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Regional Economic Integration

European Market and E.U.

Initiated in January 2005

Aim:
To create a hassle free borderless trade

Greater Choices for Customers; More Competitions amongst similar firms

Benefit 2: Greater Liquidity
•Easy to Borrow funds •Low cost of capital •Stimulated business environment •More jobs

Financial Forecasts
•EU’s GDP would increase by 1.1% a year • € 1300 Billlion in a decade •Total business investment: 6% Annually •Private consumption: 0.8%

•Total Employment: 0.5%

Historical Disintegration

Different Regulatory Frameworks

Different Legislations

Different Cultural and Linguistic Barriers

EU’s Progress

Positives
39 out of 42 Action Plans Completed Including •Conduct of Business by Investment firms •Accounting Standards •Stock exchanges and • Bank Legislations

Setbacks
Cross Border Acquisitions National Governments reserved the rights for friendly cross border mergers

Future Changes

The Agreements among countries in a geographic region to reduce, and ultimately remove tariff and non tariff barriers to the free flow of goods, services and factors of production between each other

The Contribution of WTO and GATT in Regional Trade

Other Regional Trade Agreements

The European Union has been the most significant and Successful in the past decade

Steps:
•Removed Transit Trade
•Launched a single currency •Closer Political Union

•More members: From 15 to 25 (May 2004) •And over 450 Million Customers

A TRILLION DOLLAR ECONOMY!

Barriers:
• Linguistic
• Social • Cultural

Other Trade Agreements
• NAFTA

• MERCOSUR
• APEC

Regional Bloc theory

Consequence
•High Tariff •Declining Trade among blocs

REGIONAL ECONOMIC INTEGRATION

LEVELS OF ECONOMIC INTEGRATION
FREE TRADE AREA:
In a free trade area all barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to determine its own trade policies with regard to nonmembers.

Eg: EFTA and NAFTA

LEVELS OF ECONOMIC INTEGRATION
CUSTOMS UNION:
Eliminates trade barriers between member-countries and adopts a common external trade policy. Eg: Andean Pact

LEVELS OF ECONOMIC INTEGRATION

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

LEVELS OF ECONOMIC INTEGRATION

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

THE ECONOMIC CASE FOR INTEGRATION
Unrestricted free trade will allow countries to specialize in the production of goods and services that they can produce most efficiently Opening a country to free trade stimulates economic growth in the country, which in turn creates dynamic gains from trade. Flows of FDI can transfer technological, marketing and managerial know-how to host nations. Stimulates Economic Growth

POLITICAL CASE FOR INTEGRATION

Incentives are created or political cooperation between neighboring states

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

IMPEDIMENTS TO INTEGRATION

•Costs
•Painful

adjustments in certain segments of economy
•Concerns

over national sovereignty

THE CASE AGAINST REGIONAL INTEGRATION
TRADE CREATION
Occurs when high-cost domestic producers are replaced by lowcost external suppliers within the free trade area.

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

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

Regional Economic Integration in Europe

Europe’s Trade Blocs
• European Union
• European Free Trade Association

Evolution European Union
The devastation of western Europe during two world wars and the desire for long lasting peace The European Union’s desire to hold their own world’s political and economic stage Besides, many Europeans were aware of potential economic benefits of closer economic integration of the countries.

The forerunners of the EU, the European Coal and Steel Community , was formed in 1951 by Belgium France, West Germany, Italy, Luxembourg, and the Netherlands to remove barriers from the trade of Coal, Iron, Steel and Metal.

Establishment of European Community was enunciated by the signing of Treaty of Rome in 1957.
The ratification of Maastricht Treaty helped renaming the European Community to European Union.

The Treaty of Rome became the basis for the creation of a a common market The Article 3 of the treaty helped remove the major barriers and creation of a common external tariff and required the members to abolish the factors of free movement of factors of production among the members.

The Treaty of Rome

The Growth of EU
1973- Great Britain, Ireland & denmark 1981: Greece 1986: Spain & Portugal 1996: Austria, Finland and Sweden. 2004: 10 more countries, including Malta & Cyprus

2007: Bulgaria and Romania.
The inclusion of Turkey is still under consideration.

Political Structure of E.U.

• A complex and evolving structure.
• The Four main institutions are: • The European Commission
• The Council of the E.U. • European Parliament • Court of Justice

THE EUROPEAN COMMISSION - PROPOSES EU LEGISLATION, IMPLEMENTS IT, AND MONITORS COMPLIANCE

THE EUROPEAN COUNCIL - THE ULTIMATE CONTROLLING AUTHORITY WITHIN THE EU

THE EUROPEAN PARLIAMENT - DEBATES LEGISLATION PROPOSED BY THE COMMISSION AND FORWARDED TO IT BY THE COUNCIL

THE COURT OF JUSTICE - THE SUPREME APPEALS COURT FOR EU LAW

The Single European Act

The Single European Act

•The Single European Act (1987) committed EC countries to work toward establishment of a single market by 1992 •The Act was born out of frustration among EC members that the community was not living up to its promise

The Act proposed to
•remove all frontier controls between EC countries •apply the principle of mutual recognition to product standards •open procurement to nonnational suppliers •lift barriers to competition in retail banking and insurance •remove all restrictions on foreign exchange transactions between member countries

•abolish restrictions on cabotage

The Act prompted the restructuring of substantial sectors of European Industry

The Establishment of Euro

The Maastricht Treaty (1991) committed EU members to adopt a single currency, the euro •The euro is used by 15 of the 27 member states •This has created the euro zone, the second largest currency zone in the world after that of the U.S. dollar •Countries that participate have agreed to give up control of their monetary policy •So far, Britain, Denmark and Sweden have opted out of the euro zone

What are the benefits of the euro?
•Firms and individuals should save by handling one currency, rather than many •Consumers should find it easier to compare prices across Europe •Producers should become more efficient as they reduce their production costs in order to maintain their profit margins •The highly liquid pan-European capital market should get a strong boost •The range of investment options open both to individuals and institutions should increase

What are the costs of the Euro?
•Membership in the euro zone implies that nations lose control over the monetary policy •The European Central Bank (ECB) was established to manage monetary policy, but some question its ability to act independently •The EU is not an optimal currency area (an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy) •So, countries may react very differently to changes in the euro

Since its establishment the euro has had a volatile trading history with the U.S. dollar.

Initially, the euro was valued at $1.17, then fell in value relative to the dollar, but strengthened to an alltime high of $1.54 in March 2008.

REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS

THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

• The North American Free Trade Agreement is an agreement signed by the governments of Canada, Mexico, and the United States. • The goal of NAFTA is to eliminate barriers to trade, creating a trilateral trade bloc in North America.

•The agreement came into force on January 1, 1994.
•It superseded the 1989 Canada-United States Free Trade Agreement.

NAFTA CONTENTS

NAFTA CONTENTS

• Abolition within 10 years, of tariffs on 99% of the goods traded.

• Removal of trade barriers on cross border flow of services.
• Removal of most restrictions on FDI, with specialized protection to; – Energy and Railway industries (Mexico) – Airlines and Radio Communications Industries (US) – Culture (Canada)

NAFTA CONTENTS
• Application of national environmental standards that have scientific basis. • Establishment of commissions to ensure compliance to environmental standards and labor regulations.

– Commission for Environmental Cooperation (CEC) under the

North American Agreement on Environmental Cooperation (NAAEC)
– Commission for Labor Cooperation (CLC) under the

North American Agreement on Labor Cooperation (NAALC)

THE CASE FOR NAFTA

THE CASE FOR NAFTA

• Opportunity to create an enlarged and more efficient productive base for the entire region. • US and Canadian firms would move production to Mexico, to take advantage of lower labor cost. • Movement of production will occur in low skilled, labor intensive manufacturing industries. • Movement of production to Mexico
– Mexico has comparative advantage in terms of labor cost – Labor cost in Mexico is still one tenth of that in US and Canada

THE CASE FOR NAFTA

• Benefits of movement of production to Mexico
– Inward investment and employment opportunities in Mexico.

– Increased income in Mexico will result in increased demand for US and Canadian products in Mexican Market.
– US and Canadian Consumers will benefit from lower prices of products made in Mexico. – US and Canadian firms with production in Mexico will enhance their competitiveness in global market against their European and Asian counterparts.

THE CASE FOR NAFTA
• Exposure of Mexican firms to highly competitive US and Canadian competitors

– Long term dynamic gains in the efficiency of Mexican firms as they adjust to the rigors of a more competitive marketplace. – Mexican economic growth rate will accelerate. – Mexico might become a major market for US and Canadian firms.

THE CASE AGAINST NAFTA

THE CASE AGAINST NAFTA
• Mass exodus of jobs from US and Canada into Mexico

• Net creation of 170,000 jobs with the increased Mexican Demand for US goods and services.
• A net loss of 490,000 jobs in the United States as firms move their production to Mexico. • NAFTA would have a small impact on US and Canada, as Mexican Economy is only 5% of the size of the US economy. • Mexican firms will be exposed to highly efficient competitors of US and Canada.

THE CASE AGAINST NAFTA

• The short run outcome will be painful economic restructuring and unemployment in Mexico with the entrance of US and Canadian competitors.

• Mexicans fear loss of sovereignty, use of Mexico as a low cost assembly site by US firms without contribution to Mexican economic growth.

THE CASE AGAINST NAFTA

• Environmentalists believe Mexico could degrade clean air and toxic waste standards across the continent. • With NAFTA, chemical waste and sewage would increase along the course of Rio Grande river from El Paso, Texas to Gulf of Mexico.

NAFTA: THE FIRST DECADE

NAFTA: THE FIRST DECADE

• Most comprehensive early study was conducted by UCLA with funding from various departments of US government.

• Focused on the effects of NAFTA in its first three and a half years.
• Growth in trade between US and Mexico began to change nearly a decade before the implementation of NAFTA. • Changes due to Mexico’s unilateral liberalization of trade regimes to conform to GATT standards.

NAFTA: THE FIRST DECADE

• US exports to Mexico in sectors liberalized under NAFTA grew by 5.83% annually and grew by 5.35% annually in sectors not yet liberalized. • NAFTA had only a marginal impact on the level of trade between US and Mexico. • NAFTA created 31,158 new jobs and eliminated 28,168 jobs in US. Net job gain of 3000 jobs in the first two years.

NAFTA: INDICATIONS FROM RECENT SURVEY

• From 1993 to 2004, trade between NAFTA partners grew by 250%.

• Canada and Mexico are the No.1 and No.2 trade partners of US, suggesting that economies of the NAFTA nations are closely integrated. • From 1993 to 2004, Canadian trade with US and Mexico increased from 70% to 80% of all Canadian foreign trade.

nafta: indications from recent survey

• From 1993 to 2004, Mexican trade increased from 66% to 80%. • NAFTA nations experienced strong productivity growth over this period. • Labor productivity in Mexico increased by 50%. • Mexico has benefited from NAFTA in terms of increased political stability and consistent economy growth.

NAFTA: ENLARGEMENT

NAFTA: ENLARGEMENT
• Many Latin American countries wish to join NAFTA. • US and Canadian firms have adopted wait-and-see attitude for most countries. • Canadian, US and Mexican governments began considering Chile’s possible entry in 1994 into NAFTA. As of 2005, no decision has been taken.

• Political opposition in the US congress to expanding NAFTA.
• US and Chile signed a bilateral free trade pact.

THE ANDEAN COMMUNITY

• Bolivia, Chile, Ecuador, Colombia and Peru signed an agreement in 1969 to create the Andean Pact.

• Based largely on EU model, but less successful in achieving stated goals.

• Steps of integration included – An internal tariff reduction plan, – A common external tariff, – A transportation and common industrial policy – Special concession for Bolivia and Ecuador. • By the mid 1980s failed to achieve any of its stated objectives. • Political and Economic problems hindered cooperation between member countries.

THE ANDEAN COMMUNITY

• Turn came in the late 1980s when Latin America began to adopt free market policies. • In 1990, head of the Andean Community countries met which resulted in Galapagos Declaration, which was renamed the Andean Pact in 1992

• The declaration objectives included
– Establishment of free trade area by 1992 – Custom union by 1994 – Common market by 1995

In December 2003, Andean Community signed an agreement with Mercosur to restart stalled negotiations on the creation of a free trade area between the two trading blocs

MERCOSUR
• Originated in 1988 as a free trade pact between Brazil and Argentina. • Modest reduction in tariff and quota, helped bring an increase of 80% in trade between the two countries in late 1980s

MERCOSUR
• The success encouraged to include Paraguay and Uruguay in March 1990. • For the first eight years or so, MERCOSUR made a positive contribution to the economic growth of the member countries. • The combined GDP of the four members grew at an annual rate of 3.5% between 1990-1998

Criticism by Alexander Yeats
MERCOSUR countries, insulated from outside competition by tariffs, are investing in products that are too expensive to sell to anyone but themselves. MERCOSUR countries may not be able to compete globally.

• MERCOSUR hit a significant roadblock in 1998 when its member states slipped into recession and intrabloc trade slumped. • Brazil faced Financial Crisis in 1999, which was the largest export market for MERCOSUR.

Brazilian President announced his support to reestablish MERCOSUR by expanding it with a larger membership and a common currency after the EU. As of 2005, no progress has been made in this regard.

Central American common market and caricom

• 1960s – Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua attempted to set up American Common Market. • It collapsed in 1969, when war broke out between Honduras and El Salvador

• In 1973, Referred to as Caricom, a custom union was created between the Caribbean countries. • Repeatedly failed to progress towards economic integration. • In 1991, the CARICOM governments failed for the third time to meet a deadline for establishing a common external tariff.

REGIONAL ECONOMIC INTEGRATION ELSEWHERE
ASIA & AFRICA

REGIONAL ECONOMIC INTEGRATION - IN ASIA
ASEAN APEC

ASEAN
(ASSOCIATION OF SOUTHEAST ASIAN NATIONS)
Formed in August 8th 1967. Last MEETING held on Hanoi (Vietnam)

MEMBER COURTIERS OF ASEAN

AIM & PURPOSE

ASEAN MOTTO

ASEAN FLAG

AFTA
•Acronym of ASEAN Free Trade Agreement

• AFTA has cut tariffs on Manufacturing & Agricultural products to less than 5% among ASEAN members

FREE TRADE ZONE
ASEAN & AFTA are still progressing for Free TRADE Zone. They have reduced tariff to ZERO % in Six original (founders) members this year. Expected to reduce tariff by ZERO % for other members till 2015.

ISSUES
• There is a conflict in member countries like, • Malaysia refused to bring down tariff on Imported cars. • Philippine refused to bring down tariff on Petrochemicals & Rice.

AMM
• 43rd Annual Minstrel Meeting hold on Hanoi (Vietnam) • 2010 is chaired by Vietnam

• Issues are discussed in AMM, likewise, Problems in Burma were discussed in Hanoi.

APEC – ASIA PACIFIC ECONOMIC
COOPERATION

Formed in 1989

MEMBER COUNTRIES - APEC
APEC currently has 21 member states including China, US & Japan.

PURPOSE AND GOAL

“Open barriers for FREE trade “

TRADE AND INVESTMENT LIBERALISATION
APEC – Shanghai (China) • Reduce tariffs and other trade barriers • Helps economies to grow • Free and open trade helps to lower the costs of production

TRADE AND INVESTMENT LIBERALISATION
• Industrialized members to remove their trade barriers by 2010 & developing economies to do so by 2020. • But in 2010, they agreed on trade at reducing trade transaction costs.

WORLD’S LARGEST FREE TRADE AREA
APEC

REGIONAL TRADE BLOCS IN AFRICA
• Trade Blocs in Africa.
• Dormant trade groups in Africa. • Protection against foreign Competition.

REGIONAL TRADE BLOCS IN AFRICA
• Free trade movement in 2001. • Failure in making free trade among African countries.

IMPLICATIONS FOR MANAGERS

OPPORTUNITIES
• Creation of Single Market • Lower costs of doing business

• FREE movement of goods across borders
• Can tolerate foreign competition

OPPORTUNITIES
• 3M consolidated with European manufacturing & distributing facilities to take advantage of economies of scale. • 3M chose a location for centralized production after carefully considering the likely production costs in alternative locations within the EU.

THREATS
• The emergence of single markets threats. • Increased Price competition. • Shut out of local businesses. • Mergers & acquisitions.

THREATS
• Many foreign companies confirm growing hurdles to doing business in China. • Foreign investment is still restricted in some sectors, patent and trademark infringements in China.

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