Regional Economic Integration
Regional Economic Integration
Regional Economic Integration
Free Trade – All barriers to the trade of goods and services among
member countries are removed.
North American Free Trade Agreement (NAFTA) – US, Canada,
and Mexico
Customs Union – Eliminates trade barriers between member countries
and adopts a common external trade policy.
Andean Pact – Bolivia, Columbia, Ecuador, and Peru is an example
of a customs union
Common Market – No barriers to trade between member countries,
includes a common external trade policy, and allows factors of production
to move freely between members
MERCOSUR – Brazil, Argentina, Paraguay, and Uruguay is aiming
for common market status
Economic Union – Has free flow of products and factors of production
between members, a common external trade policy, a common currency,
a harmonized tax rate, and a common monetary and fiscal policy.
European Union (EU) is an imperfect economic union
Political Union – A central political apparatus coordinates the economic,
social, and foreign policies of the member states.
The EU is headed toward at least partial political union, and the
United States is an example of even closer political union
Pros
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.
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
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 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 is a unique organization in that it is not a single country but a group of countries
that have agreed to closely cooperate and coordinate key aspects of their economic
policy. Accordingly, the organization has its own governing and decision-making
institutions.
European Union
The devastation of two world wars on Western Europe prompted the
formation of the EU
There are more than one hundred regional trade agreements in place, a number
that is continuously evolving as countries reconfigure their economic and
political interests and priorities. Additionally, the expansion of the World Trade
Organization (WTO) has caused smaller regional agreements to become obsolete.
Some of the regional blocs also created side agreements with other regional
groups leading to a web of trade agreements and understandings.
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.
The goal of NAFTA has been to encourage trade between Canada, the United States,
and Mexico. By reducing tariffs and trade barriers, the countries hope to create a free-
trade zone where companies can benefit from the transfer of goods. In the 1980s,
Mexico had tariffs as high as 100 percent on select goods. Over the first decade of the
agreement, almost all tariffs between Mexico, Canada, and the United States were
phased out.
NAFTA
The North American Free Trade Agreement was an agreement signed by
Canada, Mexico, and United States that created a trilateral trade bloc in
North America
The Andean Community (called the Andean Pact until 1996)12 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.
Andean Pact
Promote the balanced and harmonious development of the member
countries; accelerate the growth of the Andean countries and the creation
of jobs.
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.29
Asia: ASEAN
The Association of Southeast Asian Nations wants to foster free trade
between member countries and to achieve some cooperation in their
industrial policies.
Asia: APEC
As a result of the Pacific Ocean connection, this geographic grouping includes the
United States, Canada, Mexico, Chile, Peru, Russia, Papua New Guinea, New Zealand,
and Australia with their Asia Pacific Rim counterparts.33 This assortment of economies
and cultures has, at times, made for interesting and heated discussions. Focused
primarily on economic growth and cooperation, the regional group has met with success
in liberalizing and promoting free trade as well as facilitating business, economic, and
technical cooperation between member economies. With the Doha Round of the WTO
dragging, APEC members have been discussing establishing a free-trade zone. Given
its broader membership than ASEAN, APEC has found good success—once its
member countries agree. The two organizations often share common goals and seek to
coordinate their efforts.
The Cooperation Council for the Arab States of the Gulf, also known as the Gulf
Cooperation Council (GCC), was created in 1981. The six member states are Bahrain,
Kuwait, Saudi Arabia, Oman, Qatar, and the United Arab Emirates (UAE). As a political
and economic organization, the group focuses on trade, economic, and social issues.37
The GCC has become as much a political organization as an economic one. Among its
various initiatives, the GCC calls for the coordination of a unified military presence in the
form of a Peninsula Shield Force.
Overall, global businesses have benefited from the regional trade agreements by having
more consistent criteria for investment and trade as well as reduced barriers to entry.
Companies that choose to manufacture in one country find it easier and cheaper to
move goods between member countries in that trading bloc without incurring tariffs or
additional regulations.
The challenges for businesses include finding themselves outside of a new trading bloc
or having the “rules” for their industry change as a result of new trade agreements. Over
the past few decades, there has been an increase in bilateral and multilateral trade
agreements. It’s often called a “spaghetti bowl” of global bilateral and multilateral trade
agreements, because the agreements are not linear strands lining up neatly; instead
they are a messy mix of crisscrossing strands, like a bowl of spaghetti, that link
countries and trading blocs in self-benefiting trading alliances. Businesses have to
monitor and navigate these evolving trade agreements to make sure that one or more
agreements don’t negatively impact their businesses in key countries. This is one
reason why global businesses have teams of in-house professionals monitoring the
WTO as well as the regional trade alliances.
For example, American companies doing business in one of the ASEAN countries often
choose to become members of the US–ASEAN Business Council, so that they can
monitor and possibly influence new trade regulations as well as advance their business
interests with government entities.
Regional economic integration refers to efforts to promote free and fair trade on a
regional basis.
Free trade area 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.
Customs union provides for economic cooperation. Barriers to trade are removed
between member countries, and members agree to treat trade with nonmember
countries in a similar manner.
Common market allows for the creation of an economically integrated market between
member countries. Trade barriers and any restrictions on the movement of labor and
capital between member countries are removed. There is a common trade policy for
trade with nonmember nations, and workers no longer need a visa or work permit to
work in another member country of a common market.
The largest regional trade cooperative agreements are the European Union (EU), the
North American Free Trade Agreement (NAFTA) NAFTA is the biggest free trade
agreement in the world, with the gross domestic product of participating countries
exceeding $20 trillion., and the Asia–Pacific Economic Cooperation (APEC). The
African Economic Community (AEC) has more member countries than the EU, NAFTA,
and APEC but represents a substantially smaller portion of global trade than these other
cooperatives.
QUIZ.