Chapter 9

Regional Economic Integration

Global Talent Crunch

The Global Talent CrunchOver the next decade, it is estimated that the growth in demand for college-

educated talent will exceed the growth in supply for most of the developed

world. India’s educated workforce is growing 2% annually, while America’s is

shrinking 0.8% each Graphic Source: Oxford Economics (Fortune 9/22/14)

Regional Economic Integration

Regional economic integrationAgreements between countries in a geographic

region to reduce tariff and non-tariff barriers to the

free flow of goods, services, and factors of

production between each other

�Designed to promote free trade, BUT

�Causes competition among regional groups

Tax differences and Starbucks –Film

Harmonization can help governments to collect

more taxes

Hear about Swiss banks??

Impediments To Integration

Economic integration can be difficult because:

�while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose (e.g., unions)

�it implies a loss of national sovereignty(e.g., regional decisions)

The Case Against Regional Integration

Trade creationLow cost producers (within the free trade area) replace high cost domestic producers

Trade diversionHigher cost suppliers (within the free trade area) replace lower cost external suppliers

Regional economic integration - only beneficial IF

Trade Creation > Trade Diversion

5 Levels Of Economic Integration

� Free Trade AreaEliminates all barriers to the trade of goods and services among member countries (but members determine their own trade policies for nonmembers)

� Customs UnionEliminates trade barriers between member countries and adopts a common external trade policy (among nonmembers)

� Common MarketNo barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production

� Economic UnionCommon currency, a harmonized tax rates, and a common monetary and fiscal policy, free flow of products and factors of production between members, and a common external trade policy

� Political UnionInvolves a central political apparatus that coordinates the economic, social, and foreign policy of member states

Regional Integration Bodies

1. NAFTA (1)

2. Andean Pact (2)

3. MERCOSUR (3)

4. European Union (EU) (4)

5. ASEAN

6. APEC

1st Level Of Economic Integration

1. Free Trade AreaEliminates all barriers to the trade of goods and services among member countries (but members determine their own trade policies for nonmembers)

Examples:

� European Free Trade Association (EFTA) (between Norway, Iceland, Liechtenstein, and Switzerland)

� North American Free TradeAgreement (NAFTA) (U.S., Canada, and Mexico)

Let’s look at it . . .

The North American Free Trade Agreement

�Abolished Tariffs on 99 % of goods traded

�Removed most barriers on services

�Protects intellectual property (IP) rights

�removes most FDI restrictions

�Each country can apply its own environmental

standards (must have a scientific base)

�Establishes two commissions to impose fines and

remove trade privileges when environmental

standards or legislation involving health and safety,

minimum wages, or child labor are ignored

The North American Free Trade Agreement

Supporters argue that:

�Mexico will benefit from increased jobs

�The U.S. and Canada will benefit from access to a large and increasingly prosperous market

�Lower prices for Mexican goods

�U.S. and Canadian firms producing in Mexico will be more competitive on world markets

Critics argue that:

�Jobs will be lost and wage

levels will decline in the U.S.

and Canada

�Mexican workers will

emigrate north

�More pollution due to

Mexico's lax standards

�Mexico would lose its

sovereignty

NAFTA - Jorge Castañeda’s View

According to Jorge Castañeda, who later became Mexico’s foreign minister, in his book The Mexican Shock, NAFTA was not a deal between competing national interests. It was “an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.”

Over 1,000 pages – it helped big business to:

- Pay less wages in all 3 countries (negotiate with unions)

- Dispute settlement procedures to override labor & environmental regulations – is more than just an FTA

Resulted in:

- Less employment in U.S. & Canada

- Depressed wages in Mexico, yet increased productivity

What should be done, according to Castañeda?

Negotiate a rebalanced agreement—one with enforceable labor standards and protections equaling those given to investors—so that workers’ wages on both sides of the border could once again rise with their productivity.

What do you think?

Who Was Right?

The jury is still out …

�Research indicates that NAFTA’s early impact was subtle (both sides exaggerated)

�NAFTA increased political stability in Mexico

�Other Latin American countries would like to join NAFTA

Global Regional Trade – Intraregional vs. Extraregional

“Fortress Europe” – 59% of trade and rising

Free Trade Of The Americas

�Talks began in April 1998 to establish a Free Trade of The Americas (FTAA) by 2005

�It did not happen - now support from the U.S.,

Brazil and Argentina is mixed

�If the FTAA was established, it would have major

implications for cross-border trade and investment

flows within the hemisphere

�The FTAA would create a free trade area of

nearly 800 million people

�Discussions in Colombia in 2012 – no results

2nd Level Of Economic Integration

2. Customs UnionEliminates trade barriers between member countries

and adopts a common external trade policy (among

nonmembers)

Example:

� Andean Pact (between Bolivia, Colombia, Ecuador

and Peru)

Let’s look at it . . .

The Andean Community

�The Andean Pact: formed in 1969 using the EU model

�Failed by the mid-1980s

�Re-launched in 1990, and now operates as a customs union

�Signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade area

3rd Level Of Economic Integration

3. Common MarketNo barriers to trade between member countries, a

common external trade policy, and the free movement

of the factors of production

Example:

� MERCOSUR (between Brazil, Argentina, Paraguay,

and Uruguay) is aiming for common market status –

Let’s look at it . . .

MERCOSUR

�Originated in 1988 as a free trade pact between Brazil and Argentina

�1990 included Paraguay and Uruguay

�Making progress on reducing trade barriers between member states

�May be diverting trade (rather than creating trade), and local firms are investing in industries that are not competitive on a worldwide basis

4th Level Of Economic Integration

4. Economic UnionCommon currency, a harmonized tax rates, and a common monetary and fiscal policy, free flow of products and factors of production between members, and a common external trade policyExample:

�European Union (EU) is an imperfect economic union

Lets look at the EU . . .

EU Membership

�28 independent member states: Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech

Republic, Denmark, Estonia, Finland, France, Germany,

Greece, Hungary, Ireland, Italy, Latvia, Lithuania,

Luxembourg, Malta, the Netherlands, Poland, Portugal,

Romania, Slovakia, Slovenia, Spain, Sweden, and the

United Kingdom (Brexit)

�Candidate countries:

Albania, Montenegro, Republic of Macedonia, Serbia,

and Turkey (blocked based on human rights)

�Potential Candidates: Bosnia and Herzegovina, and Kosovo

�Iceland – pulled out of EU candidacy

Political Structure Of The European Union

Five main institutions of the EU:

�European Council - resolves major policy issues and sets policy directions

�European Commission - responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws

�Council of the European Union - the ultimate controlling authority within the EU

�European Parliament - debates legislation proposed by the commission and forwarded to it by the council

�Court of Justice - the supreme appeals court for EU law

European Political Complexity

Complex - No one centralized political structure

Source (updated: 1/1/2015): http://en.wikipedia.org/wiki/Template:Supranational_European_Bodies

Maastricht Treaty - The Establishment Of The Euro

Currently Use (19)Austria – Belgium – Cyprus –Estonia – Finland – France –Germany – Greece – Ireland – Italy –Lithuania – Latvia - LuxembourgMalta – Netherlands – Portugal –Spain – Slovakia - Slovenia

Non-Euro statesPoland - BulgariaCzech Republic - SwedenHungary – Romania - Croatia

Opt OutUnited KingdomDenmark

5th Level Of Economic Integration

5. Political UnionInvolves a central political apparatus that coordinates the economic, social, and foreign policy of member states Example:

� The EU is headed toward at least partial political union, and the United States is an example of even closer political union

Political Union – If each U.S. state were a nation ?

Political Union – If each U.S. state were a nation ?

2014 population statistics

Association of Southeast Asian Nations

Association of Southeast Asian Nations (ASEAN):�Formed in 1967

�Currently includes:

Brunei, Indonesia, Malaysia,

the Philippines, Singapore,

Thailand, Vietnam, Myanmar,

Laos, and Cambodia

�Fosters freer trade and

cooperation in industrial policies

�an ASEAN Free Trade Area (AFTA) between the six original

members of ASEAN came into effect in 2003

2015 News: Indonesia trying to strengthen Rupiah

(interest at 7.5%) – it helped stabilize the Rupiah since Jan 2016

Asia-Pacific Economic Cooperation

Asia-Pacific Economic Cooperation (APEC):

�21 members including the United States, Japan, and China

�Wants to increase multilateral cooperation in view of the

economic rise of the Pacific nations and the growing

interdependence within the region

What Does Economic

Integration Mean For Managers?

�Regional economic integration

�Opens new markets

�Companies can realize cost economies by

centralizing production in those locations where the

mix of factor costs and skills is optimal

�But

�within each grouping, the business environment

becomes competitive

� there is a risk of being shut out of the single market by

the creation of a “trade fortress”

Project – Negotiating

4 Section to Analyze --------------------------1. Style & Pace2. Bargaining3. Decision Making4. Agreements (contracts)

Obtain from my home page: http://instruction2.mtsac.edu/rjagodka

Many Sources of Information

HTTP://RTAIS.WTO.ORG/UI/PUBLICALLRTALIST.ASPX

Link – Regional trade agreements around the world

http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/

index.asp

Link – These are agreements with the U.S.

http://www.sice.oas.org/agreements_e.asp

Link – These are agreements in the Americas (North & South)

http://www.bilaterals.org/

Link – News about agreements worldwide – can subscribe

Check before doing business …HTTP://WWW.WTO.ORG/ENGLISH/TRATOP_E/REGION_E/RTA_PARTICIPATION_MAP_E.HTM

Link –Select by Country – EXAMPLE - BRAZIL

Group work – small groups

Select 1 assigned country from the groupPut everyone’s name at top of paper:

1. Country (select using pick list)2. List RTAs in force (center column)3. Click on any RTA to see details

What are pros and cons? Who wins, who loses?

Go to: https://goo.gl/Ngv4kX (WatCh CaPItaliZAtion)