Chapter 9

1 Chapter 9 regional economic IntegrationGlobal Talent CrunchThe Global Talent CrunchOver the next decade, it is estimated that the growth in demand for college-educated talent will exceed the growth in supply for most of the developed world. India s educated workforce is growing 2% annually, while America s is shrinking each Graphic Source: Oxford Economics(Fortune 9/22/14) regional economic IntegrationRegional economic integrationAgreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other Designed to promote free trade, BUT Causes competition among regional groupsTax differences and Starbucks FilmHarmonization can help governments to collect more taxesHear about Swiss banks?

2 ?Impediments To Integration economic integration can be difficult because: while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose ( , unions) it implies a loss of national sovereignty( , regional decisions)The Case Against regional IntegrationTrade creationLow cost producers (within the free trade area) replace high cost domestic producersTrade diversionHigher cost suppliers (within the free trade area) replace lower cost external suppliersRegional economic integration - only beneficial IFTrade Creation >Trade Diversion5 Levels Of economic Integration Free Trade AreaEliminates all barriers to the trade of goods and services among member countries (but members determine their own trade policies for nonmembers) Customs UnionEliminates trade barriers between member countries and adopts a common external trade policy (among nonmembers)

3 Common MarketNo barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production economic UnionCommon currency, a harmonized tax rates, and a common monetary and fiscal policy, free flow of products and factors of production between members, and a common external trade policy Political UnionInvolves a central political apparatus that coordinates the economic , social, and foreign policy of member states regional Integration (1) Pact (2) (3) Union (EU) (4) Of economic Trade AreaEliminates all barriers to the trade of goods and services among member countries (but members determine their own trade policies for nonmembers)Examples: European Free Trade Association (EFTA)(between Norway, Iceland, Liechtenstein, and Switzerland) North American Free TradeAgreement (NAFTA) ( , Canada, and Mexico) Let s look at it.

4 The North American Free Trade Agreement Abolished Tariffs on 99 % of goods traded Removed most barriers on services Protects intellectual property (IP) rights removes most FDI restrictions Each country can apply its own environmental standards (must have a scientific base) Establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignoredThe North American Free Trade AgreementSupportersargue that: Mexico will benefit from increased jobs The and Canada will benefit from access to a large and increasingly prosperous market Lower prices for Mexican goods and Canadian firms producing in Mexico will be more competitive on world markets Criticsargue that.

5 Jobs will be lost and wage levels will decline in the and Canada Mexican workers will emigrate north More pollution due to Mexico's lax standards Mexico would lose its sovereigntyNAFTA - Jorge Casta eda s ViewAccording to Jorge Casta eda, who later became Mexico s foreign minister, in his bookThe Mexican Shock, NAFTA was not a deal between competing national interests. It was an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.

6 Over 1,000 pages it helped big business to:-Pay less wages in all 3 countries (negotiate with unions)-Dispute settlement procedures to override labor & environmental regulations is more than just an FTAR esulted in: -Less employment in & Canada-Depressed wages in Mexico, yet increased productivityWhat should be done, according to Casta eda?Negotiate a rebalanced agreement one with enforceable labor standards and protections equaling those given to investors so that workers wages on both sides of the border could once again rise with their do you think?

7 Who Was Right?The jury is still out .. Research indicates that NAFTA s early impact was subtle (both sides exaggerated) NAFTA increased political stability in Mexico Other Latin American countries would like to join NAFTA Global regional Trade Intraregional vs. Extraregional Fortress Europe 59% of trade and risingFree Trade Of The Americas Talks began in April 1998 to establish a Free Trade of The Americas (FTAA)by 2005 It did not happen - now support from the , Brazil and Argentina is mixed If the FTAA was established, it would have major implications for cross-border trade and investment flows within the hemisphere The FTAA would create a free trade area of nearly 800 million people Discussions in Colombia in 2012 no results2ndLevel Of economic Integration2.

8 Customs UnionEliminates trade barriers between member countries and adopts a common external trade policy (among nonmembers)Example: Andean Pact(between Bolivia, Colombia, Ecuador and Peru) Let s look at it ..The Andean Community The Andean Pact: formed in 1969 using the EU model Failed by the mid-1980s Re-launched in 1990, and now operates as a customs union Signed an agreement in 2003 with MERCOSUR to restart negotiations towards the creation of a free trade area3rdLevel Of economic Integration3. Common MarketNo barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production Example: MERCOSUR(between Brazil, Argentina, Paraguay, and Uruguay) is aiming for common market status Let s look at it.

9 MERCOSUR Originated in 1988 as a free trade pact between Brazil and Argentina 1990 included Paraguay and Uruguay Making progress on reducing trade barriers between member states May be diverting trade(rather than creating trade), and local firms are investing in industries that are not competitive on a worldwide basis4thLevel Of economic Integration4. economic UnionCommon currency, a harmonized tax rates, and a common monetary and fiscal policy, free flow of products and factors of production between members, and a common external trade policyExample: European Union (EU) is an imperfect economic unionLets look at the EU.

10 EU Membership 28 independent member states: Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom (Brexit) Candidate countries:Albania, Montenegro, Republic of Macedonia, Serbia, and Turkey (blocked based on human rights) Potential Candidates: Bosnia and Herzegovina, and Kosovo Iceland pulled out of EU candidacy Political Structure Of The European UnionFive main institutions of the EU.