8-1

Lecture Focus
 Examine the trends of regional economic
integration
 Explore the economic and political debate
surrounding integration
 Review the progress -- worldwide -- toward
integration
 Comprehend the managerial implications
 8-2

Levels of Economic Integration

 Free Trade Area: NAFTA
 All barriers to trade among members removed
 Each country can determine policies toward nonmembers
 Customs Union: Andean Pact
 Free trade among members with a common external policy
 Common Market: Early EU
 Free movement among members of goods, people, & capital
 Economic Union: Current EU
 No barriers among members, common external policy,
common monetary and fiscal policy, as well as harmonized
tax rates and common currency
 Political Union:
 Has a coordinating bureaucracy accountable to all citizens
 8-3

Level of Economic Integration

ation
nt egr
o f I
el
Lev Political
Economic Union
NAFTA Common Union
Market
Free Customs
Trade Union
Area “Articles of
Confederation
and Perpetual
Union” adopted
EU 1992 in 1781 by the
Figure 8.1 Colonial States

The Case for Regional Integration
Economic:
 Stimulates economic
growth
 In an “ideal” world -- no
need -- however!
 Easier to gain agreement
than through WTO
 Role of FDI is enhanced
 Exploit gains from free
flow of goods, services,
and investment.
8-4
Political:
 Creates incentive for
political cooperation
 Reduces potential for
violent confrontation
 Clout to deal with
“superpowers”
 8-5

Impediments to Integration
 Although a nation may
benefit, groups within a
nation may be hurt
 Discriminates against
trade outside of area
 Concerns about national
egration? sovereignty & security
Global Int
 Areas of concern:
 Trade creation
Is almost like attempting  Trade diversion
“cat” herding!
QuickTime™ and a YUV420 codec decompressor are needed to see this picture.
 Economic adjustments
Click to view the video
too painful politically
courtesy of EDS corporation
 8-6

Integration in Europe

Map 8.1
 8-7

The Single European Act - History

European Community agrees to establish
a single market by December 31, 1992
Stimulus: Objectives:
 Disharmony among the EC  Remove frontier controls
member countries:  “Mutual recognition” of
 Trade policy product standards
 Technical standards  Open public procurement to
 Need to be efficient non-nationals
 This led to establishing the  Lift barriers to banking and
Delors Commission in 1985 insurance competition
 Basis for the Single European  Remove restrictions on foreign
Act exchange transactions
 Name change to EU  Abolish cabotage restrictions

Goal of the Act: gains in trade and investment and

increased competition with the removal of barriers
 8-8

EU
 The European Union is composed  There are five official
of 27 sovereign Member States: candidate countries, Croatia,
Austria, Belgium, Bulgaria, Iceland, Macedonia,
Cyprus, the Czech Republic, Montenegro and Turkey.
Denmark, Estonia, Finland,
Albania,
France, Germany, Greece,
Bosnia and Herzegovina and
Hungary, Ireland, Italy, Latvia,
Serbia are officially
Lithuania, Luxembourg, Malta,
recognized as potential
the Netherlands, Poland,
candidates.
Portugal, Romania, Slovakia,
Slovenia, Spain, Sweden, and the
United Kingdom.
 8-9

The Euro
Treaty of Maastricht:
 11 of 15 member states
 1/1/1999 - Exchange
rates locked in QuickTime™ and a YUV420 codec decompressor are needed to see this picture.

 1/1/2002 - Euro notes

and coins issued
 National currencies
taken out of circulation
Preparing the public for the
introduction of the Euro in
Ireland through a public
service advertisement
 8-10

Benefits:
 Savings from using only one currency
 Easy to compare prices, means lower prices
 Forces firms to be efficient and cut costs
 Creates liquid pan-Europe capital market
 Increases range of investments for
individuals and institutions

QuickTime™ and a YUV420 codec decompressor are needed to see this picture.
 8-11

Costs of the Euro

 Countries lose monetary policy control:
 European Central Bank controls policy for the “Euro zone”
 EU is not an “optimal currency area”:
 Country economies are different
 Early slump (20% through 2001) against the US$
 2004 Euro is strong compared to US$ - and is
expected to increase:
 Makes it harder for Euro zone exporters to sell goods
 8-12

EU Issues
 EU in 2010 was the
single largest market
with a population QuickTime™ and a
YUV420 codec decompressor
greater than the USA are needed to see this picture.

 Further enlargement?
 Fortress Europe?
 European barriers to An ad for those that wanted
to “close” their doors.
trade from the outside For everyone else,
Latvia is open and
a part of the EU
 8-13

Economic Integration of the Americas

 On the rise in the Americas

 NAFTA

 MERCOSUR

 Plans for FTAA

 8-14

NAFTA
Jan. 1, 1994
The first two
years: The U.S.
Abolish Remove lost 28,000 jobs,
tariffs cross-border but created
flow of 31,000, for a net
services gain of 3,000 jobs
Protect
intellectual
property
Remove FDI
restrictions
Apply
national Two commissions
environmental to enforce treaty
standards
 8-15

ASEAN
 8-16

Association of Southeast Asian Nations

 Created in 1967
 Economic, political and social cooperation
 however, little has been accomplished
 Brunei, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore,
Thailand, and Vietnam
 Progress limited by Asian financial crisis of the
1990’s
 ASEAN + China = ?
 8-17

Asian Trade Flows

Intra-ASEAN

NAFTA

EU

Japan

China Destination of Exports

South Korea

Australia & NZ
Source of Imports

Rest of World

0 5 10 15 20 25 %
 SOUTH ASIAN ASSOCIATION 8-18

FOR REGIONAL COOPERATION

SAARC
 Member Countries
 Pakistan, India, Bhutan, Sri Lanka, Bangladesh,
Maldives, Nepal, Afghanistan
 More than 1.5 billion people live in these countries
 ???
 SAFTA
 8-19

APEC
 8-20

Asia Pacific Economic Cooperation

 Founded in 1990 to “promote open trade and
practical economic cooperation”
 Promotes a sense of “community”
 18 members
 50% of world’s GNP
 40% of global trade
 Brookings Institution: APEC “is in danger of
shrinking into irrelevance as a serious forum”
 Despite slow progress, if successful, could
become the world’s largest free trade area
 8-21

Regional Blocs’ Impact on Business

 Positive:  Negative:
 Protected markets  Differences in culture and
are now open competitive practices make
 Lower costs doing realizing economies of scale
business in single difficult
market  Threats:
 More price competition
 Firms become more
competitive
 Outside firms shut
out of market
 Intervention in M&A
activity

Source of graphics: http://europa.eu.int/comm/publications/booklets/eu_glance/12/txt_en.htm

 The Shanghai Cooperation
8-22

Organization

 was founded in 2001  The SCO is primarily

in Shanghai by the centered on its
leaders of China, member nations'
Kazakhstan, Central Asian
Kyrgyzstan, Russia, security-related
Tajikistan, and concerns
Uzbekistan