Chapter 9 Regional Economic Integration
Global Talent Crunch The Global Talent Crunch Over the next decade, it is estimated that the growth in demand for collegeeducated talent will exceed the growth in supply for most of the developed world. India s educated workforce is growing 2% annually, while America s is shrinking 0.8% each Graphic Source: Oxford Economics (Fortune 9/22/14)
Regional Economic Integration Regional economic integration Agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other Designed to promote free trade, BUT Causes competition among regional groups Tax differences and Starbucks Film Harmonization can help governments to collect more taxes Hear about Swiss banks??
Impediments To Integration Economic integration can be difficult because: while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose (e.g., unions) it implies a loss of national sovereignty (e.g., regional decisions)
The Case Against Regional Integration Trade creation Low cost producers (within the free trade area) replace high cost domestic producers Trade diversion Higher cost suppliers (within the free trade area) replace lower cost external suppliers Regional economic integration - only beneficial IF Trade Creation > Trade Diversion
5 Levels Of Economic Integration Free Trade Area Eliminates all barriers to the trade of goods and services among member countries (but members determine their own trade policies for nonmembers) Customs Union Eliminates trade barriers between member countries and adopts a common external trade policy (among nonmembers) Common Market No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production Economic Union Common currency, a harmonized tax rates, and a common monetary and fiscal policy, free flow of products and factors of production between members, and a common external trade policy Political Union Involves a central political apparatus that coordinates the economic, social, and foreign policy of member states
Regional Integration Bodies 1. NAFTA (1) 2. Andean Pact (2) 3. MERCOSUR (3) 4. European Union (EU) (4) 5. ASEAN 6. APEC
1 st Level Of Economic Integration 1. Free Trade Area Eliminates all barriers to the trade of goods and services among member countries (but members determine their own trade policies for nonmembers) Examples: European Free Trade Association (EFTA) (between Norway, Iceland, Liechtenstein, and Switzerland) North American Free Trade Agreement (NAFTA) (U.S., Canada, and Mexico) Let s look at it...
The North American Free Trade Agreement Abolished Tariffs on 99 % of goods traded Removed most barriers on services Protects intellectual property (IP) rights removes most FDI restrictions Each country can apply its own environmental standards (must have a scientific base) 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
The North American Free Trade Agreement Supporters argue that: Mexico will benefit from increased jobs The U.S. and Canada will benefit from access to a large and increasingly prosperous market Lower prices for Mexican goods U.S. and Canadian firms producing in Mexico will be more competitive on world markets Critics argue that: Jobs will be lost and wage levels will decline in the U.S. and Canada Mexican workers will emigrate north More pollution due to Mexico's lax standards Mexico would lose its sovereignty
NAFTA - Jorge Castañeda s View According to Jorge Castañeda, who later became Mexico s foreign minister, in his book The Mexican Shock, NAFTA was not a deal between competing national interests. It was an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies. Over 1,000 pages it helped big business to: - Pay less wages in all 3 countries (negotiate with unions) - Dispute settlement procedures to override labor & environmental regulations is more than just an FTA Resulted in: - Less employment in U.S. & Canada - Depressed wages in Mexico, yet increased productivity What should be done, according to Castañeda? Negotiate a rebalanced agreement one with enforceable labor standards and protections equaling those given to investors so that workers wages on both sides of the border could once again rise with their productivity. What do you think?
The jury is still out Who Was Right? Research indicates that NAFTA s early impact was subtle (both sides exaggerated) NAFTA increased political stability in Mexico Other Latin American countries would like to join NAFTA
Global Regional Trade Intraregional vs. Extraregional Fortress Europe 59% of trade and rising
Free Trade Of The Americas Talks began in April 1998 to establish a Free Trade of The Americas (FTAA) by 2005 It did not happen - now support from the U.S., Brazil and Argentina is mixed If the FTAA was established, it would have major implications for cross-border trade and investment flows within the hemisphere The FTAA would create a free trade area of nearly 800 million people Discussions in Colombia in 2012 no results
2 nd Level Of Economic Integration 2. Customs Union Eliminates trade barriers between member countries and adopts a common external trade policy (among nonmembers) Example: Andean Pact (between Bolivia, Colombia, Ecuador and Peru) Let s look at it...
The Andean Community The Andean Pact: formed in 1969 using the EU model Failed by the mid-1980s Re-launched in 1990, and now operates as a customs union Signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade area
3 rd Level Of Economic Integration 3. Common Market No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production Example: MERCOSUR (between Brazil, Argentina, Paraguay, and Uruguay) is aiming for common market status Let s look at it...
MERCOSUR Originated in 1988 as a free trade pact between Brazil and Argentina 1990 included Paraguay and Uruguay Making progress on reducing trade barriers between member states May be diverting trade (rather than creating trade), and local firms are investing in industries that are not competitive on a worldwide basis
4 th Level Of Economic Integration 4. Economic Union Common currency, a harmonized tax rates, and a common monetary and fiscal policy, free flow of products and factors of production between members, and a common external trade policy Example: European Union (EU) is an imperfect economic union Lets look at the EU...
EU Membership 28 independent member states: Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom (Brexit) Candidate countries: Albania, Montenegro, Republic of Macedonia, Serbia, and Turkey (blocked based on human rights) Potential Candidates: Bosnia and Herzegovina, and Kosovo Iceland pulled out of EU candidacy
Political Structure Of The European Union Five main institutions of the EU: European Council - resolves major policy issues and sets policy directions European Commission - responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws Council of the European Union - the ultimate controlling authority within the EU European Parliament - debates legislation proposed by the commission and forwarded to it by the council Court of Justice - the supreme appeals court for EU law
European Political Complexity Complex - No one centralized political structure Source (updated: 1/1/2015): http://en.wikipedia.org/wiki/template:supranational_european_bodies
Maastricht Treaty - The Establishment Of The Euro Currently Use (19) Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Lithuania Latvia - Luxembourg Malta Netherlands Portugal Spain Slovakia - Slovenia Non-Euro states Poland - Bulgaria Czech Republic - Sweden Hungary Romania - Croatia Opt Out United Kingdom Denmark
5 th Level Of Economic Integration 5. Political Union Involves a central political apparatus that coordinates the economic, social, and foreign policy of member states Example: The EU is headed toward at least partial political union, and the United States is an example of even closer political union
Political Union If each U.S. state were a nation?
Political Union If each U.S. state were a nation? 2014 population statistics
Association of Southeast Asian Nations Association of Southeast Asian Nations (ASEAN): Formed in 1967 Currently includes: Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia Fosters freer trade and cooperation in industrial policies an ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in 2003 2015 News: Indonesia trying to strengthen Rupiah (interest at 7.5%) it helped stabilize the Rupiah since Jan 2016
Asia-Pacific Economic Cooperation Asia-Pacific Economic Cooperation (APEC): 21 members including the United States, Japan, and China Wants to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region
What Does Economic Integration Mean For Managers? Regional economic integration But Opens new markets Companies can realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal 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
Project Negotiating Obtain from my home page: http://instruction2.mtsac.edu/rjagodka 4 Section to Analyze -------------------------- 1. Style & Pace 2. Bargaining 3. Decision Making 4. Agreements (contracts)
Many Sources of Information HTTP://RTAIS.WTO.ORG/UI/PUBLICALLRTALIST.ASPX Link Regional trade agreements around the world http://tcc.export.gov/trade_agreements/all_trade_agreements/ index.asp Link These are agreements with the U.S. http://www.sice.oas.org/agreements_e.asp Link These are agreements in the Americas (North & South) http://www.bilaterals.org/ Link News about agreements worldwide can subscribe
Check before doing business HTTP://WWW.WTO.ORG/ENGLISH/TRATOP_E/REGION_E/RTA_PARTICIPATION_MAP_E.HTM Link Select by Country EXAMPLE - BRAZIL
Group work small groups Go to: https://goo.gl/ngv4kx (WatCh CaPItaliZAtion) Select 1 assigned country from the group Put everyone s name at top of paper: 1. Country (select using pick list) 2. List RTAs in force (center column) 3. Click on any RTA to see details What are pros and cons? Who wins, who loses?