REGIONAL ECONOMIC REGIONAL ECONOMIC INTEGRATION INTEGRATION

Case: Ford in EuropeCase: Ford in Europe• One of the most notable trends in the global One of the most notable trends in the global

economy in recent years has been the accelerated economy in recent years has been the accelerated movement toward regional economic integrationmovement toward regional economic integration

• Regional Economic Integration: agreements Regional Economic Integration: agreements between groups of countries in a geographic region between groups of countries in a geographic region to reduce, and ultimately remove, tariff and to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, nontariff barriers to the free flow of goods, services, and factors of production between each services, and factors of production between each other. other.

• By entering into regional agreements groups of By entering into regional agreements groups of countries aim to reduce trade barriers more rapidly countries aim to reduce trade barriers more rapidly than can be achieved under the auspices of the than can be achieved under the auspices of the WTOWTO

• The specter of the EU and NAFTA turning into The specter of the EU and NAFTA turning into ëconomic fortress”that shut out foreign producers ëconomic fortress”that shut out foreign producers with high tariff barriers is particularly worrisome to with high tariff barriers is particularly worrisome to those who believe in the value of unrestricted free those who believe in the value of unrestricted free tradetrade

I - LEVELS OF ECONOMIC I - LEVELS OF ECONOMIC INTEGRATIONINTEGRATION

Free Trade AreaFree Trade Area: In a free trade area all barriers : In a free trade area all barriers to the trade of goods and services among member to the trade of goods and services among member countries are removed. In the theoretically ideal countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are subsidies, or administrative impediments are allowed to determine its own trade policies with allowed to determine its own trade policies with regard to nonmembers. regard to nonmembers.

ExEx: EFTA and NAFTA: EFTA and NAFTA

Customs UnionCustoms Union: eliminates trade barriers between : eliminates trade barriers between member-countries and adopts a common external member-countries and adopts a common external trade policy.trade policy.

ExEx: Andean Pact: Andean Pact

• Common MarketCommon Market: The theoretically ideal common : The theoretically ideal common market has no barriers to trade between market has no barriers to trade between member-countries and a common external trade member-countries and a common external trade policy. Unlike in a customs union, in a common policy. Unlike in a customs union, in a common market factors of production also are allowed to market factors of production also are allowed to move freely between member-countries. Thus, move freely between member-countries. Thus, labour and capital are free to move, as there are labour and capital are free to move, as there are no restrictions on immigration, emigration, or no restrictions on immigration, emigration, or cross-border flows of capital between member-cross-border flows of capital between member-countries. countries.

• Economic UnionEconomic Union: An Economic Union involves the : An Economic Union involves the free flow of products and factors of production free flow of products and factors of production between member-countries and the adoption of a between member-countries and the adoption of a common external trade policy. A full economic common external trade policy. A full economic union also requires a common currency, union also requires a common currency, harmonization of the member-countries tax rates harmonization of the member-countries tax rates and a common monetary and fiscal policy.and a common monetary and fiscal policy.

II - THE CASE FOR REGIONAL II - THE CASE FOR REGIONAL INTEGRATIONINTEGRATION

A - THE ECONOMIC CASE FORA - THE ECONOMIC CASE FOR

Unrestricted free trade will allow countries to Unrestricted free trade will allow countries to specialize in the production of goods and services specialize in the production of goods and services that they can produce most efficientlythat they can produce most efficiently

Asian, Russian, and Latin American Crisis: Asian, Russian, and Latin American Crisis: Questioning liberalization of financial markets!!!Questioning liberalization of financial markets!!!

Opening a country to free trade stimulates Opening a country to free trade stimulates economic growth in the country, which in turn economic growth in the country, which in turn creates dynamic gains from trade. creates dynamic gains from trade.

Flows of FDI can transfer technological, marketing Flows of FDI can transfer technological, marketing and managerial know-how to host nations. and managerial know-how to host nations.

Stimulates Economic GrowthStimulates Economic Growth

Incentives are created or political cooperation Incentives are created or political cooperation between neighboring statesbetween neighboring states

By grouping their economies together, the countries By grouping their economies together, the countries can enhance their political weight in the world.can enhance their political weight in the world.

B – POLITICAL CASE FOR INTEGRATIONB – POLITICAL CASE FOR INTEGRATION

Costs, painful adjustmentsCosts, painful adjustments

Concerns over national sovereigntyConcerns over national sovereignty

C – IMPEDIMENTS TO INTEGRATIONC – IMPEDIMENTS TO INTEGRATION

III - THE CASE FOR/AGAINST III - THE CASE FOR/AGAINST REGIONAL INTEGRATIONREGIONAL INTEGRATION

A - TRADE CREATIONA - TRADE CREATION

Occurs when high-cost domestic producers are Occurs when high-cost domestic producers are replaced by low-cost external suppliers within the replaced by low-cost external suppliers within the free trade area.free trade area.

B - TRADE DIVERSIONB - TRADE DIVERSION

Occurs when lower-cost external suppliers are replaced Occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area.by higher-cost suppliers within the free trade area.

A regional free trade agreement will benefit the wold A regional free trade agreement will benefit the wold only if the amount of trade exceeds the amount it only if the amount of trade exceeds the amount it diverts.diverts.

In theory, GATT and WTO rules should ensure that a In theory, GATT and WTO rules should ensure that a free trade agreement does not result in trade free trade agreement does not result in trade diversion. diversion.

IV - REGIONAL ECONOMIC IV - REGIONAL ECONOMIC INTEGRATION IN EUROPEINTEGRATION IN EUROPE

The EU is the product of two political factors:

a) Devastation of two warsb) Desire to hold their own on the world’s

political and economic stage

TREATY OF ROME – 1957

In 1973, first enlargement of the EC

Other additions, Greece in 1981, Spain and Portugal in 1986, and in 1996 by Finland, Austria and Sweden

With a population of 350 million and a GDP greater than that of the United States, these enlargements made the EU a potential global superpower.

In 1994, following the ratification of the In 1994, following the ratification of the Maastricht treatyMaastricht treaty

Single European Act: The main problem with the Single European Act: The main problem with the EC was the disharmony of the member-countries EC was the disharmony of the member-countries technical, legal, regulatory and tax standards. technical, legal, regulatory and tax standards. The rules of the game differed substantially from The rules of the game differed substantially from country to country, which stalled the creation of a country to country, which stalled the creation of a true single internal market. true single internal market.

The “White Paper” was published in 1985, The “White Paper” was published in 1985, proposing that all impediments to the formation proposing that all impediments to the formation of a single market be eliminated by 1992.of a single market be eliminated by 1992.

Objectives of the Act: frontier controls, mutual Objectives of the Act: frontier controls, mutual recognition of standards, public procurement, recognition of standards, public procurement, financial markets, lifting barriers, exchange financial markets, lifting barriers, exchange controls, freight transport.controls, freight transport.

““The United States of Europe”The United States of Europe”

The Treaty of MaastrichtThe Treaty of Maastricht

Common currency, lower cost of doing business in Common currency, lower cost of doing business in Europe, reduce risks that arise from currency Europe, reduce risks that arise from currency fluctuations.fluctuations.

National authorities would lose control over National authorities would lose control over monetary policymonetary policy

Enlargement of the European Union: Eastern Enlargement of the European Union: Eastern European Countries? European Countries?

Fortress Europe? Fortress Europe?

V - REGIONAL ECONOMIC V - REGIONAL ECONOMIC INTEGRATION IN THE AMERICASINTEGRATION IN THE AMERICAS

A - The Nafta AgreementA - The Nafta Agreement

Nafta became law January 1, 1994.Nafta became law January 1, 1994.

Guidelines: Guidelines:

- Abolition within 10 years of tarifs on 99% of - Abolition within 10 years of tarifs on 99% of the goods traded among Mexico, Canada, and the goods traded among Mexico, Canada, and the U.S.the U.S.

- Remove most of the barriers on the cross-- Remove most of the barriers on the cross-border flow of servicesborder flow of services

- Protect intellectual property rights- Protect intellectual property rights

- Removes most restrictions on FDI among the - Removes most restrictions on FDI among the three membersthree members

- Members are allowed to apply its own - Members are allowed to apply its own environmental standardsenvironmental standards

Arguments against NAFTA: Arguments against NAFTA:

- mass exodus of jobs from the US and Canda - mass exodus of jobs from the US and Canda (Perot’s “Sucking Sound”)(Perot’s “Sucking Sound”)

- Expose Mexican firms to highly efficient - Expose Mexican firms to highly efficient Canadian and American firms. Canadian and American firms.

- Painful Economic Restructuring and - Painful Economic Restructuring and Unemployment in MexicoUnemployment in Mexico

- Loss of National Sovereignty- Loss of National Sovereignty

B - FTAAB - FTAA

Enlargement of NAFTA or the creation of two major Enlargement of NAFTA or the creation of two major trading blocks in the Americas SAFTA and NAFTA? trading blocks in the Americas SAFTA and NAFTA?

C - CACM, CARICOMC - CACM, CARICOM

D - MERCOSURD - MERCOSUR

VI - ASIAN AND AFRICAN VI - ASIAN AND AFRICAN TRADING BLOCKS TRADING BLOCKS

ASEAN, APECASEAN, APEC

AFRICAN COOPERATIONAFRICAN COOPERATION

VII - COMMODITY AGREEMENTSVII - COMMODITY AGREEMENTS

BUFFER-STOCK SYSTEMBUFFER-STOCK SYSTEM

MULTIFIBER ARRANGEMENT (MFA)MULTIFIBER ARRANGEMENT (MFA)

VIII - THE UNITED NATIONSVIII - THE UNITED NATIONS

UNCTADUNCTAD

IX - THE ENVIRONMENTIX - THE ENVIRONMENT

THE RIO EARTH SUMMIT THE RIO EARTH SUMMIT