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Undergrad Chapter 9: Regional Economic Integration

Posted on the 17 October 2014 by Socialmediaevie @socialmediaevie
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Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

Despite the rapid spread of regional trade agreements designed to promote free trade, there are those who fear that the world is moving toward a situation in which a number of regional trade blocks compete against each other. In this scenario of the future, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs.

 There are five levels of economic integration are: free trade area, customs union, common market, economic union, and political union.

The most enduring free trade area in the world is the European Free Trade Association. EFTA currently joins four countries-Norway, Iceland, Liechtenstein, and Switzerland. Other free trade areas include the North American Free Trade Agreement (NAFTA).

A site with information and additional links on NAFTA is available at {}.  The site includes downloadable power point presentations on the benefits of NAFTA

To find out more about EFTA, go to {}, and click on “EFTA AELE”.  From here you can click on several icons to get quick facts, more in- depth reports, information on the European Economic Area, and many other issues related to EFTA.

 Customs unions around the world include the current version of the Andean Pact (between Bolivia, Columbia, Ecuador and Peru).

Currently, MERCOSUR, the South America grouping that includes Brazil, Argentina, Paraguay, and Uruguay, is aiming to eventually establish itself as a common market.

The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, the currency of the EU, and differences in tax rates across countries still remain.

The Economic and Political Case for regional economic integration can be seen as 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.

The political case for integration has two main points: 1) 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, and 2) by linking countries together, they have greater clout and are politically much stronger in dealing with other nations.

There are two main impediments to integration:

  • although a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose
  • concerns over national sovereignty

Whether regional integration is in the economic interests of the participants depends upon the extent of trade creation as opposed to trade diversion.  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.  A regional free trade agreement will only make the world better off if the amount of trade it creates exceeds the amount it diverts.

Regional Economic Integration in Europe involves two trade blocks in Europe:

  • the European Union (EU)
  • the European Free Trade Association

The EU is by far the more significant, not just in terms of membership, but also in terms of economic and political influence in the world economy.

The Evolution of the European Union is the product of two political factors:

  • the devastation of two world wars on Western Europe and the desire for a lasting peace
  • the European nations’ desire to hold their own on the world’s political and economic stage.

The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951.

The EEC was formed in 1957 at the Treaty of Rome.  While the original goal was for a common market, progress was generally very slow. The EU web site is {}.  The site contains a broad array of information about the historical role and current activities of the EU in the global economy.

 The Single European Act called for the removal of border controls, mutual recognition of standards, open public procurement, a barrier free financial services industry, no currency exchange controls, free and open freight transport, and freer and more open competition.

 The Political Structure of the European Union. The main institutions of the EU are:

  • the European Council (ultimate controlling authority within the EU)
  • the European Commission (responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws)
  • the European Parliament (debates legislation proposed by the commission and forwarded to it by the council)
  • the Court of Justice (the supreme appeals court for EU law).

The Establishment of the Euro  was initiated by the Treaty of Maastricht, signed in 1991. It committed the EU to adopt a single currency, the euro, by January 1, 1999.  The euro is used by 17 of the 27 member states.  By adopting the euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar.

Since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar.  Initially, the currency fell in value relative to the dollar, but has since strengthened.

 The European Union has a web page devoted to the euro {}.  You 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.

 The European Central Bank maintains a web site with current information on the euro.  The site is available at {}.

 At one point in time, joining the Euro Zone had been the goal of many Eastern European countries.  Now however, given the recent financial crises that is threatening the future of the euro, many are rethinking their plans.  To learn more, go to {}.

 The Enlargement of the European Union was propelled by several countries, particularly from Eastern Europe.  In December of 2002, the EU formally agreed to accept the applications of 10 countries, and they joined on May 1, 2004.  Today, membership is up to 27 countries.

 Regional Economic Integration in the Americas includes the North American Free Trade Agreement (NAFTA) is the most significant attempt at economic integration in the Americas.  Other efforts include the Andean group and MERCOSUR.  In addition, there are plans to establish a hemisphere wide Free Trade Area of the Americas (FTAA.)

The North American Free Trade Agreement between the United States, Canada, and Mexico became law January 1, 1994. More information on NAFTA  can be found at {}.

Following approval of NAFTA by the U.S. Congress a number of other Latin American countries indicated their desire to eventually join NAFTA. Currently the governments of both Canada and the U.S. are adopting a wait and see attitude with regard to most countries.

Many organizations are anxious to take advantage of the opportunities offered by NAFTA.  The NAFTA Register {} is a directory of export management companies, export service providers, and trading companies that want to profit from NAFTA by helping buyers and selling take advantage of NAFTA related opportunities.

 The Andean Community  formed the Andean Pact in 1969. It was based on the EU model, but was far less successful in achieving its stated goals.  In 1990, the Andean Pact was re-launched, and now operates as a customs union. To see new developments with the Andean Community go to {}.

MERCOSUR is trade diverting rather than trade creating, and local firms are investing in industries that are not competitive on a worldwide basis. MERCOSUR’s Homepage, includes a broad array of useful information, can be accessed at {}.

The Central American Trade Agreement Market and CARICOM are two other trade pacts in the America, the Central American Trade Market and CARICOM, although neither has made much progress as yet.

If the Free Trade of the Americas is established, it will have major implications for cross-border trade and investment flows within the hemisphere. The FTAA would create a free trade area of 850 million people. Additional information on the Free Trade of the Americas can be found at {}.

Several Regional Economic Integration efforts have been made to integrate Asia. One of the most successful is the Association of Southeast Asian Nations (ASEAN). Association of Southeast Asian Nations  Formed in 1967, ASEAN currently includes Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and, most recently, Vietnam, Myanmar, Laos, and Cambodia.  The basic objectives of ASEAN are to foster freer trade between member countries and to achieve some cooperation in their industrial policies.

Asia Pacific Cooperation, APEC, currently has 21 members including such economic powerhouses as the United States, Japan, and China.  The stated aim of APEC is to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. For more on APEC, go to its web site at {}.

There are nine Regional Trade Blocks in Africa on the African continent. The progress toward the establishment of meaningful trade blocs has been slow.

The EU and NAFTA currently have the most immediate implications for business. The greatest implication for MNEs is that the free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes, makes it possible for firms to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal.  Through specialization and shipping of goods between locations, a much more efficient web of operations can be created. Just as the emergence of single markets in the EU and North America creates opportunities for business, so it also presents a number of threats.

  • Undergrad Chapter 9: Regional Economic Integration
    Undergrad International Business Chapter 7: The Political Economy of International Trade

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