Sprott School of

Business

Bus. 2701
Fundamentals of
International
Business
Lecture # 4
Course Administration

Mid-Term Exam instructions

2 hours (120 minutes)

100 multiple choice (100

questions)
about 25% will be difficult

Scantron marking papers

2
Regional Economic Integration

lecture # 4
Learning Outcome:
Learn the arguments for and against
regional economic integration
Understand the different types /
different levels of regional economic
integration
Know about trade blocks being
formed: NAFTA, EU, TPP, Mercosur
Examine the implications for business
inherent in regional economic 3
Regional
Economic
Integration

Chapter 8

4
Regional Economic Integration

Definition:
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.

5
What Drives Regional Economic
Integration?
There are a number of reasons:
European Common Market
originally an agreement on
steel & coal between France
and Germany; largely to form
economic links to avert future
wars!
Can also be for access to
resources; to free up labour
mobility; to gain access to
larger markets; and of course 6
Critical Question:
Do regional trade agreements
promote free trade?
In theory, yes, with positive
examples.
Within Europe it is efficient to work
with one common currency, which is
beneficial for business and for
tourism
Within North America trade provides
businesses with access to over 400
million consumers, and flexibility on
plant location, input sources, etc.
To be fair, there are criticisms:

The world may be moving

toward a situation in which a
number of regional trade
blocks compete against each
other
The current U.S.
administration believes trade
is bad for America
Council of Canadians warns
against loss of culture, loss of
head offices, selling out to
And the European Union is in a
mess (still)!
More on the E.U. later.
Regional Economic Integration -
examples
Example:
NAFTA (North American Free Trade
Agreement)
Canada
United States
Mexico
Originally the FTA free trade
agreement between Canada &
United States
Expanded to include Mexico, 10
BRIC Countries

BRICS refers to
Brazil
Russia
India
China
South Africa
The first 4 are the
four largest economies
outside of the OECD

11
BRIC Countries

Unlike the countries that make up

the G7, there are large differences
between BRIC countries.
Two are democracies,
While two have
authoritarian regimes.

12
Levels of Economic Integration

13
Examining The Levels Of
Regional Economic Integration

1. A free trade area:

Eliminates all barriers to the trade of
goods and services among member
countries
Each country sets its own trade policy for non-
members

Examples:
European Free Trade Association (EFTA) -
Norway, Iceland, Liechtenstein, and
Switzerland

North American Free Trade Agreement

(NAFTA) - U.S., Canada, and Mexico
An with more Integration.

2. A customs union:
Eliminates all barriers to the trade of
goods and services among member
countries, and
Adopts a common external trade policy,
and must set up common administration to
deal with non-members

Example:
Andean Pact (Bolivia, Columbia, Ecuador
and Peru)

Note: With five associate members: Argentina,

Brazil, Paraguay, Chile, and Uruguay.
3. A common market :
Eliminates all barriers to the trade of
goods and services among member
countries,
Adopts a common external trade policy,
and
Permits the free movement of the
factors of production (labour, capital,
technology, services, etc.)

Example (in theory):

MERCOSUR (Brazil, Argentina, Paraguay, and
Uruguay)

Footnote: Mercosur recently admitted Venezuela

as a full member!
4. An economic union:

Eliminates all barriers to the trade of

goods and services among member
countries,
Adopts a common external trade policy,
Allows the free movement of the factors
of production, and
Adopts a common currency, a harmonized
tax rate, and a common monetary and
fiscal policy
Example (almost):
European Union (EU)
Explanation: The Schengen Area is a zone of 26 EU countries
that have abolished passports at their common borders. This
is being reconsidered by some, due to the refugee crisis.
5. A political union involves a
central political apparatus that
coordinates the economic,
social, and foreign policy of
member states

The EU was headed toward at least partial

political union,
Collective approval of fiscal budgets,
integrated monetary policy, common
supervision of large banks

Note (1): Canada as a federation devolves great

responsibilities to the Provinces
Note (2): the United States is an example of even
closer political union.
The Case for Regional Integration

Economic Case for Integration

Regional economic integration can be
seen as an attempt to achieve
additional gains from the free flow of
trade and investment between
countries
Political Case for Integration
Linking neighbouring economies and
making them increasingly dependent
on each other creates incentives for
political cooperation between 19
Impediments to Integration

Despite the strong economic and political

arguments for integration, it has never
been easy to achieve or sustain for two
main reasons:
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.

20
Impediments to Integration

A second impediment to integration

arises from concerns over national
sovereignty.
For example, Mexicos concerns about
maintaining control of its oil interests
resulted in an agreement with Canada
and the United States to exempt the
Mexican oil industry from any
liberalization of foreign investment
regulations achieved under NAFTA.
Another example, Canada negotiated
protection for culture under NAFTA,
and moved milk & egg board price
restrictions into high external tariffs
Third example, United States has buy21
The Case Against Regional
Integration
In recent years, some economists
have expressed concern that the
benefits of regional integration
have been oversold, while the
costs have often been ignored

22
The Case Against Integration
(cont)
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.

Trade diversion occurs when lower-cost external

suppliers are replaced by higher cost suppliers within
the free trade area.
 Canada EU trade agreement
(CETA)
The Comprehensive Economic and Trade
Agreement (CETA)
A next generation free trade and investment act

http://ec.europa.eu/trade/policy/in-focus/ceta/
Trans-Pacific Partnership(TPP)

Originally Chile, New Zealand,

and Singapore, then Brunei
added on
In 2008 the United States
joined the negotiations, as
well as Australia, Vietnam,
Malaysia, and Peru
Canada and Mexico announced
negotiation in 2012
Japan was a major partner to
27
the U.S.A. in the TPP.
TPP Members List
Country Status Date
Brunei Original Signatory June 2005
Chile Original Signatory June 2005
Singapore Original Signatory June 2005
New Zealand Original Signatory June 2005
United States Negotiating February 2008
Australia Negotiating November 2008
Peru Negotiating November 2008
Vietnam Negotiating November 2008
Malaysia Negotiating October 2010
Mexico Negotiating June 2012
Canada Negotiating June 2012

28
What is in this TPP?

The goal of the TPP was to

eliminate all tariffs on goods and
services among participating
countries, as well as negotiate
freer government procurement;
better intellectual property
protection; increased regulatory
coherence; and labour and
environmental rights.

Source: Canada should be part of Trans-Pacific

Partnership talks; 29
What was good about the TPP?

1.Open up markets in Asia for

Canadian companies
2.Access to market totalling $20
trillion, with 750 million
consumers
3.Facilitates amending NAFTA,
without re-opening NAFTA
(supersedes previous agreement)
on intellectual property, state-
owned companies, government
procurement 30
So whats bad about this TPP?

WE MUST DECIDE THIS AND

PROVIDE OUR OPINION TO THE
MINISTRY:

GLOBAL AFFAIRS CANADA

Open Letter to Canadians on the Trans-

Pacific Partnership from the Honourable
Chrystia Freeland, Minister of International
Trade
Dated: 25 January 2016
31
So whats bad about this TPP?

WE MUST DECIDE THIS AND

PROVIDE OUR OPINION TO THE
MINISTRY:

GLOBAL AFFAIRS CANADA

Open Letter to Canadians on the Trans-

Pacific Partnership from the Honourable
Chrystia Freeland, Minister of International
Trade
Dated: 25 January 2016
32
Comment on the TPP:
The 21st-century aspects of TPP
are behind-the-border issues, such
as intellectual-property protection,
environmental and labour standards,
the privileges of state-owned
enterprises and government-
procurement practices.
All are problematic.
But at the TPPs core is the
traditional free-trade aim of
comprehensive duty-free access.
And some of the biggest difficulties
remain in the area of market access.
Regional Trade Blocs in Africa

34
European Economic Integration

35
What Is The European Union?
The Maastricht Treaty (1991)
committed the EU to adopt a
single currency
This created the second largest currency
zone in the world after that of the U.S.
dollar
The EURO is used by 17 of the 28
member states
Britain, Denmark and Sweden opted out
Since its establishment January
1, 1999, the euro has had a
volatile trading history with the 36
Political Structure of the European
Union

The five main institutions in this

structure are:
1. The European Council
2. The Council of Ministers
3. The European Commission
4. The European Parliament
5. The Court of Justice

37
European Union who are the
members?
The European Union was initially composed of 15
member states representing 374 million people(year of entry in brackets):
Belgium (1950),
Germany (1950),
France (1950),
Italy (1950),
Luxembourg (1950),
the Netherlands (1950),
Denmark (1973),
Ireland (1973),
United Kingdom (1973),
Greece (1981),
Spain (1986),
Portugal (1986),
Austria (1995),
Finland (1995),
and Sweden (1995).

38
Member states of the EU (year of
entry)
Austria(1995) Italy(1952)
Belgium(1952) Latvia(2004)
Bulgaria(2007) Lithuania(2004)
Croatia(2013) Luxembourg(1952)
Cyprus(2004) Malta(2004)
Czech Republic Netherlands(1952)
(2004) Poland(2004)
Denmark(1973) Portugal(1986)
Estonia(2004) Romania(2007)
Finland(1995) Slovakia(2004)
France(1952) Slovenia(2004)
Germany(1952) Spain(1986)
Greece(1981) Sweden(1995)
Hungary(2004) United Kingdom
Ireland(1973) (1973)
European Union the 2004 members

40
European Union the 2007 members

41
The Euro ()

By January 1, 1999, the European

Union adopted the Euro as a common
currency
Benefits
in the Union.
Costs
Individuals and businesses National authorities have lost
will realize significant savings control over monetary policy
from having only one The Maastricht Treaty called
currency for establishment of an
A common currency makes it independent European
easy to compare prices across Central Bank
Europe ECB has the responsibility to
European producers will be set interest rates and
forced to look for ways to determine monetary policies
reduce their production costs for the euro zone
to maintain profits
Supports the development of
the pan-European capital
market 42
What Works for the Eurozone ( )?

The EU common market is

conducive to increased
competition, and
increasedspecialisation of
production
Provides larger economies of
scale, allows greater mobility of
factors of production (to move to
the area where they are most
valued, and thus more efficient
allocation of resources). 43
 What are the Problems for the
Eurozone ()?
Common monetary policy (the
Eurozone currency and
European Central Bank) without
common fiscal policy
Countries on periphery are in
crisis due to large debt-loads,
and central countries were/are
reluctant to pay out to help
Crisis provoked a loss of
sovereignty, which may be good
or bad! 44
Eurozone (Euro ) some history

Closer integration of monetary

& fiscal policies (ECB interest
rates & reserves, common
tariffs, etc)
Without integration of budgets
nor banking regulations
Simplistically: Northern E.
countries invested in
productivity; Southern E.
countries invested in houses
(i.e. Spain & Ireland) and ran
Eurozone () the results now!

Germany is either # 1 or # 2 for

total exports in the world
Germany wants balanced budgets,
reduced social spending, and
privatization of assets
Greece in 2015 had elected a
government to push back against
privatization, after nearly 5 years
of recession/depression. i.e. over
25% unemployment (official rates)
Greece

IMF reports three-quarters of

Greek public debt or around
270bn out of a total of 317bn
is held by the official sector
(meaning European Central
Bank, the EFSF rescue fund, and
the IMF)

Source: FP, 13 January 2015

http://www.ft.com/intl/cms/s/0/c133ac38-981b-11e
4-b4be-00144feabdc0.html#
axzz3RJ3DNJko
http://www.economist.com/blogs/dailychart/2011/04/european_bail-outs
Eurozone ( ) today (Fall 2015)

Economists use an index:

Debt
Income
Applies equally to countries or
companies or individuals
Debt / GDP for countries
Greece Italy Canada
Germany
175% 125% 89% 82%
http://www.economist.com/content/global_debt_clock?page=7&fsrc=scn%2Ffb%2Fwl%2Fdc%2Fdebt
 Austerity
Asking individuals to make do with
less
Government raises taxes
Retirement age extended
Less generous pensions
Structural Reform
Selling off airports, roads, etc
More licences issued & increased
competition i.e. taxis, lawyers
Incumbents are threatened and not
pleased!
Eurozones Crisis a parable for
students!
Think of the periphery
countries as people with too
much debt, and not enough
income with which to make
payments
What has to change? Either
set aside more money to pay
debt (i.e. work harder, save
more: AUSTERITY) or, default
and not pay, (i.e.: people &
companies can go bankrupt,
countries: DEFAULT).
So do countries default?

United States after Civil War

Russia after 1917 revolution
Argentina in 2003
Greece in 2011
Canada, EU leaders sign CETA pact
despite Germanconcerns
FP, September 26, 2014
Source: http
://business.financialpost.com/2014/09/26/s
tephen-harper-eu-leaders-meet-amid-ceta-cl
oud
/
OTTAWA After five years of drawn-out
negotiations, Canada and the European
Union have finally put pen to paper,
creating one of the worlds largest free-
trade blocs, while at the same time
downplaying concerns over a possible
negotiating rift with Germany.
* Still not ratified, as some European
CETA key sections

Agreement Overview
Trade in Goods
Investment
, Services and Related Matters
Government Procurement
Intellectual Property
Dispute
Settlement - now via a court, and n
ot only lawyers
Sustainable
Development, Labour and Environm
ent
Regional Integration in the
Americas

55
NAFTA

Click on the screen capture to go direct to the website on the

Dept. of Foreign Affairs re: NAFTA

56
NAFTA
The Case FOR NAFTA

Proponents argue that NAFTA should be viewed as an

opportunity to create an enlarged and more efficient
productive base for the entire region.

(average hourly labour costs in Mexico are about one-tenth

those found in Canada and the United States).

57
NAFTA

The Case AGAINST NAFTA

Those who opposed NAFTA claimed that ratification

would be followed by a mass exodus of jobs from the
United States and Canada into Mexico as employers
sought to profit from Mexicos lower wages and less
strict environmental and labour laws.

The period since NAFTA took effect has had little

impact the on trends already in place.

58
Mercos
ur
Originated in 1988 as a
free trade pact between
Brazil and Argentina

The pact was expanded

in March 1990 to
include Paraguay and
Uruguay.

The four countries

of MERCOSUR have a
combined population of
200 million.

59
Caricom

A customs union 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
established in 1973. However, it has
repeatedly failed to progress toward economic
integration.
In early 2006, six CARICOM members
established the Caribbean Single Market
and Economy (CSME). Modelled on the
EUs single market, the goal of CSME is
to lower trade barriers

60
What Is The Status Of
Economic Integration In The
Americas (FTAA)?
Economic Integration in the Americas

61
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 of
intellectual property rights and lower
manufactured goods tariffs
Brazil and Argentina want the U.S. to eliminate
agricultural subsidies and tariffs

If the FTAA was established, it would have

major implications for cross-border trade
and investment flows within the hemisphere
FTAA would create a free trade area of 850
million people who accounted for nearly $18
trillion in GDP in 2008
Asia Pacific Economic Cooperation

63
Asia Pacific Economic Cooperation

http://www.apec.org/

64
 ASEAN Association of South East Asian Nations

ASEAN members are countries that do NOT

include the big economies of
China
Japan
South Korea

http://www.aseansec.org/

65
What are the Implications of
Economic Integration for
Managers?
Regional economic integration
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
Some of the criticims
Within each grouping, the business
environment becomes even more competitive
There is a risk of being shut out of the single
market by the creation of a trade fortress
Always dislocation for some industries
Lecture 4 Summary
History and status of Regional
Economic Integration
Types of integration, and current
models
Advantages and disadvantages
to integration; and some of the
unforeseen developments
For countries and for students:
moderate debt level is
manageable; excessive debt is a
time bomb! 67