Chapter ObjectivesI. Levels of Economic IntegrationA. The Free Trade Area—all barriers to trade among member countries are removed, but members may decide their own trade policies toward nonmembersCHAPTER 8ECONOMIC INTEGRATIONChapter Objectives- To review types of economic integration among countries- To examine the costs and benefits of integrative arrangements- To understand the structure of the European Union and its implications for firms within and outside Europe- To explore the emergence of other integration agreements, especially in the Americas and Asia- To suggest corporate response to advancing economic integrationOpening VignetteBuilding Blocs Toward Worldwide Free TradeSummary:This vignette tells about the development of all sorts of economic and trade unions in their varying degrees.Some are more political while others are more economic. The trend toward greater integration across national borders is clear, however. The movement is toward more free trade.Chapter OutlineI. LEVELS OF ECONOMIC INTEGRATIONA. THE FREE TRADE AREA—ALL BARRIERS TO TRADE AMONG MEMBER COUNTRIES ARE REMOVED, BUT MEMBERS MAY DECIDE THEIR OWN TRADE POLICIES TOWARD NONMEMBERSB. The Customs Union—Free Trade Area plus a common trade policy toward nonmembersC. The Common Market—Customs Union plus free flow of labor, capital, and technology among members (factor mobility)D. The Economic Union—Common Market plus integration of economic policies such as monetary policies, taxation, government spending, and a common currencyII. Arguments Surrounding Economic IntegrationA. Trade Creation and Trade Diversion1. Trade creation—increased exports by new member to other members resulting from membership2. Trade diversion—decreased exports to members of the economic union by nonmember nations often resulting in the advantage shifting away from the lower-cost producer to the higher cost producerB. Reduced Import Prices can result from importers efforts to remain competitive despite tariffs imposedC. Increased Competition and Economies of Scale1. The larger market created also means more competing firms which can result in greaterefficiency and lower consumer prices2. Economies of Scale—lower production costs resulting from greater production for an enlarged marketD. Higher Factor Productivity1. Factor mobility leads to movement of labor and capital from areas of low productivity to areas of high productivity2. Poorer countries may lose badly needed investment capital or labor to a more profitablericher country3. More developed countries may lose companies who move to areas where operating costs are lowerE. Regionalism versus Nationalism1. The greatest impediment to economic integration is the desire of nations to maintain autonomyIII. European IntegrationA. Economic Integration in Europe from 1948 to the Mid-1980s1. Organization for European Economic Cooperation (OEEC) 1948 set up to administer the Marshall Plan2. European Coal and Steel Community (ECSC) in 19523. European Economic Community (EEC) in 19574. European Community (EC) in 19675. European Free Trade Association in 1960 (8 countries abolished trade barriers only)6. European Union in 1994B. The European Union Since the Mid-1980s1. 1992 White Paper identified barriers to integration and came up with measures to overcome them2. A common standards approach has been developed to facilitate integration3. A common immigration policy is still lacking4. European Union officially began on January 1, 1994 with goals of economic, monetary,and political unionC. Organization of the EU1. European Commission is the executive body (20 commissioners and president)2. The Council of Ministers had ultimate authority and is legislative branch3. The Court of Justice is judicial branch4. The European Parliament has 626 members has grown in powerFocus on EthicsIntegration PainsSummary:Many developed countries fear the loss of jobs comes with integration. U.S. truckers opposed letting Mexican trucks have free access to U.S. states, but the NAFTA arbitration panel allowed them in. In Europe politicians blame other member countries for the loss of investment opportunities and the jobs that go with them.D. Implications of the Integrated European Market1. Economic growth is expecteda. Gains from eliminating the transaction cost associated with bordersb. Economies of scale will be achievedc. Gains from more intense competition2. Benefits for companies within the EU3. Firms from nonmember nations will benefit if they are located inside the EU4. Fortress Europe—fear that as Europe unifies internally more barriers will be raised externallyIV. North American Economic IntegrationA. U.S.-Canada Free Trade Agreement 1989B. North American Free Trade agreement (NAFTA)1. Proponentsa. Access to low-cost Mexican laborb. Job creation in Mexicoc. Access to more consumers2. Opponentsa. Job loss to Mexicob. Lower environmental standards in Mexicoc. Segments of the U.S. economy will be harmedd. Wages will declineFocus on EntrepreneurshipNAFTA: Reshaping the Retail Market in Mexico and BeyondSummary:The story of how Wal-Mart entered Mexico prior to the formation of NAFTA and has benefited from its size and buying power since NAFTA is given here. Wal-Mart has hurt other Mexican retailers and is not the country’s top retailer.V. Other Economic AlliancesA. Integration in Latin America1. Latin America Free Trade Association (LAFTA) 1961 was not successful2. Latin America Integration Association in 1980 has higher integration level goals3. Central American Common Market (CACM) 1960a. Eliminated restrictions on 80 percent of trade among membersb. Renewed commitment to integration4. Caribbean Basin Initiative (CBI) in 1983—U.S. unilaterally extended them NAFTA benefits5. MERCOSUR—South American common market that plans economic convergence likeEU6. Andean Common Market (ANCOM)7. Free Trade Area of the Americas (FTAA) is a goal by 2005B. Integration in Asia1. Association of Southeast Asian Nations (ASEAN) was very informal2. ASEAN Free Trade Area (AFTA) formed in 1991 reduced tariffs and set goal for customs union by 20103. East Asia Economic Group (EAEG) has been proposed4. Asia Pacific Economic Cooperation (APEC) proposed by Australia as an annual forum and has set goals of liberalizing trade5. South Asian Association for Regional Cooperation (SAARC) on Indian subcontinent in1985Focus on PoliticsIn Support of Free Trade in AsiaSummary:This vignette describes the expected