INTERNATIONAL ECONOMIC

INTEGRATION
CFS4202
What Is The Status Of Regional Economic
Integration In Europe?
 Europe has two trade blocs
1. The European Union (EU) with 27 members
2. The European Free Trade Area (EFTA) with 4
members
 The EU is seen as the world’s next economic and
political superpower
What Is The Status Of Regional Economic
Integration In Europe?
Member States of The European Union in 2011
What Is The European Union?
The devastation of two world wars on Western
Europe prompted the formation of the EU
Members wanted lasting peace and to hold their own on
the world’s political and economic stage
Forerunner was the European Coal and Steel
Community (1951)
The European Economic Community (1957) was
formed at the Treaty of Rome with the goal of
becoming a common market
What Is The European Union?
The Single European Act (1987)
committed the EC countries to work toward
establishment of a single market by December 31, 1992
was born out of frustration among EC members that the
community was not living up to its promise
provided the impetus for the restructuring of substantial
sections of European industry allowing for faster
economic growth than would otherwise have been the
case
What Is The Political Structure
Of The European Union?
 The main institutions in the EU include:
1. The European Council - the ultimate controlling authority
within the EU
2. The European Commission - responsible for proposing
EU legislation, implementing it, and monitoring
compliance with EU laws by member states
3. The European Parliament - debates legislation proposed
by the commission and forwarded to it by the council
4. The Court of Justice - the supreme appeals court for EU
law
What Is The Euro?
The Maastricht Treaty committed the EU to adopt a
single currency
created the second largest currency zone in the world
after that of the U.S. dollar
used by 17 of the 27 member states
Britain, Denmark and Sweden opted out
since its establishment January 1, 1999, the euro has
had a volatile trading history with the U.S. dollar
Is The Euro A Good Thing?
Benefits of the euro
savings from having to handle one currency, rather than
many
it is easier to compare prices across Europe, so firms are
forced to be more competitive
gives a strong boost to the development of highly liquid
pan-European capital market
increases the range of investment options open both to
individuals and institutions
Costs of the euro
loss of control over national monetary policy
EU is not an optimal currency area
Should The EU
Continue To Expand?
Many countries have applied for EU membership
Ten countries joined in 2004 expanding the EU to 25
states
In 2007, Bulgaria and Romania joined bringing
membership to 27 countries
Turkey has been denied full membership because of
concerns over human rights
What Is The Status Of Economic
Integration In The Americas?
There is a move toward greater regional economic
integration in the Americas
The biggest effort is the North American Free Trade
Area (NAFTA)
Other efforts include the Andean Community and
MERCOSUR
A hemisphere-wide Free Trade of the Americas is

under discussion
What Is The Status Of Economic
Integration In The Americas?
Economic Integration in the Americas
What Is The North American
Free Trade Agreement?
 The North American Free Trade Area includes the United
States, Canada, and Mexico
abolished tariffs on 99% of the goods traded between
members
removed barriers on the cross-border flow of services
protects intellectual property rights
removes most restrictions on FDI between members
allows each country to apply its own environmental
standards
establishes two commissions to impose fines and remove
trade privileges when environmental standards or
legislation involving health and safety, minimum wages,
or child labor are ignored
Is The North American
Free Trade Area Beneficial?
Supporters of NAFTA claimed that
Mexico would benefit
from increased jobs as low cost production moves south
and will see more rapid economic growth as a result
the U.S. and Canada would benefit from
access to a large and increasingly prosperous market
the lower prices for consumers from goods produced in
Mexico
low cost labor and the ability to be more competitive on
world markets
increased imports by Mexico
Is The North American
Free Trade Area Beneficial?
Critics of NAFTA claimed that
jobs would be lost and wage levels would decline in the
U.S. and Canada
pollution would increase due to Mexico's more lax
standards
Mexico would lose its sovereignty
Who Was Right?
Research indicates that NAFTA’s early impact was
subtle, and both advocates and detractors may have
been guilty of exaggeration
NAFTA is credited with helping create increased
political stability in Mexico
Other Latin American countries would like to join
NAFTA
What Is
The Andean Community?
The Andean Pact
formed in 1969 using the EU model
had more or less failed by the mid-1980s
was re-launched in 1990, and now operates as a customs
union
renamed the Andean Community in 1997
signed an agreement in 2003 with MERCOSUR to
restart negotiations towards the creation of a free trade
area
What Is MERCOSUR?
MERCOSUR
originated in 1988 as a free trade pact between Brazil
and Argentina
was expanded in 1990 to include Paraguay and Uruguay
and in 2005 with the addition of Venezuela
may be diverting trade rather than creating trade, and
local firms are investing in industries that are not
competitive on a worldwide basis
initially made progress on reducing trade barriers
between member states, but more recently efforts have
stalled
What Is The Central American
Trade Agreement And CARICOM?
There are two other trade pacts in the Americas
the Central American Trade Agreement –(CAFTA, 2005)
- to lower trade barriers between the U.S. and members
CARICOM (1973) - to establish a customs union
Neither pact has achieved its goals yet
In 2006, six CARICOM members formed the
Caribbean Single Market and Economy (CSME) -
to lower trade barriers and harmonize macro-
economic and monetary policy between members
What Is Free Trade
Of The Americas?
 Talks began in April 1998 to establish a Free Trade of The
Americas (FTAA) by 2005
 The FTAA was not established and now support from the
U.S. and Brazil is mixed
the U.S. wants stricter enforcement if intellectual
property rights
Brazil and Argentina want the U.S. to eliminate
agricultural subsidies and tariffs
 If the FTAA is established, it will have major implications
for cross-border trade and investment flows within the
hemisphere
would create a free trade area of 850 million people who
accounted for nearly $18 trillion in GDP in 2008
Economic Integration In
Asia?
Various efforts at integration have been attempted in
Asia, but most exist in name only
Association of Southeast Asian Nations (ASEAN)
Asia-Pacific Economic Cooperation (APEC)
What Is The Association Of
Southeast Asian Nations?
The Association of Southeast Asian Nations
(ASEAN, 1967)
currently includes Brunei, Indonesia, Malaysia, the
Philippines, Singapore, Thailand, Vietnam, Myanmar,
Laos, and Cambodia
wants to foster freer trade between member countries
and to achieve some cooperation in their industrial
policies
An ASEAN Free Trade Area (AFTA) between the
six original members of ASEAN came into effect
in 2003
ASEAN and AFTA are moving towards establishing a
free trade zone
What Is The Association Of
Southeast Asian Nations?
ASEAN Countries
What Is The Asia-Pacific
Economic Cooperation?
The Asia-Pacific Economic Cooperation (APEC)
has 21 members including the United States, Japan, and
China
wants to increase multilateral cooperation
member states account for 55% of world’s GNP, and
49% of world trade
What Is The Asia-Pacific
Economic Cooperation?
APEC Members
What Is The Status Of
Economic Integration In Africa?
Many countries are members of more than one of the
nine blocs in the region
but, since many countries support the use of trade
barriers to protect their economies from foreign
competition, meaningful progress is slow
The East African Community (EAC) was re-launched
in 2001, however so far, the effort appears futile
What Does Economic
Integration Mean For Managers?
Regional economic integration
opens new markets
allows firms to realize cost economies by centralizing
production in those locations where the mix of factor
costs and skills is optimal
But
within each grouping, the business environment becomes
competitive
there is a risk of being shut out of the single market by
the creation of a “trade fortress”
 REGIONAL MONETARY AND
FINANCIAL INTEGRATION
eliminating national currencies and moving to a common
currency can be expected to lead to gains in economic efficiency
These gains in efficiency have two different origins
elimination of transaction costs associated with the exchanging
of national moneys
elimination of risk coming from the uncertain future movements
of exchange rates
 Financial Integration
Elimination of transaction cost also has an indirect gain:
Better price comparisons when same monetary unit is being used
This increases competition and benefits consumers
a common currency will stimulate financial integration
 Financial Integration
financial market integration is likely to push for further
legislative harmonization
price system becomes a better guide to making the right
economic decisions
reduction of exchange rate uncertainty will lead to the reduction
of the real interest rate
Risk averse investors would demand a lower interest premium,
thus spurring economic growth
Financial Integration
a common currency, a monetary union, or a move
towards monetary integration will promote trade (at
least among members) and economic growth
 Costs for monetary integration
the loss of the independence of monetary policy
giving up the possibility of changing exchange rate when the
change is necessary for achieving fundamental balances of the
economy
the costs of adopting a single currency depend crucially on how
easily an economic shock in one country is transmitted to other
country in the same region (Mundel, 1961).
 Cost of Monetary Union
If a supply shock strikes one member of the union, and if
correlations of shocks are high among the members, all members
will be affected in the same way
A symmetrical set of policy mix can then be used to offset the
shocks for all members, thereby eliminating the need for policy
autonomy
 Pre-conditions of a Monetary Union
What are the pre-conditions to ensure a successful monetary and
financial integration process?
 Pre-conditions for a monetary
Union
Traditional literature suggests a set of criteria for optimum
currency area:
factor mobility (Mundell, 1961)
trade integration (McKinnon, 1963)
regional production patterns (Kenen, 1969)
high correlation of shocks among members