l= Regional Economic Integration LEARNING OBJECTIVES After reading this chapter, you will be able to: LOS-1 Describe the different levels of regional economic integration. LO9-2 Understand the economic and political arguments for regional economic integration, LO9-3 Understand the economic and political arguments against regional economic integration. LO9-4 — Explainthe history, current'scope, and future prospects of the world's most important regional economic agreements. LO9-5 Understand the implications for business that are inhérent in regionel economic integration agreements U.S.-Mexico Trade Relations After 20 Years of NAFTA: Is There a Dark Side to Free Trade? Opening Case (On January 1, 1994, the North American Free Trade ‘Agreement (NAFTA) went into effect, It oreated the world's largest (at the time) free trade area between the United States, Mexico and Ganada, The goal was to do away with ‘almost all of the barriers to the free exchange of goods and setvices. Today, the agreemert covers almost 450 milion people, creating approximately $17 triion worth of goods and services. As of January 1, 2008, all remaining duties and restrictions to trade were done away with, NAFTA’s performance has been impressive. Between 1998 and 2007, tracle amongst NAFTA nations more than, tripled, going from $297 billion to $990 billion. Two-way trade between the U.S. and Mexico is estimated to be ‘worth over $500 billon, supperting milions of jobs in oth countries. Daniel Chiquiar, @ statistician with the Bank of Mexico, points out that, “Before NAFTA, we had a sight trade deficit with the United States, Now we have a huge tracle surplus.” United States foreign direct investment (FD) in Mexico totalled $91.4 bition (2014), with US..com- Panies investing at least $145 billion in 18,000 companies ‘since 2000. This investment has allowed Mexico to invest in her infrastructure and become more efficient in certain sectors. Many Mexican companies now compete globally, ‘with one result being that Mexican FDI holdings in the U.S. ‘went from $1.2 bilion in 1993 to $12.6 bilion in 2010. contributed by Tom McNamara and Tony Cragg But there is 2 growing chorus of criticism about NAFTA. Between 2006 and 2010, 12 milion people fll into poverty in Mexico, bringing the poverty rate up to 51.3 percent of the population, In the past decade, Mexico had the stowest rate of reduction in poverty of any Latin American country. Also, with the removal of protective tars, the price that Mexican farmers received for their corn fall by 66 percent. AS aresul, many had to abandion farming and move to cites in search of work. An estimated 1.1 milion farmers were pushed out of work be- tween 1993 and 2005, And while prices paid to com farmers fel the price of Mexico's staple food — tortlas — increased by 279 percent during NATAS first 10 years, leading to great sodial unrest. Since NAFTA went into effect, Mexico per capita income has increased at an average annual rate of 4.2 percent, one of the worst growth rates in the region. Itis difficult to say just how many of Mexico's problems can be laid at the doorstep of NAFTA. Increasing compatition due {0 globalization, the lingering effects of the Great Recession of 2008 (the worst global financial crisis in over 70 years), poor ‘governance and financial raguation could all be having a nea- ative influence on the Mexican economy as well. Critics say that Mexico could do mote to improve its situation by better enforcing the rue of law and protecting property rights. The Word Bank, in a 2012 report entitled "Doing Business,” found ‘that with regard to the respect of contracts, the payment of taxes and the protection of investors, Mexico ranked 53rd out(of 183 countries, A sign that things might be changing for the better was sean in a recent Vote by the Mexican Congress to ‘open up the country’s previously closed cil market. Some be- {eve this wil bring in much needed technology and invest- ment, Cries say this wil only bring in more unfair outside ‘competition from richer and more developed economies. ‘While studies show that NAFTA has brought many 60> — nomic and social benefits to Mexico, unfortunately these gains have not been equally distributed amongst the pop: Ulation. It appears that more and more people are suffering from “free trade fatigue.” Even in the US, a majority of peo- ple polled in a recent survey believe that the U.S. should: either leave or renegotiate NAFTA due to parosivad losses: n the part of the American economy and worker. World Teaders would be advised to tread cautiously when negoti- ating future intemational trade agreements.’ 256 Gaeroauction This chapter takes a close look at the arguments for regional economic integration through the establishment of trading blocs such as the European Union (EU) and the North American Free Trade Agreement (NAFTA). 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. The opening case illustrates some of the issues surrounding the creation of a trading bloc, By creating a single market, NAFTA aimed to lower the price for goods and services in the United States, Canada, and Mexico. Such a policy is good for consumers, because it lowers prices, but it presents challenges to some produicers who have to adapt to a more competitive environment. As the opening case explains, NAFTA brought severe social problems to Mexico's economy when previously protected industries had difficulty competing with the more developed, richer American economy. In spite of these problems, it is believed that the gains to Mexico from NAFTA far out- weigh any perceived drawbacks, ‘The past two decades have witnessed an unprecedented proliferation of regional trade blocs that promote regional economic integration. World Trade Organization (WTO) ‘members are required to notify the WTO of any regional trade agreements in which they participate. By 2012, nearly ail the WTO"s members had notified the organization of par- ticipation in one or more regional trade agreements, The total number of regional trade. agreements currently in force is more than 500.? Consistent with the predictions of international trade theory and particularly the theory of comparative advantage (see Chapter 6), agreements designed to promote freer trade within regions are believed to produce gains from trade for all member countries. As we saw in Chapter 7, the General Agreement on Tariffs and Trade (GATT) and its successor, the World ‘Trade Organization, also seek to reduce trade barriers. However, the WTO has a global perspective and 159 members, which can make reaching an agreement extremely difficult. By entering into regional agreements, groups of countries aim to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO. Nowhere has the movement toward regional economic integration been more successful than in Europe. On January 1, 1993, the European Union formally removed many barriers to doing business across borders within the EU in an attempt to create a single market with 340 jon consumers. Today, the EU has a population of over 500 million and a gross domestic product of $17.6 trillion, making it larger than the United States in economic tern Similar moves toward regional integration are being pursued elsewhere in the world. Canada, Mexico, and the United States have implemented NAFTA. Ultimately, this aims to remove all barriers to the free flow of goods and services among the three countri While the implementation of NAFTA has resulted in job losses in some sectors of the U.S. economy, in aggregate and consistent with the predictions of international trade theory, most economists argue that the benefits of greater regional trade outweigh any costs (see the Opening Case). South America too has moved toward regional integration, In 1991, Argentina, Brazil, Paraguay, and Uruguay implemented an agreement known as Mercosur to start reducing barriers to trade between each other, and although progress