Rabu, 23 November 2011

Regional Economic Integration

Introduction
One of the most notable trends in the global economy in recent years has been the accelerated movement toward regional economic integration. By regional economic integration, we mean agreements among countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. Consistent with the predictions of international trade theory, particularly the theory of comparative advantage (see Chapter 4), the belief has been that agreements designed to promote freer trade within regions will produce gains from trade for all member countries
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 distort trade between members. Each country, however, is allowed to determine its own trade policies with regard to nonmembers.
 There are also active attempts at regional economic integration in Central America, the Andean Region of South America, Southeast Asia, and parts of Africa.
As the opening case on the European Insurance industry demonstrates, a move toward greater regional economic integration can deliver important benefits to consumers and present firms with new challenges. In the European insurance industry, the creation of a single EU insurance market opened formerly protected national markets to increased competition, resulting in lower prices for insurance products. This benefits consumers, who now have more money to spend on other goods and services. As for insurance companies, the increase in competition and greater price pressure that has followed the creation of a single market have forced them to look for cost savings from economies of scale. They have also sought to increase their presence in different nations. The mergers occurring in the European insurance industry are seen as a way of achieving both these goals.
The rapid spread of regional trade agreements raises the fear among some of a world in which regional trade blocs compete against each other. In this scenario of the future, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs. The specter of the EU and NAFTA turning into "economic fortresses" that shut out foreign producers with high tariff barriers is particularly worrisome to those who believe in unrestricted free trade. If such a scenario were to materialize, the resulting decline in trade between blocs could more than offset the gains from free trade within blocs.



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 distort trade between members. Each country, however, is allowed to determine its own trade policies with regard to nonmembers. Thus, for example, the tariffs placed on the products of nonmember countries may vary from member to member. 
Customs Union
The customs union is one step further along the road to full economic and political integration. A customs union eliminates trade barriers between member countries and adopts a common external trade policy. Establishment of a common external trade policy necessitates significant administrative machinery to oversee trade relations with nonmembers. Most countries that enter into a customs union desire even greater economic integration down the road. The EU began as a customs union and has moved beyond this stage.
Common Market
Like a customs union, the theoretically ideal common market has no barriers to trade between member countries and a common external trade policy. Unlike a customs union, a common market also allows factors of production to move freely between members. Labor and capital are free to move because there are no restrictions on immigration, emigration, or cross-border flows of capital between member countries. The EU is currently a common market, although its goal is full economic union. The EU is the only successful common market ever established, although several regional groupings have aspired to this goal. Establishing a common market demands a significant degree of harmony and cooperation on fiscal, monetary, and employment policies. Achieving this degree of cooperation has proven very difficult.
Economic Union
An economic union entails even closer economic integration and cooperation than a common market. Like the common market, 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. Unlike a common market, a full economic union  also requires a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy. Such a high degree of integration demands a coordinating bureaucracy and the sacrifice of significant amounts of national sovereignty to that bureaucracy.
Political Union
The move toward economic union raises the issue of how to make a coordinating bureaucracy accountable to the citizens of member nations. The answer is through political union. The EU is on the road toward political union.

The Case for Regional Integration 
The Economic Case for Integration
The economic case for regional integration is relatively straightforward. We saw in Chapter 4 how economic theories of international trade predict that unrestricted free trade will allow countries to specialize in the production of goods and services that they can produce most efficiently. The result is greater world production than would be possible with trade restrictions. Although international institutions such as GATT and the WTO have been moving the world toward a free trade regime, success has been less than total. In a world of many nations and many political ideologies, it is very difficult to get all countries to agree to a common set of rules.
Against this background, regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as GATT and the WTO. It is easier to establish a free trade and investment regime  among a limited number of adjacent countries than among the world community. Problems of coordination and policy harmonization are largely a function of the number of countries that seek agreement. The greater the number of countries involved, the greater the number of perspectives that must be reconciled, and the harder it will be to reach agreement. Thus, attempts at regional economic integration are motivated by a desire to exploit the gains from free trade and investment.

The Political Case for Integration
The political case for regional economic integration has also loomed large in most attempts to establish free trade areas, customs unions, and the like. By linking neighboring economies and making them increasingly dependent on each other, incentives are created for political cooperation between the neighboring states. In turn, the potential for violent conflict between the states is reduced. In addition, by grouping their economies, the countries can enhance their political weight in the world.
These considerations underlay establishment of the European Community (EC) in 1957 (the EC was the forerunner of the EU). Europe had suffered two devastating wars in the first half of the century, both arising out of the unbridled ambitions of nation-states.

Impediments to Integration
Despite the strong economic and political arguments for integration, it has never been easy to achieve or sustain. There are two main reasons for this. First, although economic integration benefits the majority, it has its costs. While a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. Moving to a free trade regime involves some painful adjustments. A second impediment to integration arises from concerns over national sovereignty.


The Case Against Regional Integration
Although the tide has been running strongly in favor of regional free trade agreements in recent years, some economists have expressed concern that the benefits of regional integration have been oversold, while the costs have often been ignored. They point out that the benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion. Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers 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 world only if the amount of trade it creates exceeds the amount it diverts.
Regional Economic Integration in Europe
Political Structure of the European Union
The European Council
The European Council is composed of the heads of state of the EU's member nations and the president of the European Commission. Each head of state is normally accompanied by a foreign minister to these meetings.
The European Commission
The European Commission is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. Headquartered in Brussels, Belgium, the commission has more than 10,000 employees. It is run by a group of 20 commissioners appointed by each member country for four-year renewable terms. The commission has a monopoly in proposing European Union legislation. The commission starts the legislative ball rolling by making a proposal, which goes to the Council of Ministers and then to the European Parliament. The Council of Ministers cannot legislate without a commission proposal in front of it. The Treaty of Rome gave the commission this power in an attempt to limit national infighting by taking the right to propose legislation away from nationally elected political representatives, giving it to "independent" commissioners.
The commission is also responsible for implementing aspects of EU law, although in practice much of this must be delegated to member states. Another responsibility of the commission is to monitor member states to make sure they are complying with EU laws. In this policing role, the commission will normally ask a state to comply with any EU laws that are being broken. If this persuasion is not sufficient, the commission can refer a case to the Court of Justice.
The Council of Ministers
The interests of member states are represented in the Council of Ministers. It is clearly the ultimate controlling authority within the EU since draft legislation from the commission can become EU law only if the council agrees. The council is composed of one representative from the government of each member state. The membership, however, varies depending on the topic being discussed. When agricultural issues are being discussed, the agriculture ministers from each state attend council meetings; when transportation is being discussed transportation ministers attend, and so on.
The European Parliament
The parliament, which meets in Strasbourg, France, is primarily a consultative rather than legislative body. It debates legislation proposed by the commission and forwarded to it by the council. It can propose amendments to that legislation, which the commission  are not obliged to take up but often will. The power of the parliament recently has been increasing, although not by as much as parliamentarians would like. The European Parliament now has the right to vote on the appointment of commissioners, as well as veto power over some laws. One major debate now being waged in Europe is whether the council or the parliament should ultimately be the most powerful body in the EU.
The Single European Act
The Stimulus for the Single European Act
There were four main reasons for this:
·                 Different technical standards required cars to be customized to national requirements .
·                 Different tax regimes created price differentials across countries that would not be found in a single market.
·                 An agreement to allow automobile companies to sell cars through exclusive dealer networks allowed auto companies and their dealers to adapt their model ranges and prices on a country-by-country basis with little fear that these differences would be undermined by competing retailers.
·                 In violation of Article 3 of the Treaty of Rome, each country had adopted its own trade policy with regard to automobile
The Objectives of the Act
1.              Remove all frontier controls between EC countries, thereby abolishing delays and reducing the resources required for complying with trade bureaucracy.
2.              Apply the principle of "mutual recognition" to product standards. A standard developed in one EC country should be accepted in another, provided it meets basic requirements in such matters as health and safety.
3.              Open public procurement to nonnational suppliers, reducing costs directly by allowing lower-cost suppliers into national economies and indirectly by forcing national suppliers to compete.
4.              Lift barriers to competition in the retail banking and insurance businesses, which should drive down the costs of financial services, including borrowing, throughout the EC.
5.              Remove all restrictions on foreign exchange transactions between member countries by the end of 1992.
6.              Abolish restrictions on cabotage--the right of foreign truckers to pick up and deliver goods within another member state's borders--by the end of 1992. This could reduce the cost of haulage within the EC by 10 to 15 percent.
7.              All those changes should lower the costs of doing business in the EC, but the single-market program was also expected to have more complicated supply-side effects. For example, the expanded market should give EC firms greater opportunities to exploit economies of scale. In addition, the increase in competitive intensity brought about by removing internal barriers to trade and investment should force EC firms to become more efficient.
Implications
The implications of the Single European Act are potentially enormous. We discuss the implications for business practice in more detail in the Implications for Business section at the end of the chapter. For now it should be noted that, as long as the EU is successful in establishing a single market, the member countries can expect significant gains from the free flow of trade and investment. On the other hand, as a result of the Single European Act, many EU firms are facing increased competitive pressure. Countries such as France and Italy have long used administrative trade barriers and subsidies to protect their home markets from foreign competition. Removal of these barriers has increased competition, and some firms may go out of business.
But the shift toward a single market has not been as rapid as many would like. Six years after the Single European Act became EU law, there have been a number of delays in applying the act to certain industries, often because countries have  appealed to the Council of Ministers for more time.
European Monetary Union (EMU: The Adoption of A Single Currency
Benefits of EMU
As with many of the provisions of the Single European Act, the move to a single currency should significantly lower the costs of doing business in the EU. The gains come from reduced exchange costs and reduced risk. As for reduced risk, a single currency would reduce the risks that arise from currency fluctuations. The values of currencies fluctuate against each other continually. As we will see in Chapter 9, this introduces risks into international transactions.
Costs of EMU
The drawback, for some, of a single currency is that national authorities would lose control over monetary policy. Thus, the EU's monetary policy must be well managed. The Maastricht Treaty called for establishment of an independent European Central Bank (ECB), similar in some respects to the US Federal Reserve, with a clear mandate to manage monetary policy so as to ensure price stability. Like the US Federal Reserve, the ECB, based in Frankfurt, is meant to be independent from political pressure--although critics question this. Among other things, the ECB will set interest rates and determine monetary policy across the euro zone. Critics fear that the ECB will respond to political pressure by pursuing a lax monetary policy, which in turn will raise average inflation rates across the euro zone, hampering economic growth.
Several nations were concerned about the effectiveness of such an arrangement and the implied loss of national sovereignty. Reflecting these concerns, Britain, Denmark, and Sweden won the right from other members to stay out of the monetary union if they chose. According to some critics, European monetary union represents putting the economic cart before the political horse. In their view, a single currency should follow, not precede, political union. They argue that the euro will unleash enormous pressures for tax harmonization and fiscal transfers, both policies that cannot be pursued without the appropriate political structure. Some critics also argue that the EMU will result in the imposition of a single interest rate regime on national economies that are not truly convergent and are experiencing divergent economic growth rates.
Regional Economic Integration in the Americas
The North American Free Trade Agreement
NAFTA's Contents
The contents of NAFTA include the following:
·                 Abolition within 10 years of tariffs on 99 percent of the goods traded between Mexico, Canada, and the United States.
·                 Removal of most barriers on the cross-border flow of services, allowing financial institutions.
·                 Protection of intellectual property rights.
·                 Removal of most restrictions on foreign direct investment between the three member countries.
·                 Application of national environmental standards, provided such standards have a scientific basis. Lowering of standards to lure investment is described as being inappropriate.
·                 Establishment of two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored.
Environmentalists have also voiced concerns about NAFTA. They point to the sludge in the Rio Grande River and the smog in the air over Mexico City and warn that Mexico could degrade clean air and toxic-waste standards across the continent. Already, they claim, the lower Rio Grande is the most polluted river in the United States, increasing in chemical waste and sewage along its course from El Paso, Texas, to the Gulf of Mexico.
There is also continued opposition in Mexico to NAFTA from those who fear a loss of national sovereignty. Mexican critics argue that their country will be dominated by US firms that will not really contribute to Mexico's economic growth, but instead will use Mexico as a low-cost assembly site, while keeping their high-paying, high-skilled jobs north of the border.
Central American Common Market and CARICOM
Then there is the customs union that was to have been created in 1991 between the English-speaking Caribbean countries under the auspices of the Caribbean Community. Referred to as CARICOM, it was originally established in 1973. However, it has repeatedly failed to progress toward economic integration. A formal commitment to economic and monetary union was adopted by CARICOM's member states in 1984, but since then little progress has been made.
Regional Economic Integration Elsewhere
Association of Southeast Asian Nations
ASEAN includes Brunei, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Laos, Myanmar, and Vietnam have all joined recently, and their inclusion complicates matters because their economies are a long way behind those of the original members. The basic objectives of ASEAN are to foster freer trade between member countries and to achieve cooperation in their industrial policies. Progress has been very limited, however.
Asia Pacific Economic Cooperation
Asia Pacific Economic Cooperation (APEC) was founded in 1990 at the suggestion of Australia. APEC currently has 18 member states including such economic powerhouses as the United States, Japan, and China. The stated aim of APEC is to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. US support for APEC was also based on the belief that it might prove a viable strategy for heading off any moves to create Asian groupings from which it would be excluded.
Implications For Business
Opportunities
Additional opportunities arise from the inherent lower costs of doing business in a single market--as opposed to 15 national markets in the case of the EU or 3 national markets in the case of NAFTA. Free movement of goods across borders, harmonized product standards, and simplified tax regimes make it possible for firms based in the EU and the NAFTA countries to realize potentially enormous cost economies by centralizing production in those EU and NAFTA locations where the mix of factor costs and skills is optimal. Rather than producing a product in each of the 15 EU countries or the 3 NAFTA countries, a firm may be able to serve the whole EU or North American market from a single location. This location must be chosen carefully, of course, with an eye on local factor costs and skills.
Even after the removal of barriers to trade and investment, enduring differences in culture and competitive practices often limit the ability of companies to realize cost economies by centralizing production in key locations and producing a standardized product for a single multicountry market. Consider the case of Atag Holdings NV, a Dutch maker of kitchen appliances that is profiled in the accompanying Management Focus. Due to enduring differences between nations within the EU's single market, Atag still has to produce various "national brands," which clearly limits the company's ability to attain scale economies.
Threats
Just as the emergence of single markets in the EU and the Americas creates opportunities for business, it also presents a number of threats. For one thing, the business environment within each grouping will become more competitive. The lowering of barriers to trade and investment between countries is likely to lead to  increased price competition throughout the EU, NAFTA, and MERCOSUR. This could transform many EU companies into efficient global competitors. The message for non-EU businesses is that they need to prepare for the emergence of more capable European competitors by reducing their own cost structures.
A final threat to firms outside of trading areas is the threat of being shut out of the single market by the creation of "Trade Fortress." The charge that regional economic integration might lead to a fortress mentality is most often leveled at the EU. As noted earlier in the chapter, although the free trade philosophy underpinning the EU theoretically argues against the creation of any "fortress" in Europe, there are signs that the EU may raise barriers to imports and investment in certain "politically sensitive" areas, such as autos. Non-EU firms might be well advised, therefore, to set up their own EU operations as quickly as possible. This could also occur in the NAFTA countries, but it seems less likely.

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