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Part Three Chapter Regional Economic Integration Cross-Border Trade and Investment Seven Part Three Chapter Regional Economic Integration Cross-Border Trade and Investment Seven

Slide 7 -1 Regional Economic Integration l Agreements among geographically proximate countries to reduce/remove Slide 7 -1 Regional Economic Integration l Agreements among geographically proximate countries to reduce/remove tariff and non-tariff barriers to free flow of Goods u Services u Factors of production u Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -2 Levels of Economic Integration l Free Trade Area (FTA): removes tariffs Slide 7 -2 Levels of Economic Integration l Free Trade Area (FTA): removes tariffs among members u members retain own trade policies toward others u l Customs u Union (CU): FTA+ common trade policy toward others l Common u Market (CM): CU+ elimination of intra-market factor of production movements l Economic u full integration of member economies (common policy) l Political u Union (EU): CM+ Union: EU+ political and economic integration Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -3 Reasons for Regional Integration l Economic enhancement of the member states Slide 7 -3 Reasons for Regional Integration l Economic enhancement of the member states Free trade u Fee FDI u l Political Reasons Linkages of economies create interdependencies that reduce the potential for violent conflict u Grouping gives countries more political clout worldwide u l Impediments Painful adjustments in certain segments of economy u Threat to national sovereignty u Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -4 European Union l 15 member countries; 350 mm people; GDP > Slide 7 -4 European Union l 15 member countries; 350 mm people; GDP > US l 1951 6 members of coal and steel community u France, Germany (W. ), Italy, Belgium, Netherlands, Luxembourg l 1957 Treaty of Rome: European Community Common market u Elimination of internal trade barriers u Common external tariff u Free movement of factors of production u l 1973 1 st enlargement: Britain, Ireland, Denmark Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -5 European Union l 1981 2 nd enlargement: Greece l 1983 3 Slide 7 -5 European Union l 1981 2 nd enlargement: Greece l 1983 3 rd enlargement: Portugal, Spain l 1992 single European act n Remove all frontier controls n Principle of mutual recognition to product standards n Open public procurement to non-national suppliers n Lift barriers of competition to banks and insurance n Remove restrictions on foreign exchange transactions n Abolish restriction on cabotage (trucking) l 1994 Maastricht treaty: European Union l 1996 4 th enlargement: Austria, Finland, Sweden Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -6 The Euro l Maastricht treaty: European common currency adopted 1/1/99 u Slide 7 -6 The Euro l Maastricht treaty: European common currency adopted 1/1/99 u Common foreign and defense policy u Common citizenship u EU parliament with “teeth” u l The euro now used by 11 countries (x-Greece-applied for 2001 entry, Sweden, Denmark, Britain); now “virtual” currency l Actual currency will be issued 1/1/2002 Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -7 Benefits of the Euro l Lower transaction costs for individuals / Slide 7 -7 Benefits of the Euro l Lower transaction costs for individuals / business l Prices comparable across the continent; increased competition l Rationalization of production across Europe to reduce cost l Pan-European capital market l Increase range of investment options available to both individuals and institutions Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -8 Costs of the Euro l Loss of monetary policy control at Slide 7 -8 Costs of the Euro l Loss of monetary policy control at national level n ECB sets interest rates and determines monetary policy (Frankfurt, Ger. ) n ECB is not under political control; issues instructions to national central banks l EU is not an optimal currency area n Not enough similarities in the underlying structure of economic activity (e. g. , Finland vs Portugal) n Interest rates may be too high in depressed regions or too low for economically booming regions n May need to deal with this through fiscal transfers from prosperous to depressed regions l Economic Irwin/Mc. Graw-Hill issues may come against political ones Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -9 Enlargement of the EU l Enlargement means more disparity and more Slide 7 -9 Enlargement of the EU l Enlargement means more disparity and more difficult governance and control l Norway opted out of the EU (1994) l In 1997 Poland, Czech Republic, Estonia, Slovenia, Hungary were invited to apply for membership l Membership applications pending from Malta, Cyprus, and Turkey l US and Asian countries fear that EU will become protectionist (“fortress Europe”) Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -10 The Americas l North u USA, Mexico, Canada l The u Slide 7 -10 The Americas l North u USA, Mexico, Canada l The u American Free Trade Agreement (NAFTA) Andean Pact Bolivia, Chile, Ecuador, Colombia, Peru l MERCOSUR u Brazil, Argentina, Paraguay, Uruguay l Central u (FTA) American Common Market (CARICOM) Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -11 Elsewhere l Association of Southeast Asian Nations (ASEAN) u Brunei, Indonesia, Slide 7 -11 Elsewhere l Association of Southeast Asian Nations (ASEAN) u Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam l Asia u Pacific Economic Cooperation USA, Japan, China + 15 Pacific nations Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -12 NAFTA l USA, Canada, Mexico (FTA-1988) USA-Canada is world’s largest trading Slide 7 -12 NAFTA l USA, Canada, Mexico (FTA-1988) USA-Canada is world’s largest trading relationship u USA is Mexico’s largest trading partner u Mexico, USA’s third largest trading partner u l Continuation of opening process through elimination of tariffs Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -13 NAFTA - Key provisions l General (effective 1/1/94) Tariffs reduced across Slide 7 -13 NAFTA - Key provisions l General (effective 1/1/94) Tariffs reduced across all sectors by 99% over 10 yrs u FDI unrestricted (x-oil and railways in Mexico, Culture in Canada, airlines-communications US) u No free movement of labor (x-white collar easement) u Protection of intellectual property rights u Cross-border flow of services unrestricted u Application of environmental standards u Two commissions have the right to impose penalties on issues of health/safety, child labor, minimum wages u Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Slide 7 -14 Implications for Business l Opportunities Less protectionism; higher economic growth u Slide 7 -14 Implications for Business l Opportunities Less protectionism; higher economic growth u Lower cost of doing business (fewer borders) u l Threats Cultural differences persist u Increased price competition within blocks u Across-trading-block rivalry can increase barriers u Improvement of competitiveness of many local firm within the blocks u Irwin/Mc. Graw-Hill Copyright 2001 The Mc. Graw-Hill Companies, Inc. All rights reserved.