Global Business Management(MGT380)

Lecture #11: Regional and Economic

Integration

Learning Objectives

Appreciate all the possible different levels of economic integration between nations

Understand the economic and political arguments for regional economic integration

Understand the economic and political arguments against regional economic integration

Quick Recap of the last lecture Host country benefits: Resource transfer

effects - we’ve actually already talked a bit about this. Remember that FDI can benefit a country by bringing in capital, technology, and management skills helping the country to increase its economic growth.

Bring jobs. Well cited example is FDI helps BOP in two ways:

FDI is substitute for imports of goods/services, it increases CA. For instance, Japanese FDI in EU and USA.

When MNCs export product to other countries

FDI affects competition and economic growth: If FDI is in the form of greenfield investment, competition will increase in a market. This should drive down prices and benefit consumers. More competition also promotes increased productivity, innovation, and then, economic growth.

There are three main costs of inward FDI. 1. Adverse effect on competition: subsidiaries of foreign MNE’s might end up having greater economic power than indigenous competitors. It gives the negative effects on competition. 2. Negative effects on the balance of payments. When it comes to the balance of payments, host countries worry that along with the capital inflows that come will the FDI, will be the capital outflows that occur when the subsidiary repatriates profits to the parent company. Some countries actually limit the amount of profits that can be repatriated to limit the negative effects of this. Host countries are also concerned that some subsidiaries import a substantial number of their inputs.

Loss of national sovereignty and autonomy: Sometimes host governments worry that they may lose some economic independence as a result of FDI. They worry that since foreign companies have no particular commitment to the host country, they won’t really worry about the consequences of their decisions on the host country. Loss of economic independence.

The effect on the capital account of the home country’s balance of payments, the employment effects that arise from outward FDI when importing parts, the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country. Reverse resource-transfer.

The home country’s balance of payments can suffer and employment.

Well, there are various ways that home and host countries can encourage or discourage FDI (ownership and performance restraints)

Decision to export/license/FDI

What Is Regional Economic Integration? Regional economic integration -

agreements 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

Question: Do regional trade agreements promote free trade? In theory, yes, but the world may be moving

toward a situation in which a number of regional trade blocks compete against each other

. While the move toward regional economic integration is generally seen as a good thing, some observers worry that it will lead to a world in which regional trade blocs compete against each other.

In this possible future scenario, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs.

The specter of the EU and NAFTA turning into economic fortresses that shut out foreign producers with high tariff barriers is worrisome to those who believe in unrestricted free trade. If such a situation were to materialize, the resulting decline in trade between blocs could more than offset the gains from free trade within blocs

What Are The Levels Of Regional Economic Integration?

1. A free trade area eliminates all barriers to the trade of goods and services among member countries European Free Trade Association (EFTA) -

Norway, Iceland, Liechtenstein, and Switzerland

North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico

MERCOSUR, between Argentina, Brazil, Paraguay and Uruguay

2. A customs union eliminates trade barriers between member countries and adopts a common external trade policy Andean Community (Bolivia, Columbia,

Ecuador, and Peru)

3. A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production MERCOSUR (Brazil, Argentina, Paraguay, and

Uruguay)

4. An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy

European Union (EU), Euro since January 2001

5. A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states

the EU is headed toward at least partial political union, and the U.S. is an example of even closer political union

Why Should Countries Integrate Their Economies? All countries gain from free trade and

investment regional economic integration is an attempt to

exploit the gains from free trade and investment

Trade theories, +sum game, Linking countries together, making them

more dependent on each other creates incentives for political cooperation and

reduces the likelihood of violent conflict, Wars gives countries greater political clout when

dealing with other nations If no. of countries involve is higher it would be

difficult

What Limits Efforts At 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, NAFTA(job loss in Mexico),

it implies a loss of national sovereignty, main issue in NAFTA

Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts 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

What Is The Status Of Regional Economic Integration In Europe? Europe has two trade blocs 1. The European Union (EU) with 27

members2. The European Free Trade Area (EFTA)

with 4 members The EU is seen as the world’s next

economic and political superpower

What Is The European Union?

The devastation of two world wars on Western Europe prompted the formation of the EU Members wanted lasting peace and to hold

their own on the world’s political and economic stage

Forerunner was the European Coal and Steel Community (1951)

The European Economic Community (1957) was formed at the Treaty of Rome with the goal of becoming a common market

The Single European Act (1987) committed the EC countries to work toward

establishment of a single market by December 31, 1992

was born out of frustration among EC members that the community was not living up to its promise Subsidizing national firms, For example, France

injected FF6 billion to Group Bull (SOE computer maker)

provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case

Main objectives

1. Remove all controls between EC countries, abolishing delays, reduce resource requirement for complying trade bureaucracy.

2. Apply mutual product standards, should be developed by EC.

3. Open public non-national suppliers. Increase competition

4. Lift barriers to competition in retail banking, insurance business, increase borrowing

5. Remove restrictions on foreign exchange transaction

6. Abolish restrictions on ‘cabotage’- the right of foreign truckers to pick up and deliver goods by the end of 1992. It will reduce the cost by 10-15%.

What Is The Political Structure Of The European Union? The main institutions in the EU include: 1. The European Council - the ultimate controlling

authority within the EU2. The European Commission - responsible for proposing

EU legislation, implementing it, and monitoring compliance with EU laws by member states

3. The European Parliament - debates legislation proposed by the commission and forwarded to it by the council

4. The Court of Justice - the supreme appeals court for EU law

What is Euro

The Maastricht Treaty committed the EU to adopt a single currency created the second largest currency zone in

the world after that of the U.S. dollar used by 17 of the 27 member states Britain, Denmark and Sweden opted out

since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar

Is it a Good thing

Benefits of the euro savings from having to handle one currency,

rather than many, Travelers. $40 billion/year it is easier to compare prices across Europe, so

firms are forced to be more competitive Cost of production reduce gives a strong boost to the development of

highly liquid pan-European capital market like NASDAC

increases the range of investment options open both to individuals and institutions

Costs of the euro loss of control over national monetary policy EU is not an optimal currency area

Should The EU Continue To Expand? Many countries have applied for EU

membership Ten countries joined in 2004 expanding

the EU to 25 states In 2007, Bulgaria and Romania joined

bringing membership to 27 countries Turkey has been denied full membership

because of concerns over human rights

Summary of the lecture

Regional economic integration - agreements 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

regional trade blocs compete against each other Levels of integration

A free trade area eliminates all barriers to the trade of goods and services among member countries

A customs union eliminates trade barriers between member countries and adopts a common external trade policy, Andean Community (Bolivia, Columbia, Ecuador, and Peru)

A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production

4. An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy, European Union (EU), Euro since January 2001

5. A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states, the EU is headed toward at least partial political union, and the U.S. is an example of even closer political union

All countries gain from free trade and investment regional economic integration aims to exploit

the gains from free trade and investment; Trade theories, +sum game,

Linking countries together, making them more dependent on each other; creates incentives for political cooperation and reduces the likelihood of violent conflict, Wars; gives countries greater political clout when dealing with other nations; If no. of countries involve is higher it would be difficult

Forerunner was the European Coal and Steel Community (1951); The European Economic Community (1957); The Single European Act (1987); The European Council- European Commission (responsible for proposing EU legislation)- European Parliament- Court of Justice-

Benefits of the euro savings from having to handle one currency,

rather than many, Travelers. $40 billion/year it is easier to compare prices across Europe, so

firms are forced to be more competitive Cost of production reduce gives a strong boost to the development of

highly liquid pan-European capital market like NASDAC

increases the range of investment options open both to individuals and institutions