International Business Fourth Edition CHAPTER 8 Regional

International Business Fourth Edition

CHAPTER 8 Regional Economic Integration

8 -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. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -4 Regional Trade Agreements Notified to GATT and the WTO, 1948 -1999 Mc.

8 -5 Level of Economic Integration Political Union Economic Union Common Market Customs Union EU 1992 Free Trade Area Lev NAFTA el of Int egr ati on Figure 8. 2 Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -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. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -7 Case for Regional Integration 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. Mc. Graw-Hill/Irwin Political Creates incentive for political cooperation. Reduces potential for violent confrontation. Enhanced clout to deal with ‘superpowers’. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -8 Impediments to Integration Although a nation may benefit, groups within a nation may be hurt. Concerns about national sovereignty. Debate: ration bal Integ Glo Mc. Graw-Hill/Irwin Trade creation. Trade diversion. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

U. S. Mexican Trade in Textiles, 1993 -2000 8 -9 Figure 8. 3 Mc.

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8 -12 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. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -13 European Union GDP Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc.

8 -14 US Top European Trading Partners $ Billions Mc. Graw-Hill/Irwin © 2003 The

8 -15 EU Governance European Commission European Council Heads of State and Commission President Resolves policy issues sets policy direction. Council of Ministers European Parliament 630 directly elected members Mc. Graw-Hill/Irwin 20 Commissioners appointed by members for 4 year terms Proposing, implementing, monitoring legislation. 1 representative from each member Propose amendments to legislation, veto power over budget and singlemarket legislation, appoint commissioners. Ultimate controlling authority. No EU laws w/o approval. Court of Justice 1 judge from each country Hears appeals of EU Laws. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -16 The Single European Act 1987 - EC agrees to work toward establishing a single market by December 31, 1992. Stimulus: Objectives: Disharmony among the EC member countries: Trade policy. Technical standards. Led to establishing the Delors Commission in 1985. Basis for Single European Act. 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. The Act can lead to gains in trade and investment and increased competition when barriers are removed. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -17 The Euro Benefits: 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. Mc. Graw-Hill/Irwin 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. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -18 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. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -19 EU Issues Enlargement. Fortress Europe? Create European barriers to trade from the outside? EU promises to support GATT and the WTO. No guarantees, however. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -20 Jan. 1, 1994 Abolish tariffs NAFTA Remove cross-border flow of services Protect intellectual property Remove FDI restrictions Apply national Two commissions environmental to enforce treaty standards Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -21 Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights

8 -22 NAFTA: For/Against For Enlarged and productive regional base. Labor-intensive industries move to Mexico gets investment and employment. Increased Mexican income to buy US/Canada goods. Demand for goods increases jobs. Consumers get lower prices. Mc. Graw-Hill/Irwin 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. Impact of NAFTA has been muted. Small trade and jobs gain for US. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Andean PACT Mc. Graw-Hill/Irwin 8 -23 © 2003 The Mc. Graw-Hill Companies, Inc. ,

8 -24 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. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -25 US Trade With The Andean Community Mc. Graw-Hill/Irwin © 2003 The Mc.

Mercosur Mc. Graw-Hill/Irwin 8 -26 © 2003 The Mc. Graw-Hill Companies, Inc. , All

8 -27 The Mercosur 1988: Argentina, Brazil. 1990: Paraguay, Uruguay 1995: Agreed to move toward a full customs union. Trade quadrupled between 1990 -1998. Has significant trade diversion issues. Yeats Report. Economic problems, first in Brazil (1999), then in Argentina (2001) has put plans for the customs union on hold. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -28 US Trade With Mercosur Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies,

8 -29 Other Hemisphere Associations Central American Common Market 1960 s: 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. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

ASEAN Mc. Graw-Hill/Irwin 8 -30 © 2003 The Mc. Graw-Hill Companies, Inc. , All

8 -31 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 Vietnam. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -32 Asian Trade Flows Inter ASEAN Europe China Destination of Exports Aust. /N.

8 -33 Asian Trade Flows Destination of Exports Source of Imports Mc. Graw-Hill/Irwin ©

8 -34 Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights

8 -35 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. ” Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -36 Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights

8 -37 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”. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 -38 Impact on Business Positive: Protected markets, now open. Lower costs doing business in single market. Mc. Graw-Hill/Irwin Negative: Differences in culture and competitive practices make realizing economies of scale difficult. Threats: More price competition. Firms become more competitive. Outside firms shut of market. EU intervention in M and A activity. © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.