Rubix-
Needs a particular set of algorithms
to work out for itself
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 low-
cost 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 non-
national 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 all-
time 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.
