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CHAPTER 

Regional EconomicIntegration

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Key Issues

• Understand the different levels of economic

integration among nations

• What are the political and economic arguments for

and against regional integration?

• Be familiar with the world’s most important

regional economic agreements

• What are the implications for business from

regional economic integreation?

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Regional conomic Integration

• !greements among geographically

 pro"imate countries to reduce#remove tariffand non$tariff barriers to free flow of  % &oods

 % 'ervices

 % (actors of production

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)evels of conomic Integration

• (ree *rade !rea +(*!,-

 %  removes tariffs among members

 %  members retain own trade policies toward others

• .ustoms Union +.U,- (*! and / %  common trade policy toward others

• .ommon 0ar1et +.0,- .U and / %  elimination of intra$mar1et factor of production

movements

•conomic Union +U,- .0 and / %  full integration of member economies +common

 policy,

• 2olitical Union- U and /

 %  political integration

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Reasons for Regional Integration

• conomic enhancement of the member states %  (ree trade

 %  (ee (3I

• 2olitical Reasons %  )in1ed economies create interdependencies that

reduce the potential for armed conflict

 %  &rouping gives countries more political clout

world$wide• Impediments

 %  2ainful ad4ustments in certain segments of economy

 %  *hreat to national sovereignty

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uropean Union

• 56 member countries7 869mm people7 &32 : U'

• 5;65 < members of coal and steel community

 %  (rance= &ermany +W>,= Italy= Belgium= etherlands=

)u"embourg

• 5;6@ *reaty of Rome- uropean .ommunity %  .ommon mar1et

 %  limination of internal trade barriers

 %  .ommon e"ternal tariff 

 %  (ree movement of factors of production

• 5;@8 5st enlargement- Britain= Ireland= 3enmar1 

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uropean Union• 5;A5 nd enlargement- &reece

• 5;A8 8rd enlargement- 2ortugal= 'pain• 5;; single uropean act

• Remove all frontier controls

• 2rinciple of mutual recognition to product standards

• Cpen public procurement to non$national suppliers

• )ift barriers of competition to ban1s and insurance

• Remove restrictions on foreign e"change transactions

• !bolish restriction on cabotage +truc1ing,

• 5;;D 0aastricht treaty- uropean Union

•5;;< Dth enlargement- !ustria= (inland= 'weden• 99 6th enlargement- .yprus= the .Eech Republic=stonia= Fungary= )atvia= )ithuania= 0alta= 2oland= the'lova1 Republic and 'lovenia conclude accessionagreements>

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*he uro +G,

• 0aastricht treaty-

 %  uropean common currency adopted 5#5#;;

 %  .ommon foreign and defense policy

 %  .ommon citiEenship %  U parliament with Hteeth

•  G now used by 5 countries +"$'weden= 3enmar1=

Britain,

• .urrency was issued 5#5#99 and 5 national

currencies were withdrawn by !pril 99

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Benefits of the uro +G,

• )ower transaction costs for individuals # business

• 2rices comparable across the continent7 increased

competition• RationaliEation of production across urope to

reduce cost

•2an$uropean capital mar1et

• Increase range of investment options available to

 both individuals and institutions

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.osts of the uro +G,

• )oss of monetary policy control at national level• .B sets interest rates and determines monetary policy

+(ran1furt= &er>,

• .B is not under political control7 issues instructions tonational central ban1s

• U is not an optimal currency area•  ot enough similarities in the underlying structure of

economic activity +e>g>= (inland vs 2ortugal,

• Interest rates may be too high in depressed regions or too lowfor economically booming regions

• 0ay need to deal with this through fiscal transfers from prosperous to depressed regions

• conomic issues may come against political ones

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nlargement of the U

• nlargement means more disparity and moredifficult governance and control

•  orway opted out of the U +5;;D,

• *he U plans to conclude accession negotiations by the end of the 99 with- .yprus= the .Eech

Republic= stonia= Fungary= )atvia= )ithuania=

0alta= 2oland= the 'lova1 Republic and 'lovenia> 

• U' and !sian countries fear that U will become protectionist +Hfortress urope,

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*he !mericas

•  orth !merican (ree *rade !greement +!(*!, %  U'!= 0e"ico= .anada

• *he !ndean 2act

 %  Bolivia= .hile= cuador= .olombia= 2eru• 0R.C'UR +(*!,

 %  BraEil= !rgentina= 2araguay= Uruguay

• .entral !merican .ommon 0ar1et +.!RI.C0,

 %  .osta Rica= l 'alvador= &uatemala= Fonduras= icaragua

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lsewhere

• !ssociation of 'outheast !sian ations +!'!, %  Brunei= Indonesia= )aos= 0alaysia= 0yanmar= the

2hilippines= 'ingapore= *hailand= Jietnam

• !sia 2acific conomic .ooperation %  U'!= apan= .hina L 56 2acific nations

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 !(*!

• U'!= .anada= 0e"ico +(*!$5;AA,

 % U'!$.anada is world’s largest trading

relationship % U'! is 0e"ico’s largest trading partner 

 % 0e"ico= U'!’s third largest trading partner 

• .ontinuation of opening processthrough elimination of tariffs

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 !(*! $ Key provisions

• &eneral +effective 5#5#;D, %  *ariffs reduced across all sectors by ;;M over 59 yrs

 %  (3I unrestricted +"$oil and railways in 0e"ico= .ulture

in .anada= airlines$communications U',

 %  o free movement of labor +"$white collar easement,

 %  2rotection of intellectual property rights

 %  .ross$border flow of services unrestricted

 %  !pplication of environmental standards %  *wo commissions have the right to impose penalties on

issues of health#safety= child labor= minimum wages

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Implications for Business

• Cpportunities

 %  )ess protectionism7 higher economic growth

 %  )ower cost of doing business +fewer borders,

• *hreats

 %  .ultural differences persist

 %  Increased price competition within bloc1s

 %  !cross$trading$bloc1 rivalry can increase barriers %  Improvement of competitiveness of many local firm

within the bloc1s

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