bus280 7th ed chapter 8 ppt
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Copyri ght 2011 by The McGraw-H il l Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin
Global Business Today7e
by Charles W.L. Hill
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Chapter 8
Regional Economic
Integration
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Introduction
Regional economic integration - agreements betweencountries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, andfactors of production between each other
in theory, regional economic integration benefits allmembers
Over the last two decades, the number of regional tradeagreements has been on the rise
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Introduction
Question: Is regional economic integration a good thing?
Answer:
While regional trade agreements are designed topromote free trade, there is some concern that the worldis moving toward a situation in which a number ofregional trade blocks compete against each other
if this scenario materializes, the gains from free tradewithin blocs could be offset by a decline in tradebetween blocs
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Levels of Economic Integration
There are five levels of economic integration
1. Free trade area - all barriers to the trade of goods andservices among member countries are removed, butmembers determine their own trade policies with regardto nonmembers
the most popular form of integration
Examples include
the European Free Trade Association (betweenNorway, Iceland, Liechtenstein, and Switzerland)
the North American Free Trade Agreement (betweenthe U.S., Canada, and Mexico)
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Levels of Economic IntegrationFigure 8.1: Levels of Economic Integration
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Levels of Economic Integration
2. Customs union- eliminates trade barriers betweenmember countries and adopts a common external tradepolicy
most countries that enter a customs union desire
further integration in the futureExamples include
the Andean Pact (between Bolivia, Columbia,Ecuador, Venezuela, and Peru)
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Levels of Economic Integration
3. Common market - no barriers to trade between membercountries, a common external trade policy, and the freemovement of the factors of production
can be difficult to achieve and requires significant
harmony among members in fiscal, monetary, andemployment policies
Examples include
MERCOSUR (between Brazil, Argentina, Paraguay,and Uruguay) hope to achieve this status
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Levels of Economic Integration
4. Economic union - involves the free flow of products andfactors of production between members, the adoption ofa common external trade policy, and in addition, acommon currency, harmonization of the member
countries tax rates, and a common monetary and fiscalpolicy
involves sacrificing a significant amount of nationalsovereignty
Examples include
the European Union (EU)
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Levels of Economic Integration
5. Political union- independent states are combined into asingle union
requires that a central political apparatus coordinateeconomic, social, and foreign policy for memberstates
The EU is headed toward at least partial political union,and the United States is an example of even closerpolitical union
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The Case for Regional Integration
There are both economic and political argumentssupporting regional economic integration
Generally, many groups within a country oppose thenotion of economic integration
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The Economic Case for Integration
Regional economic integration is an attempt to achieveadditional gains from the free flow of trade andinvestment between countries beyond those attainableunder international agreements such as the WTO
Since it is easier to form an agreement with a fewcountries than across all nations, there has been a pushtoward regional economic integration
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The Political Case for Integration
Politically, integration is attractive because
by linking countries together, making them moredependent on each other, and forming a structurewhere they regularly have to interact, the likelihood ofviolent conflict and war will decrease
by linking countries together, they have greater cloutand are politically much stronger in dealing with othernations
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Impediments to Integration
Integration is not easy to achieve or maintain
There are two main impediments to integration
1. it can be costly - while a nation as a whole maybenefit from a regional free trade agreement, certain
groups may lose2. it can result in a loss of national sovereignty
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Case Against Regional Integration
Regional economic integration only makes sense whenthe amount of trade it creates exceeds the amount itdiverts
Trade creation occurs when low cost producers withinthe free trade area replace high cost domestic producers
Trade diversion occurs when higher cost suppliers withinthe free trade area replace lower cost external suppliers
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Regional Economic Integration in Europe
Europe has two trade blocs
the European Union with 27 members
the European Free Trade Association with 4
membersThe European Union is expected to become a
superpower of the same order as the United States
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Evolution of the European Union
The European Union (EU) is the result of
the devastation of two world wars on Western Europeand the desire for a lasting peace
the desire by the European nations to hold their own
on the worlds political and economic stageThe forerunner of the EU was the European Coal and
Steel Community (formed in 1951)
The Treaty of Rome established the European Economic
Community in 1957the name was changed to the EU in 1994
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Evolution of the European UnionMap 8.1: Member States of the European Union in 2010
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Political Structure of the EU
The four main institutions of the EU are
1. the European Commission - proposes EU legislation,implements it, and monitors compliance
2. the European Council - the ultimate controlling authoritywithin the EU
3. the European Parliament - debates legislationproposed by the commission and forwarded to it by thecouncil
4. the Court of Justice - the supreme appeals court for EUlaw
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The Single European Act
The Single European Act (1987) committed EC countriesto work toward establishment of a single market by 1992
The Act proposed toremove all frontier controls between EC countries
apply the principle of mutual recognition to productstandardsopen procurement to non-national supplierslift barriers to competition in retail banking and
insurance
remove all restrictions on foreign exchangetransactions between member countriesabolish restrictions on cabotage
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The Establishment of the Euro
The Maastricht Treaty (1991) committed EU members toadopt a single currency, the euro
the euro is used by 16 of the 27 member states
created the euro zone, the second largest currencyzone in the world after that of the U.S. dollar
countries that participate have agreed to give upcontrol of their monetary policy
Britain, Denmark and Sweden have opted out of theeuro zone
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The Establishment of the Euro
Question: What are the benefits of the euro?
Answer:
handling one currency, rather than many
easier to compare prices across Europeincreased competition promotes greater
efficiencies in production
the pan-European capital market should further
developrange of investment options open both to
individuals and institutions should increase
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The Establishment of the Euro
Question: What are the costs of the euro?Membership implies a loss of control over monetary
policy
The European Central Bank (ECB) was established to
manage monetary policy, but some question its abilityto act independently
The EU is not an optimal currency area - an area wheresimilarities in the underlying structure of economic
activities make it feasible to adopt a single currency anduse 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 Establishment of the Euro
Since its establishment the euro has had a volatiletrading history with the U.S. dollar
initially, the euro was valued at $1.17, then fell invalue relative to the dollar, but strengthened to an all-time high of $1.54 in March 2008
in early 2010, the exchange rate was1=$1.35
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Enlargement of the European Union
Many countries, particularly from Eastern Europe, haveapplied for membership in the EU
Ten countries joined in 2004 expanding the EU to 25states, with population of 450 million people, and asingle continental economy with a GDP of11 trillion
In 2007, Bulgaria and Romania joined bringingmembership to 27 countries
Turkey has also applied for membership, but is notexpected to join until 2013, if at all
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Economic Integration in the Americas
Regional economic integration is on the rise in theAmericas
The most significant attempt is the North AmericanFree Trade Agreement
Other agreements includethe Andean Community
MERCOSUR
There are also attempts to form a Free Trade Area of the
Americas
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Economic Integration in the AmericasMap 8.2: Regional Integration in the Americas
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NAFTA
The North American Free Trade Agreement (NAFTA)between the U.S., Canada, and Mexico became law in1994 and
abolished tariffs on 99 percent of goods traded
removed barriers on the cross-border flow of servicesprotects intellectual property rights
allows each country to apply its own environmentalstandards
establishes two commissions to impose fines andremove trade privileges when environmentalstandards or legislation involving health and safety,minimum wages, or child labor are ignored
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NAFTA
Question: What are the benefits of NAFTA?
Answer:Mexico
increased jobs as low cost production moves southand more rapid economic growthThe U.S. and Canadaaccess to a large and increasingly prosperous market
and lower prices for consumers from goods produced
in MexicoU.S. and Canadian firms with production sites in
Mexico are more competitive on world markets
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NAFTA
Question: What are the drawbacks of NAFTA?
Answer:
Jobs could be lost and wage levels could decline in the
U.S. and CanadaMexican workers could emigrate north
Pollution could increase due to Mexico's more laxstandards
Mexico would lose its sovereignty
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NAFTA
Question: How successful has NAFTA been?
Answer:Studies of NAFTAs early impact suggest that both
advocates and detractors may have been guilty ofexaggerationtrade between the three countries has increased by
250 percentthe members have become more integrated
productivity has increased in member nationsemployment effects have been smallMexico has become more politically stable
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NAFTA
Question: Should NAFTA accept new members?
Answer:
Several other Latin American countries have indicated
their desire to eventually join NAFTACurrently both Canada and the U.S. are adopting a wait
and see attitude with regard to most countries
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The Andean Community
TheAndean Pact (1969) was based on the EU modelthe 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 1990, the Andean Pact was re-launched, and now
operates as a customs union In 2003, it signed an agreement with MERCOSUR to
restart negotiations towards the creation of a free tradeareacurrent members include Bolivia, Ecuador, Peru, and
Columbia
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MERCOSUR
MERCOSUR (1988) - a free trade pact between Braziland Argentina
in 1990, it was expanded to include Paraguay andUruguay
MERCOSUR has been successful at reducing tradebarriers between member states
However, critics worry that MERCOSUR is divertingtrade rather than creating trade, and local firms areinvesting in industries that are not competitive on aworldwide basiscurrent members include Brazil, Argentina, Paraguay,
Uruguay, and Venezuela
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Other Trade Pacts in the Americas
Two other trade pacts in the Americas are
1. the Central American Common Market
Costa Rica, El Salvador, Guatemala, Honduras,Nicaragua, and the Dominican Republic
these countries were joined by the U.S. in 2003 tocreate a free trade agreement, the Central AmericanFree Trade Agreement (2003)
2. CARICOM (1973), a customs union between English-
speaking Caribbean countriessix members formed the Caribbean Single Market
and Economy (CSME) in 2006 to lower trade barriersand harmonize macro-economic and monetary policy
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Free Trade of the Americas
Talks began in 1998 to establish a Free Trade of TheAmericas(FTAA) by 2005
The FTAA was not established as planned
Current support for the agreement by the U.S. and Brazilis limited
If the FTAA is established, it would create a free tradearea of nearly 800 million people
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Economic Integration Elsewhere
There have been various attempts at regional economicintegration 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 EconomicCooperation
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ASEAN
TheAssociation of Southeast Asian Nations (ASEAN)(1967) - foster freer trade between member countriesand to achieve some cooperation in their industrialpolicies
Brunei, Indonesia, Malaysia, the Philippines,Singapore, Thailand, Vietnam, Myanmar, Laos, andCambodia
AnASEAN Free Trade Area (AFTA) (2003) between the
six original members of ASEAN came into full effect toreduce import tariffs among members
Vietnam, Laos, and Myanmar have all joined
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Asia-Pacific Economic Cooperation
Asian Pacific Economic Cooperation (APEC) wasfounded in (1990) to increase multilateral cooperation inview of the economic rise of the Pacific nations and thegrowing interdependence within the region
APEC currently has 21 members including the UnitedStates, Japan, and China
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Regional Trade Blocs in Africa
There are nine trade blocs on the African continent
However progress toward the establishment ofmeaningful trade blocs has been slow
Many countries believe that they need to protect theirindustries from unfair foreign competition making itdifficult to create free trade areas or customs unions
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Implications for Managers
Question: Why is regional economic integrationimportant to international companies?
Answer:
Regional economic integration means that markets thathad been protected from foreign competition areincreasingly open
these developments are particularly significant in theEuropean Union and NAFTA
However, regional economic integration is likely toincrease competition
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Opportunities
Formerly protected markets are now open to exports anddirect investment
The free movement of goods across borders, theharmonization of product standards, and the
simplification of tax regimes mean that firms can realizepotentially enormous cost economies by centralizingproduction in those locations where the mix of factorcosts and skills is optimal
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Threats
Lower trade and investment barriers could lead toincreased price competition within the EU and NAFTAincreased competition within the EU is forcing EU
firms to become more efficient, and stronger globalcompetitors
Firms outside the blocs risk being shut out of the singlemarket by the creation of a trade fortressfirms may be limited in their ability to pursue the
strategy of their choice if the EU intervenes andimposes conditions on companies proposing mergers
and acquisitions
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Classroom Performance System
In a _______, all barriers to the free flow of goods andservices between member countries are removed, and acommon policy toward nonmembers is established
a) Free trade area
b) Customs unionc) Common market
d) Economic union
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Classroom Performance System
The European Union is an example of a(n)a) Free trade area
b) Customs union
c) Common market
d) Economic union
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Classroom Performance System
The ultimate decision making body of the European Unionis the
a) Council of the European Union
b) European Parliament
c) Court of Justice
d) European Commission
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Classroom Performance System
Studies show that after its first decade
a) There was a small net gain of jobs in the U.S.
b) Exports from the U.S. failed to grow
c) NAFTAs overall impact has been significantd) The U.S., Canada, and Mexico all experienced adecrease in productivity
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