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Because learning changes everything.®
Chapter 9
Regional Economic
Integration
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© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Learning Objectives
9-1 Describe the different levels of regional economic integration.
9-2 Understand the economic and political arguments for regional
economic integration.
9-3 Understand the economic and political arguments against
regional economic integration.
9-4 Explain the history, current scope, and future prospects of the
world’s most important regional economic agreements.
9-5 Understand the implications for management practice that are
inherent in regional economic integration agreements.
© McGraw Hill
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Opening Case
The World’s Largest Trade Deal
Regional 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.
© McGraw Hill
MANAN VATSYAYANA/Shutterstock
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Introduction
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.
As of 2020, there were 303 regional trade agreements in force.
• Most ambitious movement toward integration has been in the
European Union.
• United States–Mexico–Canada Agreement (USMCA) has replaced NA
FTA.
• Attempts at integration in South America and Africa.
• Regional Comprehensive Economic Partnership (RCEP) is close to
being finalized by 15 nations.
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Figure 9.1 Levels of Economic Integration
Access the text alternative for slide images.
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Levels of Economic Integration
1
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.
• European Free Trade Association (EFTA) between Norway,
Iceland, Liechtenstein, and Switzerland began in 1960.
• Other free trade areas include NAFTA, now replaced by the
United States Mexico–Canada Agreement (USMCA).
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Levels of Economic Integration
2
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.
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Levels of Economic Integration
3
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.
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Levels of Economic Integration
4
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).
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Levels of Economic Integration
5
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.
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The Case for Regional Integration
1
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.
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The Case for Regional Integration
2
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.
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The Case for Regional Integration
3
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.
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The Case against Regional Integration
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.
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Regional Economic Integration in Europe
1
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.
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Regional Economic Integration in Europe
2
Evolution of the European Union
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.
Forerunner of EU was the European Coal and Steel Community
(formed in 1951).
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.
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Map 9.1 Member States of the European
Union in 2020
Access the text alternative for slide images.
© McGraw Hill
Source: European Union, 1995–2020.
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Regional Economic Integration in Europe
3
Political Structure of the European Union
1. European Commission: proposes EU legislation, implements
it, and monitors compliance.
2. European Council: the ultimate controlling authority within the
EU.
3. European Parliament: debates legislation proposed by the
commission and forwarded to it by the council.
• Treaty of Lisbon increased power.
4. Court of Justice: the supreme appeals court for EU.
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Regional Economic Integration in Europe
4
The Single European Act
Committed EC countries to work toward establishment of a single
market by 1992.
Objectives of the 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.
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Regional Economic Integration in Europe
5
The Single European Act continued
Impact of the 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.
Reality, however, still falls short of the ideal.
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Regional Economic Integration in Europe
6
The Establishment of the Euro
In 1992, the Maastricht Treaty committed EU members to adopt a
single currency, the euro.
• The euro is used by 19 of the member states.
• Created the euro zone, encompassing 330 million EU citizens.
• Countries that participate have agreed to give up control of their
monetary policy.
• Britain, Denmark, and Sweden opted out.
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Regional Economic Integration in Europe
7
The Establishment of the Euro continued
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.
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Regional Economic Integration in Europe
8
The Establishment of the Euro continued
Costs of the euro.
• Membership implies a loss of control over monetary policy.
• The EU is not an 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.
• Countries may react differently to changes in the euro.
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Regional Economic Integration in Europe
9
The Establishment of the
Euro continued
The Euro Experience.
• Since its establishment, the euro
has had a volatile trading history
with the U.S. dollar.
• 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.
• By early 2020, the exchange rate
was €1 = $1.12.
© McGraw Hill
Martin Leissl/Bloomberg/Getty Images
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Regional Economic Integration in Europe
10
Enlargement of the European Union
Many countries, particularly from eastern Europe, have applied for
membership.
• 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.
•
© McGraw Hill
Turkey has also applied for membership, but it is not clear whether it will be
accepted.
25
Croatia Joins the EU
Welcome sign to Croatia when the country joined the European Union.
© McGraw Hill
Frederick Florin/AFP/Getty Images
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Regional Economic Integration in Europe
11
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.
Britain was EU’s second largest
economy and seen as a
counterweight to Germany.
Most experts predict Great Britain
will see significant short- to
medium-term costs based on
exit.
© McGraw Hill
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Regional Economic Integration in the
Americas
1
The North American Free Trade Agreement (NAFTA)
NAFTA’s contents:
• Abolished tariffs on 99 percent of goods traded among Mexico,
Canada, and United States.
• Removed barriers on the cross-border flow of services.
• Protected intellectual property rights.
• Removed most restrictions on FDI among members.
• Applied national environmental standards.
• 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.
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Map 9.2 Economic Integration in the
Americas
Access the text alternative for slide images.
© McGraw Hill
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Regional Economic Integration in the
Americas
2
The Case for NAFTA
The Case against NAFTA
Mexico:
U.S. and Canada:
• Increased jobs as low-cost
production moves south and
more rapid economic growth.
• Job loss and wage levels could
decline.
U.S. and Canada:
• Access to a large and
increasingly prosperous market
and lower prices for consumers
from goods produced in Mexico.
Mexico:
• Pollution may increase due to
Mexico’s more lax standards.
• Mexico feared its loss of
sovereignty.
• U.S. and Canadian firms with
production sites in Mexico are
more competitive in world
markets.
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Regional Economic Integration in the
Americas
3
NAFTA: The Results
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.
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Regional Economic Integration in the
Americas
4
The United States–Mexico–Canada Agreement (USMCA)
Despite positive results, there is political criticism of NAFTA from
both the right and left.
NAFTA was renegotiated under Trump administration: now the
United States–Mexico–Canada Agreement (USMCA).
• Changes made to automobile trade, dairy industry, intellectual property
rights.
Critics see results in trade diversion rather than trade creation, and
consequences may include higher costs to North American
automobile producers and higher prices for consumers.
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Regional Economic Integration in the
Americas
5
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.
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Regional Economic Integration in the
Americas
6
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.
Has been successful at reducing trade barriers between member
states.
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.
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Regional Economic Integration in the
Americas
7
Central American Common Market, CAFTA, and CARICOM
Central American Common Market collapsed in 1969.
• Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Dominican
Republic.
In 2004, U.S. joined to create new agreement: Central American Free
Trade Agreement (CAFTA).
In 1973, CARICOM established a customs union between Englishspeaking Caribbean countries.
• Six members formed the Caribbean Single Market and Economy (CSME) in
2006 to lower trade barriers and harmonize macro-economic and monetary
policy.
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Regional Economic Integration Elsewhere
1
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.
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Regional Economic Integration Elsewhere
2
Association of Southeast Asian Nations (ASEAN)
Fosters freer trade between member countries and cooperation in
their industrial policies.
• Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, and Vietnam.
• Laos, Myanmar, Vietnam, and Cambodia joined recently.
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.
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Map 9.3 ASEAN Countries
Access the text alternative for slide images.
© McGraw Hill
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Regional Economic Integration Elsewhere
3
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.
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Regional Economic Integration Elsewhere
4
Other Trade Agreements
Under President Obama: U.S. pursed Trans-Pacific Partnership with 11
other Pacific Rim countries and Transatlantic Trade and Investment
Partnership (TTIP) with the European Union.
Under President Trump: U.S. pulled out of TPP and negotiations on hold
for TTIP.
Remaining TPP members renegotiated a new deal: Comprehensive and
Progressive Trans-Pacific Partnership (CPTPP).
• China still excluded.
Accelerated negotiations for the Comprehensive Economic Partnership
(RCEP).
• Comprises members of ASEAN plus Australia, China, Japan, New Zealand,
and South Korea.
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360° View: Managerial Implications
1
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.
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360° View: Managerial Implications
2
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.
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Summary
In this chapter, we have
• Described the different levels of regional economic integration.
• Understood the economic and political arguments for regional
economic integration.
• Understood the economic and political arguments against
economic integration.
• Explained the history, current scope, and future prospects of the
world’s most important regional economic agreements.
• Understood the implications for business that are inherent in
regional economic integration agreements.
© McGraw Hill
43
Because learning changes everything.
®
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© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
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