Global Business Today: Sixth Canadian Edition

GLOBAL
BUSINESS
TODAY
Sixth Canadian Edition
CHARLES W. L. HILL
G. TOMAS M. HULT
THOMAS McKAIG
FRANK COTAE
©2021 McGraw-Hill Ryerson

All rights reserved
Global Business Today 6th Edition ©2021 McGraw Hill Ryerson All rights reserved Chapter 1 Slide 1
PowerPoints by Associate Professor Frank Cotae, Mount Royal University
Part 3 Cross-Border Trade and Investment
Chapter 8
Regional Economic Integration
Learning objectives
1. Describe different levels of regional economic integration(REI).
2. Understand the economic and political arguments for REI.
3. Understand economic and political arguments against REI.
4. Explain the history, current scope, and future prospects of the

world’s most important REI.
5. Understand how foreign investment can support sustainable

community development.
6. Understand the implications for business that are inherent in regional

economic integration agreements.
Opening Case: Nafta 2.0: CUSMA

• The renegotiation of NAFTA was complicated by the fact that
multilayered supply chains now span both sides of the U.S.–
Mexican border. Nowhere is this more the case than in the
automobile industry.
• Auto parts manufactured in the US shipped to plants in

Mexico, for assemblage and then shipped back to the US
• On 30 September 2018, Canada, Mexico, and the United

States reached agreement on a revised version of NAFTA
• The past two decades have witnessed a proliferation of regional trade
blocs that promote regional economic integration
• In 2018, there were 284 regional trade agreements in force
• Groups of countries aim to reduce trade barriers more rapidly than can be
achieved under the auspices of the WTO
• This has become an increasingly important policy approach, given the

failure of the WTO to make any progress with its the Doha Round.
Level of Economic Integration(1)
1. Free Trade Area :all barriers to the trade of goods and

services among member countries are removed)
2. A Customs Union : group of countries committed to:

• removing all barriers to the free flow of goods and
services between each other and
• the pursuit of a common external trade policy.)
3. A Common Market :A group of countries committed to:
•removing all barriers to the free flow of goods, services, and

factors of production between each other;
•pursuing a common external trade policy; and
•allowing factors of production to move freely among members.)
4. Economic Union: A group of countries committed to:
•The removal of all barriers to the free flow of goods, services,

and factors of production between each other;
•the adoption of a common currency;
•the harmonization of tax rates; and
•the pursuit of a common external trade policy.
5. Political Union : A central political apparatus that coordinates

economic, social, and foreign policy.
The Case for Regional Integration(1)
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 beyond those attainable under
global agreements such as the WTO
Political Case for Integration

• Linking neighboring economies and making them increasingly
dependent on each other creates incentives for political
cooperation between neighboring states and reduces the
potential for violent conflict.
Impediments to Integration
•Strong economic, political arguments for integration, but
never been easy to achieve or sustain:
1.Economic integration benefits the majority but 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.
Impediments to Integration
2.Concerns over national sovereignty.

• Mexico’s concerns about maintaining control of its oil interests
resulted in an agreement with Canada and USA under CUSMA
(formally NAFTA).
The Case Against Regional Integration
Concerns that the benefits of regional integration have been oversold,
while the costs have often been ignored
•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.
Regional Economic Integration in Europe(1)
MAP 8.1
European
Union
Countries
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
The Establishment of the Euro
In 1999, EU adopted the Euro as a common currency in Union.
Benefits Costs
• Individuals and businesses realize • National authorities have lost
significant savings from having control over monetary policy
only one currency • The Maastricht Treaty called for
• A common currency makes it easy establishment of an independent
to compare prices across Europe European Central Bank
• European producers will be forced • ECB has the responsibility to set
to look for ways to reduce their interest rates and determine
production costs to maintain profits monetary policies for the euro zone
• Supports the development of the
pan-European capital market
Enlargement of the European Union
The United Kingdom's exit from the European Union in
2020 brings the total number of member states to 27.
Regional Economic Integration in the Americas(1)
Map 8.2
Economic
integration in
the Americas.
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.
•Advocate acknowledge that one effect of NAFTA would be that

many U.S. and Canadian firms will move some production to
Mexico to take advantage of lower labour costs
• (In 2015, the average hourly labour cost in Mexican

automobile factories was $8–$10 an hour including
benefits, compared to $42–$58 an hour in the USA)
The Case AGAINST NAFTA
Trade agreements continue to elicit strong opinions.
The Case AGAINST NAFTA
•Those who opposed NAFTA claimed that ratification would

be followed by a mass exodus of jobs from the USA and
Canada into Mexico as employers sought to profit from
Mexico’s lower wages and less strict environmental and
labour laws.
•The period since NAFTA took effect has had little impact on
trends already in place.
The new NAFTA: CUSMA
Canada-United States-Mexico Agreement, or CUSMA for

short, the "New NAFTA," made some changes to the 25-year-
old NAFTA treaty, as discussed earlier in this chapter
NAFTA required automakers to produce 62.5 percent of a vehicle’s

content in North America to qualify for zero tariffs. CUSMA raises
that threshold to 75 percent.
The new NAFTA: CUSMA
The idea is to compel automakers to source fewer parts for a car

assembled in North America from Germany, Japan, South Korea, or
China
Critics see CUSMA as likely to result in trade diversion rather than

trade creation and argue that the consequences may include higher
costs to North American automobile producers and higher prices for
consumers
The Andean Community
•Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in

1969 to create the Andean Pact trade bloc
•The Andean Community now operates as a customs union.

•In 2006, Venezuela withdrew from the Andean Community as part of
that country’s attempts to join Mercosur.
Mercosur
•Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a

free trade area.
•As a customs union, they negotiate as a bloc with potential trading

partners such as Canada
Golden BRICS Countries
•Also sometimes called the golden BRICS or The Big Five refers to:
Brazil, Russia, India, China, South Africa
•They are the largest economies outside of the OECD
•They are neither a formal economic bloc like the European Union,
nor do they share a common currency
Central American Common Market, CAFTA, and CARICOM
Central American Common Market
•A trade pact among Costa Rica, El Salvador, Guatemala, Honduras,

and Nicaragua, which began in the early 1960s but collapsed in 1969
due to war.
Central America Free Trade Agreement (CAFTA)

•The agreement of the member states of the Central American
Common Market joined by the Dominican Republic to trade freely
with the United States.
Central American Common Market, CAFTA, and CARICOM
CARICOM
An association of English-speaking Caribbean states that are

attempting to establish a customs union.
In early 2006, six CARICOM members established the Caribbean

Single Market and Economy (CSME).
Modelled on the EU’s single market, CSME’s goal is to lower trade

barriers and harmonize macroeconomic and monetary policy between
member states
Regional Economic Integration elsewhere(1)
Association of Southeast Asian Nations(ASEAN)
Association of Southeast Asian Nations
An attempt to establish a free trade area among Brunei, Cambodia,

Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand, and Vietnam.
Laos, Myanmar, Vietnam, and Cambodia have all joined recently,

creating a regional Page 276 --> grouping of 600 million people with a
combined GDP of some $2 trillion
Regional Trade Blocs in Africa
Nominally there are now 19 trade blocs on the African continent.

Many countries are members of more than one group.
Although the number of trade groups is impressive, progress toward

the establishment of meaningful trade blocs has been slow

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GLOBAL

©2021 McGraw-Hill Ryerson

2. Understand the economic and political arguments for REI.

3. Understand economic and political arguments against REI.

4. Explain the history, current scope, and future prospects of the

5. Understand how foreign investment can support sustainable

6. Understand the implications for business that are inherent in regional

Opening Case: Nafta 2.0: CUSMA

• Auto parts manufactured in the US shipped to plants in

• On 30 September 2018, Canada, Mexico, and the United

• In 2018, there were 284 regional trade agreements in force

• This has become an increasingly important policy approach, given the

1. Free Trade Area :all barriers to the trade of goods and

2. A Customs Union : group of countries committed to:

3. A Common Market :A group of countries committed to:

•removing all barriers to the free flow of goods, services, and

•pursuing a common external trade policy; and

•allowing factors of production to move freely among members.)

•The removal of all barriers to the free flow of goods, services,

•the adoption of a common currency;

•the harmonization of tax rates; and

•the pursuit of a common external trade policy.

5. Political Union : A central political apparatus that coordinates

Political Case for Integration

1.Economic integration benefits the majority but has its costs.

• Moving to a free trade regime involves some painful adjustments.

2.Concerns over national sovereignty.

•The benefits of regional integration are determined by the

• Trade creation occurs when high-cost domestic producers are

• Trade diversion occurs when lower-cost external suppliers are

Political Structure of the European Union

The five main institutions in this structure are:

•Proponents argue that NAFTA should be viewed as an

•Advocate acknowledge that one effect of NAFTA would be that

• (In 2015, the average hourly labour cost in Mexican

•Those who opposed NAFTA claimed that ratification would

Canada-United States-Mexico Agreement, or CUSMA for

NAFTA required automakers to produce 62.5 percent of a vehicle’s

The idea is to compel automakers to source fewer parts for a car

Critics see CUSMA as likely to result in trade diversion rather than

•Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in

•The Andean Community now operates as a customs union.

•Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a

•As a customs union, they negotiate as a bloc with potential trading

•They are the largest economies outside of the OECD

•A trade pact among Costa Rica, El Salvador, Guatemala, Honduras,

Central America Free Trade Agreement (CAFTA)

An association of English-speaking Caribbean states that are

In early 2006, six CARICOM members established the Caribbean

Modelled on the EU’s single market, CSME’s goal is to lower trade

An attempt to establish a free trade area among Brunei, Cambodia,

Laos, Myanmar, Vietnam, and Cambodia have all joined recently,

Regional Trade Blocs in Africa

Nominally there are now 19 trade blocs on the African continent.

Although the number of trade groups is impressive, progress toward

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