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Chapter9-RegionalEconomicIntegration.pptxGlobal Business Today 10e
by Charles W.L. Hill
and G. Tomas M. Hult
©McGraw-Hill Education. 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 Education.
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The Global Trade and Investment Environment
Chapter 9: Regional Economic Integration
Source: © APA Images/SIPA/SIPA France/Sharm El Sheikh/Egypt/Newscom
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Learning Objectives
Disciplinary:
Identify how your venture can benefit from the existing economic integration between the chosen countries
Essential:
Explain the implications for your team and company, as country managers, of the specific benefits you can derive from current economic integration between the chosen countries
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Lecture Script 6-3
Seat with your teammates
Get to know your Country of choice even more!
What product/service are you selling?
What are the current trade barriers, if any, based on the bilateral agreements between the chosen countries?
Is there an economic/political situation, related to your industry, that you need to mitigate?
Update your SMART goals and project management
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Lecture Script 6-4
Learning Objectives
LO 9-1 Describe the different levels of regional economic integration.
LO 9-2 Understand the economic and political arguments for regional economic integration.
LO 9-3 Understand the economic and political arguments against regional economic integration.
LO 9-4 Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.
LO 9-5 Understand the implications for management practice that are inherent in regional economic integration agreements.
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Opening Case: The Push Toward Free Trade in Africa
Tripartite Free Trade Area signed in 2015 by 26 African nations
Nations would work together to establish free trade area
17 African trading blocs made it difficult to realize gains from trade that could flow from an expanded single market
Intra-African made inconvenient
African countries more likely to trade with U.S. and Europe than each other
TFTA has been difficult to implement
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Other costs of intra-African trade include often-lengthy stops at borders for customs inspection, excessive customs-related bureaucracy and red tape, and a lack of adequate physical infrastructure, including roads and railways. There are also some vexing local content requirements.
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Introduction
Past two decades brought in many regional trade blocs that promote regional economic integration
There is some concern that the world is moving toward a situation in which a number of regional trade blocks compete against each other
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Figure 9.1 Levels of Economic Integration
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Levels of Economic Integration 1 of 5
Free trade area
All (?) barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers
The European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland)
The N orth A merican F ree T rade A greement (between the U.S., Canada, and Mexico). . Now USMCA
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LO 9-1 Describe the different levels of regional economic integration.
The free trade area is the most popular form of integration and account for almost 90 percent of regional agreements.
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Levels of Economic Integration 2 of 5
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
The Andean Community (between Bolivia, Colombia, Ecuador, and Peru)
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Venezuela was accepted as a full member of Mercosur subject to ratification by the governments of the four existing members, but as off early 2016, Paraguay had yet to ratify Venezuela’s membership.
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Levels of Economic Integration 3 of 5
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+ Venezuela…) hopes to achieve this status
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Venezuela was accepted as a full member of Mercosur subject to ratification by the governments of the four existing members, but as off early 2016, Paraguay had yet to ratify Venezuela’s membership.
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Levels of Economic Integration 4 of 5
Economic union
Involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries’ tax rates, and a common monetary and fiscal policy
Involves sacrificing a significant amount of national sovereignty
The European Union (EU)
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Levels of Economic Integration 5 of 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 of 3
The Economic Case for Integration
Regional economic integration is an attempt 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
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LO 9-2 Understand the economic and political arguments for regional economic integration.
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The Case for Regional Integration 2 of 3
The Political Case for Integration
By linking countries together, making them more dependent on each other, and forming a structure where they regularly have to 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 of 3
Impediments to Integration
It can be costly - while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose
It can result in a loss of national sovereignty
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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
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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LO 9-3 Understand the economic and political arguments against regional economic integration.
Suppose the United States and Mexico imposed tariffs on imports from all countries, and then they set up a free trade area, scrapping all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. If the United States began to import textiles from Mexico, would this change be for the better? If the United States previously produced all its own textiles at a higher cost than Mexico, then the free trade agreement has shifted production to the cheaper source
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Regional Economic Integration in Europe 1 of 10
Europe has two trade blocs
The European Union with 28 (-1) members (Britain has voted to exit)… Who is next?
The European Free Trade Association with 4 members
The European Union is expected to become a superpower of the same order as the United States
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LO 9-4 Explain the history, current scope, and future prospects of the world's most important regional economic agreements.
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Regional Economic Integration in Europe 2 of 10
Evolution of the European Union
The European Union (EU) is the result of
The devastation of two world wars on Western Europe and the desire for a lasting peace
The desire by the European nations to hold their own on the world’s political and economic stage
The forerunner of the EU was the European Coal and Steel Community (formed in 1951)
The Treaty of Rome established the European Economic Community in 1957
The name was changed to the EU in 1993
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Map 9.1 Member States of the European Union in 2016
Source: European Union, 1995–2013.
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Regional Economic Integration in Europe 3 of 10
Political Structure of the European Union
The European Commission (Brussels): proposes EU legislation, implements it, and monitors compliance
The European Council (Brussels): the ultimate controlling authority within the EU
The European Parliament (Brussels): debates legislation proposed by the commission and forwarded to it by the council
Treaty of Lisbon increased power
The Court of Justice (Luxemburg): the supreme appeals court for EU law
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Management Focus: The European Commission and Intel
Summary
This feature explores the European Commission’s case against computer chip maker Intel. According to the European Commission which fined the company $1.45 billion, Intel engaged in anti-competitive behavior from 2002 until 2007. Discussion of the feature can begin with the following questions.
Suggested Discussion Questions
1. Was the European Commission justified in its case against Intel? Why or why not?
Discussion Points: After Intel was accused by the European Commission of using its market power to ensure that rival chip maker AMD was at a competitive disadvantage the company immediately filed an appeal claiming that the accusations were false. The issue seems to revolve around the rebates paid by Intel to PC manufacturers. According to Intel, the rebates were not designed to encourage any specific behavior by PC makers, nor limit AMD’s position in the market. The European Commission of course, believes otherwise. Many students will probably predict that the European Commission’s case will be upheld noting that it is unlikely that Intel would have offered rebates for its products unless it was trying to influence the decision to buy.
2. Why are the actions of institutions like the European Commission important to the function of markets? How does the European Commission protect consumers?
Discussion Points: The European Commission is playing an increasingly bigger role in ensuring that markets in Europe are competitive, and that no single player is permitted to dominate the market. Most students will recognize the importance of this type of institution and the protection it offers consumers. In the Intel case for example, Intel controlled more than 70 percent of the market from 2002 to 2007. In a more competitive market, consumers would have enjoyed lower prices and more choice. Students should also recognize that Intel’s dominance of the market harmed other makers of microprocessors and their customers.
Teaching Tip: To learn more about Intel, go to {http://www.intel.com/content/www/us/en/company-overview/company-overview.html}.
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Regional Economic Integration in Europe 4 of 10
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 non-national 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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cabotage—the right of foreign truckers to pick up and deliver goods within another member state’s borders
Country Focus: Creating a Single European Market in Financial Services
Summary
This feature explores the European Union’s progress towards creating a single financial market. The quest, started in 1999, was to have been completed by 2005, however, progress has been slowed by various factors related to the tradition of each member country operating autonomously. By 2007, significant progress had been made. Some 41 measures designed to create a single market were in place, and others were in the pipeline. The current issue facing the EU revolves around the enforcement of the rules that have been established as law. Some experts believe that it will be at least another decade before the benefits of the new rules become apparent. Discussion of this feature can begin with the following questions.
Suggested Discussion Questions
1. What are the benefits of creating a single financial market in the European Union for companies? Does it make sense for consumers?
Discussion Points: A single financial market involving a common currency eliminates numerous challenges for companies and consumers. Not only are transactions and the associated paperwork greatly simplified, a single currency system also facilitates price comparisons across borders which should force companies to become more competitive. In addition, a single financial system would encourage competition in the financial services sector and increase liquidity in capital markets.
2. What are the impediments to creating a single financial market in the European Union? What does the potential for this type of market mean for countries like Great Britain that have not joined the euro-zone?
Discussion Points: Creating a single financial market is not easy. Countries which have a long history of operating autonomously have to work together for common economic goals, a common regulatory framework must be developed, and cultural and linguistic barriers must be overcome. Countries that choose not participate in the system will retain control over their monetary policy, but may also lose investments or sales as companies seek to simplify their financing alternatives.
Teaching Tip: The European Union has a web page devoted to the euro {http://ec.europa.eu/economy_finance/euro/our_currency_en.htm}. Students can explore the site and click on the pages to see pictures of the coins and notes, the advantages of participating in the euro zone, and frequently asked questions about the euro.
Regional Economic Integration in Europe 5 of 10
The Establishment of the Euro
Maastricht Treaty committed EU members to adopt a single currency, the euro
The euro is used by 19 of the 28 member states
Created the euro zone, the second largest currency zone in the world after that of the U.S. Dollar
Countries that participate have agreed to give up control of their monetary policy
Britain, Denmark and Sweden are still on the sidelines
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Country Focus: The Greek Sovereign Debt Crisis
Summary
This feature explores the causes of the 2010 financial crisis in Greece and its implications for other countries in the Euro Zone. Years of overspending by the Greek government led to huge deficits that the country could not manage. While the country’s problems had been hidden throughout much of the decade, a new government that took power in 2009 revealed that Greece’s problems were actually worse than had been suspected. Investors lost faith in the Greece and its ability to not only refinance its debt, but also implement policies to reduce its debt load. This combined with concerns that other countries in the Euro Zone could have problems sent the euro to its lowest level in years. Discussion of this feature can begin with the following questions:
Suggested Discussion Questions
1. Discuss the implications of the financial crisis in Greece on other countries in the Euro Zone. What does the loss of confidence in Greece and indeed in Spain, Portugal, and Italy as well mean for the bloc?
Discussion Points: The financial crisis in Greece highlighted the difficulties associated with having multiple countries sharing a single currency. Greece’s problems contributed to a drop in the value of the euro and concern that Greece’s problems could spill over into the other weaker countries in the European Union including Spain, Portugal, and Italy. Greece was forced to seek air from other Euro Zone countries and the IMF – aid that was granted with strict debt restructuring requirements. As of 2014, there was reason to believe that the reforms were working. Yields on 10-year bonds had fallen and the government’s budget was improving. The question now is whether the turnaround will continue.
2. What does a falling euro mean for U.S. companies exporting to the European Union and for U.S. companies with operations in the bloc?
Discussion Points: For U.S. firms that export to the European Union, the falling euro is a problem because it will make their products seem more expensive in Europe. For U.S. firms operating within the European Union, the falling euro could reduce earnings as euro profits are converted back into U.S. dollars. For both types of firms, the loss of confidence in the euro could contribute to a slower economy and slower demand.
Lecture Note: To extend this discussion, consider {http://www.bbc.com/news/business-29777589} and {http://www.bbc.com/news/world-europe-29702017}.
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Regional Economic Integration in Europe 6 of 10
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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Eurozone, or Euro Area
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Can the Euro Survive?
It seems like experts and interested observers are always debating the merits of the euro and its likelihood of survival. The answers lie in examining several interesting facts of the European Union. First, the lack of a European treasury is a missing piece of the puzzle. Without it, the ECB is limited in the assistance it can provide to euro zone member-states. In theory, the European Central Bank (ECB) could bail out those member-states burdened with excessive debt by printing more money. However, that would require the approval of all of the EU member countries (not just the countries that that use the euro as their national currency). Germany is typically opposed to any measure that may light the fires of inflation. Some of the EU members also think it is unfair to bail out those states that have lived beyond their means for many years. It is difficult to compare the difficulties within the EU to those of other nations that have faced similar problems and survived. But the basic question remains, will the euro survive?
Source: http://seekingalpha.com
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Regional Economic Integration in Europe 7 of 10
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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The European Central Bank (ECB) was established to manage monetary policy, but some question its ability to act independently.
Regional Economic Integration in Europe 8 of 10
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
In early 2016, the exchange rate was €1=$1.11
The weakened value of the euro against the U.S. dollar has been a cause for concern among many nations.
Source: © Martin Leissl/Bloomberg/Getty Images
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More troubling perhaps for the long-run success of the euro, many of the newer EU nations that had committed to adopting the euro put their plans on hold. Countries like Poland and the Czech Republic had no desire to join the euro zone and then have their taxpayers help bail out the profligate governments of countries like Italy and Greece. To compound matters, the sovereign debt crisis had exposed a deep flaw in the euro zone: it was difficult for fiscally more conservative nations like Germany to limit profligate spending by the governments of other nations that might subsequently create strains and impose costs on the entire euro zone.
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Regional Economic Integration in Europe 9 of 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, with population of 450 million people, and a single continental economy with a GDP of €11 trillion
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
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Left standing at the door is Turkey. Turkey, which has long lobbied to join the union, presents the EU with some difficult issues. The country has had a customs union with the EU since 1995, and about half its international trade is already with the EU. However, full membership has been denied because of concerns over human rights issues (particularly Turkish policies toward its Kurdish minority).
Croatia Joins the EU
Croatia is the 28th nation to join the EU.
Source: © Frederik Florin/AFP/Getty Images
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Regional Economic Integration in Europe 10 of 10
British Exit from the European Union
Voted to leave on June 23, 2016
Have two years to negotiate exit with the EU
Haven’t been comfortable with loss of national sovereignty
Immigration has become a key issue/want to “take back control” of immigration
Britain is EU’s second largest economy and is seen as a counterweight to Germany
Britain will likely see significant short- to medium-term costs based on this decision
Less likely to attract inward investment from foreign multinationals
Exports to EU may fall
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Map 9.2 Economic Integration in the Americas
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Regional Economic Integration in the Americas 1 of 7
The North American Free Trade Agreement
United States, Canada, and Mexico
Abolished tariffs on 99% of goods traded
Removed barriers on the cross-border flow of services
Protects intellectual property rights
Removal of most restrictions on FDI among members
Application of 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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LO 9-4 Explain the history, current scope, and future prospects of the world's most important regional economic agreements.
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Regional Economic Integration in the Americas 2 of 7
The Case for NAFTA now USMCA
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
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Regional Economic Integration in the Americas 3 of 7
The Case against NAFTA
Jobs could be lost and wage levels could decline in the U.S. and Canada
Mexican workers could emigrate north (?)
Pollution could increase due to Mexico's more lax standards
Mexico would lose its sovereignty
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Did You Know?
Did you know that NAFTA was thought to produce a "giant sucking sound?“
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Regional Economic Integration in the Americas 4 of 7
NAFTA: The Results
Studies of NAFTA’s early impact suggest that both advocates and detractors may have been guilty of exaggeration
Trade between the three countries increased by 250%
The members have become more integrated
Productivity has increased in member nations
Employment effects have been small
Mexico and U.S. saw small welfare gains while Canada suffered a welfare loss
NAFTA 2.0…? Now called USMCA
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Regional Economic Integration in the Americas 5 of 7
The Andean Community
Based on the EU model
The agreement had more or less failed by the mid-1980s
In the late 1980s, Latin American governments began to adopt free market economic policies
In the 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
Current members include Bolivia, Ecuador, Peru, and Columbia
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Regional Economic Integration in the Americas 6 of 7
Mercosur
Free trade pact (Brazil and Argentina)
Expanded to include Paraguay and Uruguay in 1990
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
Venezuela joined in 2006, but is not yet a full member
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Regional Economic Integration in the Americas 7 of 7
Central American Common Market, CAFTA, and CARICOM
Central American Common Market
Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic
The U.S. joined in 2004 to create the Central American Free Trade Agreement (CAFTA)
CARICOM (1973), a customs union between English-speaking 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 of 4
There have been various attempts at regional economic integration throughout Asia and Africa
The success of these attempts have been limited
The most significant efforts are the Association of Southeast Asian Nations and the Asia-Pacific Economic Cooperation
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LO 9-4 Explain the history, current scope, and future prospects of the world's most important regional economic agreements.
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Regional Economic Integration Elsewhere 2 of 4
Association of Southeast Asian Nations (ASEAN)
Fosters freer trade between member countries and cooperation in their industrial policies
Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia
An ASEAN Free Trade Area (AFTA) (2003) between the six original members of ASEAN came into full effect to reduce import tariffs among members
Vietnam, Laos, Myanmar, and Cambodia have all joined
In 2010, ASEAN signed a free trade agreement with China to remove tariffs on 90% of all traded goods
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Map 9.3 ASEAN countries
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Asia-Pacific Economic Cooperation
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Regional Economic Integration Elsewhere 3 of 4
Regional Trade Blocs in Africa
There are 17 trade blocs on the African continent
However progress toward the establishment of meaningful trade blocs has been slow
Many countries believe that 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 relaunched bloc
In 2015, Tripartite Free Trade Area established
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Regional Economic Integration Elsewhere 4 of 4
Other Trade Agreements
U.S. pursuing Trans Pacific Partnership with 11 other Pacific Rim countries and Transatlantic Trade and Investment Partnership (TTIP) with the European Union
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Transatlantic Trade and Investment Partnership (T- T IP)
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Proposed Economic Integration
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Trans-Pacific Partnership (TPP)
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Proposed Economic Integration
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Focus on Managerial Implications 1 of 2
Regional Economic Integration Threats
Opportunities
Formerly protected markets are now open to exports and direct investment
The free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes means that firms can realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal
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Focus on Managerial Implications 2 of 2
Threats
Lower trade and investment barriers could lead to increased price competition within the EU and NAFTA
Increased competition within the EU is forcing EU firms to become more efficient, and stronger global competitors
Firms outside the blocs risk being shut out of the single market by the creation of a “trade fortress”
Firms may be unable to pursue the strategy of their choice if the EU intervenes and imposes conditions on companies proposing mergers and acquisitions
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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.
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