Chapter 8

Capitalizing on Global and Regional Integration

Objectives

Importance of economic integrationGlobal integrationRegional integrationRegional organizations of interestImplications for action

Economic Integration

Regional economic integration: Efforts to reduce trade and investment barriers within one region

Global economic integration: Efforts to reduce trade and investment barriers around the globe

Smoot‐Hawley Tariff, 1930

Integrating the Global Economy

Important developments after WWII General Agreement on Tariffs and Trade (GATT):

Multilateral agreement governing the international trade of goods

World Trade Organization (WTO): Multilateral trading system and the organization underpinning the system since 1995

European Union (EU): Official title of European economic integration since 1993

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Exhibit

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8.1 Benefits of Global Economic Integration

Global Integration

General Agreement on Tariffs and Trade – 1948 –multilateral agreement governing the international trade of goods (merchandise goods) Multilateral – many countries (bilateral, 2 countries) Agreement to reduce tariffs

• Avg. developed country tariffs dropped from 40% in 1948 –3% in 2005

Not an organization Problems

• Merchandise, not services or IP• Loopholes• Didn’t address non-tariff barriers

World Trade Organization

Grew out of GATT in 1995 True organization headquartered in Geneva,

Switzerland Includes GATT plus agreements on:

• Trade in Services• Intellectual Property Rights• Dispute settlement mechanisms• Trade policy reviews – peer review of policies

World Trade Organization

Objectives of WTO

1.Non-discrimination2. Freer Trade3. Predictability – don’t raise tariffs4. “Fair Competition” – no subsidies5. Encourage development and economic reform

Dispute Settlement

Time limited reviews

Panel of three neutral countries

Enforcement still lacking Ruling is recommendation

• Can sanction retaliatory tariffs, not optimal… No way of truly enforcing

• Change policies• Carry on and face retaliatory tariffs

Most countries change policies

Debates

Turtles Turtles are endangered On US endangered species list Shrimpers in US must use Turtle Excluder Device In 1989 US banned imports from countries not requiring TEDs,

including India, Malaysia, Pakistan, and Thailand Is this allowable?

Meat and Meat Products 1996 US protested European prohibition of hormone infused beef

• Discriminated against beef from the US Is this allowable?

Future of WTO

Another round of negotiations Seattle 1999 “Doha Round” – 2001

• Followed 9/11 emphasis on unity• Promote development in developing countries• Objectives

– Reduce agricultural subsidies in developed countries– Slash tariffs – esp. to help developing countries– Free trade in services– Strengthen IP protection

Negotiations broke down

Breakdown

Subsidies EU refused to reduce farm subsidies Japan refused to reduce rice subsidies

• Rice farmers very powerful politically US wouldn’t cut farm subsidies either (increased)

Intellectual property Developing countries refused to tighten protection

• India – pharmaceuticals• No reduction in subsidies, no IPR protection

July 2006 in Geneva Doha round closed Lots of finger pointing

Regional Integration

Types of Regional Integration

Regional Economic Integration

The European Union Political origins – effort to stop cycle of hatred and

violence. First step – European Coal and Steel Community

(1951)• Belgium, France, W. Germany, Italy, Lux.,

Netherlands 1957 – Treaty of Rome, launches European Economic

Community (EEC).• FTA -> Customs Union -> Common Market

Regional Economic Integration

The European Union 1993 – Treaty of Maastricht, establishing European

Union, goes into effect• Launched toward the Euro

Monetary Union in 1999 (12 of 15 countries)• Euro not used in UK, Denmark, or Sweden

Built a single market• Companies compete in multiple countries on equal

terms– Ex: airlines, trucking companies, etc.

EU Today

28 countries in EU 19 in Euro Zone (countries the use the Euro) Little more than half

50 years of peace500 Million citizens22% of World GDP

What will happen with the exit of UK?

Spend the next 15 minutes researching the implications of Brexit on the EU.

The Euro

BenefitsReduces conversion costsFacilitates price comparisonImposes monetary

disciplineBoosted trade in EU by 10%

CostsLoss of monetary policy at

country levelLimits fiscal flexibility Deficits < 3% GDP

Greece, Italy, Ireland, Spain, Portugal,…

Cyprus

Challenges for EU

Southern EU countries are different from northern Southern countries have inflated/devalued their way out of debt

crises in the past Can no longer do that when all using the same currency, need

bailouts and guarantees from north

Economic and political union or just economic? Or maybe customs union…

Cost of enlargement Poor countries entering will use resources of wealthier Membership of Turkey? EU á la carte?

Other Agreements

NAFTA

North American Free Trade Agreement

US, Canada, Mexico

Successful? Up for debate

Counties are neighbors and trading partners

Dreamstime.com

NAFTA

North American Free Trade Agreement

US, Canada, Mexico

No “sucking sound”, US exports tripled first decade

Estimates vary but since agreement US created 20 million new jobs!

Mexican GDP per capita grew 24%

Most benefits probably accrued to Mexico “Importance of Being Unimportant”

Maquiladora (export assembly factories) production peaked in 2000 Potentially oversold to Mexicans, disappointment

South America

Andean and Mercosur not effective, major trade partners outside agreement (US)

CAFTA includes US and is successful Contains US, major

trading partner

Australia-New Zealand Closer Economic Relations Trade Agreement

Let’s just call it CER Free Trade Area

• Removes tariffs and NTBs Citizens can freely work and

move between countries Very successful

• Similar countries that are trading partners

Liberation.typepad.com

Asia

Assoc. of Southeast Asian Nations

Formed 1967AFTA in 1992Limited by

membershipExpanded to

include China in 2002, ASEAN-China

Source: Ball 12e

Asia-Pacific Economic Corporation

ASEAN EffectiveCER EffectiveASEAN and CER

countries joinedInvited JapanUS has pacific coast,

Mexico and Canada

Russia does too.So does Peru…Not effectiveDiscussion but no

binding agreements

Too big!  Too diverse!Ineffective!

Takeaways

Lots of agreements out there NAFTA, CAFTA, ASEAN, APEC Haven’t even considered bilateral agreements Some effective some not…

If regional agreements are too large or too diverse may not be effective

Implications for Action

Political institutions matter

Consider regions and regional agreements, not just global Global vs. Regional vs. Local Global company but with regional focus

Understand the rules and transitions Agreement typically phased in over time Be ready