Regional economic development

Regional Economic Integration


Regional Economic Integration
 Levels

of economic integration among nations
 Economic and political arguments for/against
 History/scope, scope and future prospects for:
–
–
–
–

EU
NAFTA
MERCOSUR, and
APEC

 Implications

for business


Regional Economic Integration
 Agreements

among geographically
proximate countries to reduce/remove
tariff and non-tariff barriers to free flow of:
– Goods

– Services
– Factors of production



Levels of Economic Integration


Free Trade Area (FTA):
– removes tariffs among members
– members retain own trade policies toward others



Customs Union (CU): FTA+
– common trade policy toward others



Common Market (CM): CU+
– eliminates intra-market factor of production movements



Economic Union (EU): CM+
– full integration of member economies (common policy)



Political Union: EU+

– political and economic integration


Reasons for Regional Integration
Economic

enhancement of the member states

– Free trade
– Fee FDI

Political

Reasons

– Linkages of economies create interdependencies that

reduce the potential for violent conflict
– Grouping gives countries more political clout world-wide
Impediments
– Painful adjustments in certain segments of economy
– Threat to national sovereignty



European Union
25 member countries; 450mm people; GDP >
US
 1951 6 members of coal and steel community


– France, Germany (W.), Italy, Belgium,

Netherlands, Luxembourg



1957 Treaty of Rome: European Community
–
–
–
–



Common market
Elimination of internal trade barriers
Common external tariff
Free movement of factors of production

1973 1st enlargement: Britain, Ireland,
Denmark



European Union




1981 2nd enlargement: Greece
1983 3rd enlargement: Portugal, Spain
1992 single European act











Remove all frontier controls
Principle of mutual recognition to product standards
Open public procurement to non-national suppliers
Lift barriers of competition to banks and insurance
Remove restrictions on foreign exchange transactions
Abolish restriction on cabotage (trucking)

1994 Maastricht treaty: European Union
1996 4th enlargement: Austria, Finland, Sweden
2003 5th enlargement: Poland, Hungary, Czech Republic,
Lithuania, Estonia, Latvia, Slovenia, Cyprus, Malta,
Slovakia


The Euro (€)
 Maastricht

–
–
–
–

€

treaty:

European common currency adopted 1/1/99
Common foreign and defense policy
Common citizenship
EU parliament with “teeth”

now used by 12 countries (since 1/1/02)

– Sweden, Denmark, Britain opted out
– 10 new countries have to qualify


Benefits of the Euro (€)






Lower transaction costs for individuals / business
Prices comparable across the continent;
increased competition

Rationalization of production across Europe to
reduce cost
Pan-European capital market
Increase range of investment options available to
both individuals and institutions


Costs of the Euro (€)
ECB

has monetary policy control not nations

Sets interest rates, monetary policy (Frankfurt, Ger.)
 Is independent; instructs national central banks


EU

is not an optimal currency area
Few similarities in structure of economic activity (e.g.,
Finland vs Portugal)
 Interest rates too high in depressed regions or too low for
economically booming regions
 May need fiscal transfers from prosperous to depressed
regions


Economic

and political issues may conflict

Early Experience of the Euro (€)


Volatile trading history
– 1999 -- €1 = US$1.17
– 10/2000 -- €1 = US$0.83
– 10/2004 -- €1 = US$1.24



EU enlargement will complicate Euro adoption;
new members with weaker economies



Major members ignoring monetary union rules to
retain control over their fiscal and monetary
policies


Enlargement of the EU
More

member disparity, more difficult
governance
Norway opted out of the EU (1994)
Membership applications pending: Turkey,
Bulgaria, Rumania, Croatia

– Turkish application controversial (economic

development, religion, labor movement problems)

Other

non-European countries will seek
membership
US and Asian countries fear that EU will
become protectionist (“fortress Europe”)



The Americas
 North

American Free Trade Agreement
(NAFTA): USA, Mexico, Canada
 The Andean Pact: Bolivia, Chile,
Ecuador, Colombia, Peru
 MERCOSUR (FTA): Brazil, Argentina,
Paraguay, Uruguay
 Central American Free Trade Agreement
(CAFTA): Costa Rica, Dominican
Republic, El Salvador, Guatemala,
Honduras, Nicaragua


The Americas

Elsewhere
 Association

of Southeast Asian Nations

(ASEAN)
– Brunei, Indonesia, Laos, Malaysia,

Myanmar, the Philippines, Singapore,
Thailand, Vietnam
 Asia

Pacific Economic Cooperation

– USA, Japan, China + 15 Pacific nations




NAFTA
 USA,

Canada, Mexico (FTA-1988)

– USA-Canada is world’s largest trading

relationship
– USA is Mexico’s largest trading partner

– Mexico, USA’s third largest trading partner

 Trade

opening process through tariff

elimination


NAFTA - Key provisions


General (effective 1/1/94)
– Tariffs of all sectors reduced by 99% over 10 yrs
– FDI unrestricted (x-oil and railways in Mexico,

Culture in Canada, airlines-communications US)
– No free movement of labor (x-white collar
easement)
– Protection of intellectual property rights
– Cross-border flow of services unrestricted
– Application of environmental standards
– Two commissions have the right to impose
penalties on issues of health/safety, child labor,
minimum wages


Implications for Business
Opportunities
– Less protectionism; higher economic growth

– Lower cost of doing business (fewer borders)

Threats
– Cultural differences persist
– Increased price competition within blocks
– Across-trading-block rivalry can increase

barriers
– Improvement of competitiveness of many local
firm within the blocks