Mexico. Mexico gets investment and employment. Increased Mexican income to buy US/Canada goods. Demand for goods increases jobs. Consumers get lower prices. NAFTA: For/Against Against For Impact of NAFTA has been muted. Small trade and jobs gain for US.

  20. Andean PACT

  21. ANCOM: Andean Pact • Bolivia, Colombia, Ecuador, Peru, Venezuela • Cartagana Agreement, 1969. One of oldest still in existence. • Nearly failed. Rejuvenated in 1990 in the Galápagos Declaration. • Changed from FTA to customs union in 1992. • Still has many political and economic problems.

  22. US Trade With The Andean Community

  23. Mercosur

  24. The Mercosur • 1988: Argentina, Brazil. 1990: Paraguay, Uruguay • 1995: Agreed to move toward a full customs union. • Trade quadrupled between 1990-1998. • Has significanttrade diversionissues. • Yeats Report. • Economic problems, first in Brazil (1999), then in Argentina (2001) has put plans for the customs union on hold.

  25. US Trade With Mercosur

  26. Other Hemisphere Associations • Central American Common Market • 1960s: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua. • Collapsed in 1969. • CARICOM • 1973: English-speaking Caribbean countries. • 191: Failed for third time to establish common external tariff. • Free Trade Area of the Americas • 1998: 34 heads of state met in Santiago, Chile and inaugurated talks to create a FTAA by 2005.

  27. ASEAN

  28. Association of Southeast Asian Nations • Created in 1967. • Economic, political and social cooperation. • Little has been accomplished. • Brunei, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand and Vietnam.

  29. Destination of Exports Source of Imports Asian Trade Flows Inter ASEAN Europe China Aust./N.Zealand % 8-30

  30. Destination of Exports Source of Imports Asian Trade Flows

  31. Asia Pacific Economic Cooperation • Founded in 1990 to ‘promote open trade and practical economic cooperation’. • ‘Promote a sense of community.’ • 18 members. • 50% of world’s GNP. • 40% of global trade. • Brookings Institution: APEC “is in danger of shrinking into irrelevance as a serious forum.”

  32. Regional Trade Blocs in Africa • 9 trade blocs on the continent. • Many countries are members of more than one group. • Progress has been slow. • Political turmoil. • Deep suspicion of free trade. • Less developed, less diversified economies need “protection”.

  33. Positive: Protected markets, now open. Lower costs doing business in single market. Negative: Differences in culture and competitive practices make realizing economies of scale difficult. Threats: More price competition. Firms become more competitive. Outside firms shut out of market. EU intervention in M and A activity. Impact on Business

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