MODULE 3: Regional Economic Integration

Regional Integration includes a multitude

of economic and / or political steps that
maybe taken by member states of a union
to increase their global competitiveness –
not only preferential trade access.
 Learning Objectives:
After studying this chapter, you should be able to:

1. Define regional economic integration and identify its

levels.
2. Discuss the benefits and drawbacks of regional economic
integration.
3. Describe regional integration in Europe and its pattern of
enlargement.
4. Discuss the regional integration in the Americas and
analyze its future prospects.
5. Characterize regional integration in Asia and how it differs
from integration elsewhere.
6. Describe integration in the Middle East and Africa, and
explain the slow progress.
Nestlé's Global Recipe

Vevey, Switzerland – Although

based in small Switzerland,
Nestlé’s (www.nestle.com)
sells its products in nearly every
Country on the planet. Nestlé is
the world’s largest food company.
It operates across cultural borders
24 hours a day and earns just 2
percent of its sales at home.
Nestlé is known for its ability
to turn humdrum products like http://www.harborbarandgrill.com/the-benefits-of-a-professional-service/
bottled water and pet food into well-known global
brands. The company also takes regional products to the
global market when opportunity arises. For example,
Nestlé first launched a cereal bar for diabetics in Asia
under the brand name Nutren Balance and then
introduced it to other markets worldwide.
Nestlé must navigate cultural and political
traditions in other countries because food is an integral
part of the social fabric everywhere. Today the company
makes every effort to be sensitive to the traditional ways
in which babies are fed. For example, Nestlé learned
from its past mistakes and now does it all it can to ensure
the mothers in developing nations to use pure water to
mix its baby milk formulas. As Nestlé expands more
aggressively into emerging markets, it must be alert to
changes in ( pls. continue reading in the next slide)
consumer attitudes due to greater cross-cultural contact
that results from regional integration.
The laws of regional trading bloc also affect the
business activities of Nestlé. When Nestlé and Coca-Cola
announced a joint venture to develop coffee and tea
drinks, they first had to show the European Union (EU)
Commission that they would not stifle competition
across the region. Firms operating within the EU also
have to abide by the EU environmental protection laws.
Nestlé works with government to minimize the
packaging waste that results from the use of its products
by developing and managing waste-recovery programs.
As you read this chapter, think of all the ways business
activities are being affected when groups of nations
band together in regional trading blocks.
 Regional trade agreements are changing the
landscape of the global marketplace. Companies like
Nestlé of Switzerland are finding these agreements
lower trade barriers and open new markets for goods
and services. Markets otherwise off-limits because
tariffs made imported products too expensive can
become quiet attractive once tariffs are lifted. Not only
those domestic companies to seek new markets
abroad, but they also let competitors from other
nations enter the domestic market. Such mobility
increases competition in every market that takes part
in an agreement.
Trade agreements can allow companies to alter
their strategies, sometimes radically. For example,
nations in the Americas want to create a free trade
area that runs from the northern tip of Alaska to the
Southern tip of South America. Companies that do
business throughout the region could save millions of
dollars annually from the removal of import tariffs
under an eventual agreement. Multinationals could
save money by supplying the entire regions from just
a few regional factories, rather than the factory in
each nation.
What is Regional Economic Integration?

The process whereby countries in geographic

region cooperate to reduce or eliminate trade barriers to
the international flow of products, people, or capital is
called Regional Economic Integration (Regionalism). A
group of nations in a geographic region undergoing
economic integration is called a regional trading bloc.
The goal of nations undergoing economic
integration is not only to increase cross-border trade and
investment but also to raise the living standards for
their people. Moreover, regional integration sometimes
has additional goals, such as protection of intellectual
property rights or the environment, or eventual political
union.
 Free Trade Area
Economic integration whereby countries seek to
remove all barriers to trade among themselves, but each
country determine its own barriers against non-members
is called a free trade area. A free trade area is the lowest
level of economic integration that is possible between
two or more countries. Countries belonging to the free
trade area strive to remove all tariffs and nontariff
barriers such as quotas and subsidies, on international
trade in goods and services.
However, each country is able to maintain
whatever policy it sees fit against non-member countries.
These policies can differ widely from one country to
another. Countries belonging to a free trade area also
typically establish a process by which trade disputes can
be resolved.
 Free Trade Area
This is the most basic form of economic
cooperation. Member countries remove all barriers
to trade between themselves but are free to
independently determine trade policies with
nonmember nations. An example is the North
American Free Trade Agreement (NAFTA).
 Customs Union
Economic integration whereby countries
remove all the barriers to trade among themselves,
but erect a common trade policy against non-
members, is called customs union. Thus the main the
difference between free trade area and a customs
union is that the members of a customs union agree
to treat trade with all non-member nations in a
similar a manner.
Countries belonging to a customs union might
also negotiate as a single entity with other
supranational organizations, such as the World Trade
Organization.
 Customs Union
This type provides for economic cooperation
as in a free-trade zone. Barriers to trade are removed
between member countries. The primary difference
from the free trade area is that members agree to
treat trade with nonmember countries in a similar
manner.
 Common Market
Economic integration whereby countries remove all
barriers to trade and the movement of labour and capital
among themselves, but erect a common trade policy
against non-members, is called a common market. Thus,
a common market integrates the elements of free trade
areas and adds the free movement of important factors
of production – people and cross-border investment.
This level of integration is very difficult to attain
because it requires members to cooperate to at least
some extent on economic and labour policies.
Furthermore, the benefits to individual countries can be
uneven because skilled labour may move to countries
where wages are higher, and investment capital may flow
to areas where return are greater.
 Common Market

` This type allows for the creation of

economically integrated markets between member
countries. Trade barriers are removed, as are any
restrictions on the movement of labor and capital
between member countries. Like customs unions,
there is a common trade policy for trade with
nonmember nations.
The primary advantage to workers is that they
no longer need a visa or work permit to work in
another member country of a common market. An
example is the Common Market for Eastern and
Southern Africa (COMESA).
 Economic Union
Economic Integration whereby countries
remove barriers to trade and the movement of
labour and capital among members, erect a common
trade policy against non-members, and coordinate
their economic policies is called an economic union.
An economic union goes beyond the demands
of a common market by requiring member nations
to harmonize their tax, monetary, and fiscal policies
and to create a common currency. Economic Unions
require the member countries concede a certain
amount of their national autonomy or (sovereignty)
to the supranational union which they are part of.
 Economic Union
This type is created when countries enter into
an economic agreement to remove barriers to trade
and adopt common economic policies. An example is
the European Union (EU).
 Political Union
Economic and political integration whereby
countries coordinate aspects of their economic and
political systems is called a political union. A political
union requires member nations to accept a common
stance of economic and political matters regarding
non-member nations. However, nations are allowed
a degree of freedom in setting its political and
economic policies within their territories.
Individually, Canada and the United States
provide early examples of political unions. In both
nations, smaller states and provinces combine to
form larger entities. A group of nations currently
taking steps in this direction is the European Union.
Pros of creating Regional Agreements
• Trade creation
The increase in the level of trade between nations
that results from regional economic integration is called
trade creation.
These agreements create more opportunities for
countries to trade with one another by removing the
barriers to trade and investment. Due to a reduction or
removal of tariffs, cooperation results in cheaper prices for
consumers in the bloc countries. Studies indicate that
regional economic integration significantly contributes to
the relatively high growth rates in the less-developed
countries.
Pros of creating Regional Agreements
• Employment opportunities By removing restrictions on
labor movement, economic integration can help expand
job opportunities.

• Consensus and cooperation Member nations may find it

easier to agree with smaller numbers of countries.
Regional understanding and similarities may also
facilitate closer political cooperation.
 Cons involved in creating Regional
Agreements
• Trade diversion The flip side to trade creation is trade
diversion. It is the diversion of trade away from nations
not belonging to a trading bloc and member nations.
Member countries may trade more with each other
than with nonmember nations.
This may mean increased trade with a less
efficient or more expensive producer because it is in a
member country. In this sense, weaker companies can
be protected inadvertently with the bloc agreement
acting as a trade barrier. In essence, regional
agreements have formed new trade barriers with
countries outside of the trading bloc.
 Cons involved in creating Regional
Agreements
• Employment shifts and reductions Countries may move
production to cheaper labor markets in member countries.
Similarly, workers may move to gain access to better jobs
and wages. Sudden shifts in employment can tax the
resources of member countries.
• Loss of national sovereignty With each new round of
discussions and agreements within a regional bloc, nations
may find that they have to give up more of their political
and economic rights. In the opening case study, you learned
how the economic crisis in Greece is threatening not only
the EU in general but also the rights of Greece and other
member nations to determine their own domestic
economic policies.
The Regional Trading Groups
 NAFTA
The North American Free Trade Agreement
(NAFTA) came into being during a period when free
trade and trading blocs were popular and positively
perceived. In 1988, the United States and Canada
signed the Canada–United States Free Trade
Agreement. Shortly after it was approved and
implemented, the United States started to negotiate a
similar agreement with Mexico.
When Canada asked to be party to any
negotiations to preserve its rights under the most-
favored-nation clause (MFN), the negotiations began
for NAFTA, which was finally signed in 1992 and
implemented in 1994.
 Effects of NAFTA
Since The North American Free Trade Agreement
(NAFTA) came into effect , trade among three nations has
increased markedly, with the greatest gains occurring in
Mexico and the United States. Today the United States
exports more to Mexico that it does to Britain, France,
Germany and Italy combined. In fact, Mexico is the third
largest source of U.S. imports (behind China and Canada)
and second largest market for U.S. exports (behind Canada)
The agreement’s effect on employment and wages is
not easy to determine. In addition to claims of job losses,
opponents that NAFTA has damaged the environment
particularly along the United States-Mexico border.
 Expansion of NAFTA
Expansion of NAFTA. Continued ambivalence
among union leaders and environmental watchdog
regarding the long-term effects of NAFTA is delaying its
expansion. The pace at which NAFTA expands will depend
to a large extent on whether the U.S. Congress grants
successive U.S. Presidents trade promotion (“fast track”)
authority.
But there us little doubt that integration will expand
some day in the Americas. In fact, it is even possible that
the North American economies will adopt a single
currency. As trade among Canada, Mexico, and the United
States strengthens, a single currency (most likely the U.S.
Dollar) would benefit companies in these countries with
reduced exposure to changes in exchange rates.
 South America: MERCOSUR
The Common Market of the South, Mercado
Común del Sur or MERCOSUR, was originally
established in 1988 as a regional trade agreement
between Brazil and Argentina and then was
expanded in 1991 to include Uruguay and Paraguay.
Over the past decade, Bolivia, Chile, Colombia,
Ecuador, and Peru have become associate members,
and Venezuela is in the process for full membership.
CARICOM and Andean Community
The Caribbean Community and Common Market
(CARICOM), or simply the Caribbean Community, was formed in
1973 by countries in the Caribbean with the intent of creating a
single market with the free flow of goods, services, labor, and
investment. The Andean Community (called the Andean Pact
until 1996) is a free trade agreement signed in 1969 between
Bolivia, Chile, Colombia, Ecuador, and Peru. Eventually Chile
dropped out, while Venezuela joined for about twenty years and
left in 2006.
This trading bloc had limited impact for the first two
decades of its existence but has experienced a renewal of
interest after MERCOSUR’s implementation. In 2007,
MERCOSUR members became associate members of the
Andean Community, and more cooperative interaction between
the trading groups is expected
 CAFTA-DR
The Dominican Republic–Central America–United
States Free Trade Agreement (CAFTA-DR) is a free trade
agreement signed into existence in 2005. Originally, the
agreement (then called the Central America Free Trade
Agreement, or CAFTA) encompassed discussions
between the US and the Central American countries of
Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua. A year before the official signing, the
Dominican Republic joined the negotiations, and the
agreement was renamed CAFTA-DR.
 Europe: EU

The European Union (EU) is the most

integrated form of economic cooperation. As you
learned in the opening case study, the EU originally
began in 1950 to end the frequent wars between
neighboring countries in the Europe.
The six founding nations were France, West
Germany, Italy, and the Benelux countries (Belgium,
Luxembourg, and the Netherlands), all of which
signed a treaty to run their coal and steel industries
under a common management. The focus was on
the development of the coal and steel industries
for peaceful purposes.
The EU Structure/Institutions
 Institution of the European Union
European Parliament
The European Parliament consist of 736 members elected by
popular vote within each member nation every five years. As
such, they are expected to voice their particular views on EU
matters. The European Parliament fulfils its role of adopting
EU law by debating and amending legislation proposed by the
European Commission. It exercises political supervision over
all EU institutions – giving it the power to supervise
commissioner appointments and to censure the commission.
It also has veto power over some laws (including the annual
budget of the EU). There is a call for increased
democratization within the EU, and some believe this could
be achieved by strengthening the powers of the parliament.
The Parliament conducts its activities in Belgium (in the city of
Brussels), France (in the city Strasbourg), and Luxembourg.
 Institution of the European Union
Council of the European Union
The council is the legislative body of the EU. When it
meets, it brings together representatives of members states at
the ministerial level. The makeup of the council changes
depending on the topic under discussion. For example, when
the topic is agriculture, the council is composed of the
ministers of agriculture from each other nation. No proposed
legislation becomes EU law unless the council votes into law.
Although passage into law of sensitive issues such as
immigration and taxation still requires a unanimous vote, some
legislation today requires only a simple majority to win
approval. The council also concludes, on behalf of the UE
international agreements with other nations or international
organizations. The council is headquartered in Brussels,
Belgium.
 Institution of the European Union
European Commission
The commission is the executive body of EU. It
comprises commissioners appointed by each member country
– larger nations get two more commissioners, smaller
countries get one. Member nations appoint the president and
commissioners after being approved by the European
Parliament. It has the right to draft legislation, is responsible
for managing and implementing policy, and monitors member
nation’s implementation of, and compliance with, EU law.
Each commissioner is assigned in a specific policy area,
such as competitive policy or agricultural policy. Although
commissioners are appointed by their national governments,
they are expected to behave in the best interest of the EU as a
whole, not in the interest of their own country. The European
Commission is headquartered in Brussels, Belgium.
 Institution of the European Union
Court of Justice
The Court of Justice is the court of appeals of the EU and is
composed 27 judges (one from each member nation) and
eight advocates general who hold renewable six year terms.
One type of case that the Court of Justice hears is one which
member nation is accused of not meeting treating obligations.
Another type is one which the commission or council
is charged with failing to live up to its responsibilities under
the terms of the treaty. Like the commissioners, justices are
required to act in the interest of the EU as a whole, not in the
interest of their own countries. The Court of Justice is located
in Luxembourg.
 Institution of the European Union
Court of Auditors
The Court of Auditors comprises 27 members (one
from each member nation) appointed for renewable six-year
terms. The court is assigned the duty of auditing the EU
accounts and implementing its budget. It also aims to improve
financial management in the EU and report to member
nation’s citizens on the use of public funds. As such, it issues
annual reports and statements on implementation of the EU
budget. The court employs roughly 800 auditors and staff to
assist it in carrying out its functions. The Court of Auditors is
based on Luxembourg.
Management Implications of the Euro
The move to a single currency influences the
activities of companies within the European Union.
First, the euro removes financial obstacles created by
the use of multiple currencies. It completely
eliminates exchange-rate risk for business deals
between member nations using the euro.
Second, the euro makes prices between
markets more transparent, making it difficult to
charge different prices in adjoining markets.
Enlargement of the European Union
One of the most historic events across Europe in
recent memory was EU enlargement from 15 to 27
members. Croatia, Turkey and the former Yugoslav Republic
of Macedonia remain candidates for EU membership and
are to becomes members after they meet certain demands
laid down by the EU. These so-called Copenhagen Criteria
require each country to demonstrate that it:

- Has stable institution

- Has a functioning market economy
- Is able to assume the obligations of membership
- Has the ability to adopt the rule and regulations of the
community
 Asia: ASEAN
The Association of Southeast Asian Nations
(ASEAN) was created in 1967 by five founding-member
countries: Malaysia, Thailand, Indonesia, Singapore, and
the Philippines. Since inception, Myanmar (Burma),
Vietnam, Cambodia, Laos, and Brunei have joined the
association.
ASEAN’s primary focus is on economic, social,
cultural, and technical cooperation as well as promoting
regional peace and stability. Although less emphasized
today, one of the primary early missions of ASEAN was
to prevent the domination of Southeast Asia by external
powers—specifically China, Japan, India, and the United
States.
 The Ins and Outs of ASEAN
Businesses unfamiliar with operating in ASEAN
countries should exercise caution in their dealings.
Some inescapable facts about ASEAN that warrant
consideration are the following:

Diverse Culture and Politics

The Philippines is a representative democracy, Brunei
is an oil-rich sultanate, and Vietnam is a state-
controlled communist country. Business policies and
protocol must be adapted to each country.
 The Ins and Outs of ASEAN
Economic Competition
Many ASEAN nations are feeling the effects of China’s
power to attract investment from multinationals
worldwide. Whereas ASEAN members used to attract
around 30 percent of foreign direct investment into Asia’s
developing economies, it now attracts about half that
amount.
Corruption and Shadow Markets
Bribery and shadow (unofficial) markets are common
in many ASEAN countries including Indonesia,
Myanmar, the Philippines, and Vietnam. Corruption
studies typically place these countries at or very near
the bottom of nations surveyed.
 The Ins and Outs of ASEAN
Political Change and Turmoil
Several nations in the region recently elected new leaders.
Indonesia in particular has gone through presidents at a fast
clip recently. Companies must remain alert to shifting
political winds and laws regarding trade and investment.
Border Disputes
Parts of Thailand’s borders with Cambodia and Laos are
tested frequently. Hostilities break out sporadically between
Thailand and Myanmar over border alignment and ethnic
rebels operating along border.
Lack of Common Tariffs and Standards
Doing business in ASEAN nations can be costly. Harmonized
tariffs, quality and safety standards, customs regulations,
and investment rules would cut transaction cost significantly.