Transcript International Business - Universiti Kebangsaan Malaysia

Regional Economic
Integrations and Cooperative
Agreements
7-1
Regionalism

described in the Dictionary of Trade
Policy Terms, as;
“actions by governments to liberalize
or facilitate trade on a regional basis,
sometimes through free-trade areas
or customs unions”.
Average Tariff Rates on
Manufactured Products
France
Germany
Italy
Japan
Holland
Sweden
Great
Britain
United
States
1913
21 %
1950
18 %
1990
5.9 %
2002
4.0 %
20 %
18 %
30 %
26 %
25 %
--
5.9 %
5.9 %
5.3 %
4.0 %
4.0 %
3.8 %
5%
20 %
--
1%
9%
%
5.9 %
4.4 %
5.9 %
4.0 %
4.0 %
4.0 %
44 %
14 %
4.8 %
4.0 %
Introduction

One notable trend in the global economy
in recent years has been the accelerated
movement toward regional economic
integration
• Regional economic integration refers to
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
Regional Economic Integration
Logic
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Distance goods need to travel between
countries is short
Consumers’ tastes are likely to be similar
Distribution channels can be easily
established in adjacent countries
Neighboring countries may have common
history and interests
By end 2005, all 150 WTO members
reported participation in at least one
regional trade agreement
7-3
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The coverage and depth of preferential treatment
varies from one RTA to another.
Modern RTAs, and not exclusively those linking
the most developed economies, tend to go far
beyond tariff-cutting exercises. They provide for
increasingly complex regulations governing intratrade (e.g. with respect to standards, safeguard
provisions, customs administration, etc.) and
they often also provide for a preferential
regulatory framework for mutual services trade.
The most sophisticated RTAs go beyond
traditional trade policy mechanisms, to include
regional rules on investment, competition,
environment and labour.
Levels of Regional Integration
Political Union
Coordinate aspects of members’ economic and
political systems
Remove barriers to trade, labor and capital,
Economic Union set a common trade policy against nonmembers,
and coordinate members’ economic policies
Remove all barriers to trade, labor and capital
Common Market among members, and set a common trade policy
against nonmembers
Customs Union
Remove all barriers to trade among members, and
set a common trade policy against nonmembers
Free-Trade Area Remove all barriers to trade among members, but
each country has own policies for nonmembers
Regional Integration

Benefits:
• Trade Creation
• Greater
Consensus
• Political
Cooperation
• Employment
Opportunities

Drawbacks:
• Trade Diversion
• Shifts in
Employment
• Loss of national
Sovereignty
European Union (EU)
Pop: 455 million
GDP: $9.3 trillion
Members: 27
Economic Union
Began: 1951
10
European Union: Early Years

European Coal and Steel Community (1951):
Removed trade barriers in coal, iron and steel

European Economic Community (1957):
Outlined and took initial steps toward common
market

European Community (1967): Expanded to
other industries including atomic energy

European Union (1994): Final name change
and reduced barriers further

Additional milestones:
•
•
Single European Act (1987): Harmonized
regulations, strived for lower barriers
Maastricht Treaty (1991): Single currency
targets, outlined eventual political union

Initially, the EU consisted of just six
countries: Belgium, Germany, France,
Italy, Luxembourg and the Netherlands.
Denmark, Ireland and the United Kingdom
joined in 1973, Greece in 1981, Spain and
Portugal in 1986, Austria, Finland and
Sweden in 1995. In 2004 the biggest ever
enlargement took place with 10 new
countries joining. In 2007 another two
countries; Bulgaria and Romania have
joined the EU.
Five Key EU Institutions
European
Parliament
Court of Justice
Council of the
European Union
Court of
Auditors
European
Commission
European Union Enlargement
Future members must meet
Copenhagen Criteria 
• Stable institutions of human
rights, democracy, and law
• Functioning and capable
market economy
• Assume economic, monetary,
and political obligations
• Adopt rules of Community,
Court of Justice, and Treaties
European Union Issues
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Abolish the right of individual EU countries
to run their own foreign policies
Have the right to raise direct taxes
Use common border controls
Integrate the European police force
Influence national governments’ budgets
much more strongly
Create a European president to run the
Council of Ministers
7-9
European Free Trade
Association
Iceland, Liechtenstein,
Norway, Switzerland
 Feared lost sovereignty
 Feared destructive
rivalry
 Desired free-trade
gains
 Cooperates with EU
Pop: 12 million
GDP: $410 billion
Members: 4
Free-Trade Area
Began: 1960
North American
Free Trade Agreement
 US-Canada (CAFTA)
1989
 US-Canada-Mexico
(NAFTA)
 Trade in many goods,
services
 Complicated rules of
origin
 Effects still fiercely
debated
Pop: 420 million
GDP: $12 trillion
Members: 3
Free-Trade Area
Began: 1994
NAFTA Effects
Three-nation
trade flows
“Fast track”
authority
Jobs
and wages
Future
expansion?
Single
currency?
Andean Community
 Internal tariff reduction
 Common external tariff
 Common transport
policies
 Impaired by ideological
conflict
Pop: 105 million
GDP: $500 billion
Members: 5
Customs Union
Began: 1969
Southern Common Market
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MERCOSUR
Very successful early
Future “SAFTA”?
Impaired by ideology and
economic hardships
Pop: 220 million
GDP: $2 trillion
Members: 4 (+2)
Customs Union
Began: 1988
Central America / Caribbean
Peace is driving
tentative optimism
Pop: 33 million
GDP: $120 billion
Members: 5
+/- Common Market
Began: 1961
Members have little
to offer each other
Pop: 6 million
GDP: $30 billion
Members: 15
Common Market
Began: 1973
Free Trade Area of the Americas
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Pop: 800 million
GDP: $14 trillion
Members: 34
Free-Trade Area
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Would create the
largest free-trade area
on the planet
From northern tip of
Alaska to southern tip
of Tierra del Fuego in
South America
Could mean enormous
cost savings for
business
Protests by many
groups is slowing
progress
Association of Southeast
Asian Nations
ASEAN
1.
2.
3.
Economic, social and cultural development
Safeguard economic and political stability
Serve as a forum to resolve disputes
Pop: 500 million
GDP: $800 billion
Members: 10
General Cooperation
Began: 1967
Association of South East Asian
Nations (ASEAN)
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Organized in 1967
Member countries
are protected in
terms of tariff and
nontariff barriers
Holds tremendous
potential market
opportunities with
more than 500
million consumers
7-13
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The Association of Southeast Asian
Nations or ASEAN was established on 8
August 1967 in Bangkok by the five
original Member Countries, namely,
Indonesia,
Malaysia,
Philippines,
Singapore, and Thailand.
Brunei
Darussalam joined on 8 January 1984,
Vietnam on 28 July 1995, Laos and
Myanmar on 23 July 1997, and Cambodia
on 30 April 1999.
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The Framework Agreement on Enhancing
Economic Cooperation was adopted at the
Fourth ASEAN Summit in Singapore in 1992,
which included the launching of a scheme
toward an ASEAN Free Trade Area or AFTA.
The strategic objective of AFTA is to increase the
ASEAN region’s competitive advantage as a
single production unit. The elimination of tariff
and non-tariff barriers among the member
countries is expected to promote greater
economic efficiency, productivity, and
competitiveness
In 1995, the ASEAN Heads of States and
Government re-affirmed that “Cooperative peace
and shared prosperity shall be the fundamental
goals of ASEAN.”
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ASEAN cooperation has resulted in
greater regional integration. Within three
years from the launching of AFTA, exports
among ASEAN countries grew from
US$43.26 billion in 1993 to almost US$80
billion in 1996, an average yearly growth
rate of 28.3 percent. In the process, the
share of intra-regional trade from ASEAN’s
total trade rose from 20 percent to almost
25 percent.
Asia Pacific Economic
Cooperation
APEC: Group of 21 nations ringing the Pacific
Ocean that accounts for over half of world trade
1. Not designed as a free-trade bloc
2. Strengthen multilateral trade system
3. Liberalize trade and investment rules
Asia Pacific Economic
Cooperation
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Founded in 1990 to ‘promote open
trade and practical economic
cooperation’.
• ‘Promote a sense of community.’
• 18 members.
• 50% of world’s GNP.
• 40% of global trade.
Middle East and Africa
Gulf Cooperation Council
(GCC)
 Six Arab nations (1980)
 Economic and political
aims
 Free travel; property
rights
Economic Community of
West African States
(ECOWAS)
 Common market hopes (1975)
 Little progress to date
Regional Trade Blocs in Africa
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9 trade blocs on the continent.
• Many countries are members of more than
one group.
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Progress has been slow.
• Political turmoil.
• Deep suspicion of free trade.
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Less developed, less diversified economies
need “protection”.
Gulf Cooperation Council (GCC)
Among Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia, and the United Arab Emirates
Impact on Business

Positive:
• Protected
markets, now
open.
• Lower costs
doing
business in
single
market.
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Negative:
• Differences in culture
and competitive
practices make
realizing economies of
scale difficult.
• Threats:
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More price competition.
Firms become more
competitive.
Outside firms shut out of
market.
Commodity Agreements

Attempts to counteract price
instability through:
• Exercise of market power through
international commodity agreements
• Stabilization of producer revenues
through risk-management instruments,
such as commodities futures
• Stabilization of government revenues
through precautionary savings funds
7-15
Organization of Petroleum
Exporting Countries (OPEC)
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Producer cartel
Group of commodity-producing countries
that control supply and price
OPEC controls price by establishing
production quotas on member countries
OPEC member countries produce 41% of
the world’s crude oil and 155 of its natural
gas
7-16
Bilateral vs Multilateral

Bilateral agreement: between two
countries
• To improve climates for investments
abroad
• ‘safeguard’ for businesses to expand
between those countries
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Multilateral agreement: between
more than two countries