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Ch 8: Regional Economic Integration
Chapter 8
Regional Economic Integration
Learning Objectives:
8.1 Outline the levels of economic integration and its debate.
8.2 Describe integration in Europe and its enlargement.
8.3 Describe the integration in the Americas and its prospects.
8.4 Summarize integration in the Asia and elsewhere.
Chapter Outline:
Introduction
Levels of Integration and the Debate
Free Trade Area
Customs Union
Common Market
Economic Union
Political Union
The Case for Regional Integration
Trade Creation
Greater Consensus
Political Cooperation
Employment Opportunities
Corporate Savings
The Case Against Regional Integration
Trade Diversion
Shifts in Employment
Loss of National Sovereignty
Integration in Europe
European Union
Early Years
Single European Act
Maastricht Treaty
European Monetary Union
Management Implications of the Euro
Enlargement of the European Union
Structure of the EU
European Parliament
Council of the EU
European Commission
Court of Justice
Court of Auditors
European Free Trade Association (EFTA)
Integration in the Americas
North American Free Trade Agreement (NAFTA)
Local Content Requirements and Rules of Origin
Effects of NAFTA
Expansion of NAFTA
Central American Free Trade Area (CAFTA-DR)
Andean Community (CAN)
Latin American Integration Association (ALADI)
Southern Common Market (MERCOSUR)
Central America and the Caribbean
Caribbean Community and Common Market (CARICOM)
Central American Common Market (CACM)
Free Trade Area of the Americas (FTAA)
Integration in Asia and Elsewhere
Association of Southeast Asian Nations (ASEAN)
Asia Pacific Economic Cooperation (APEC)
The Record of APEC
Closer Economic Relations (CER) Agreement
Gulf Cooperation Council (GCC)
Economic Community of West African States (ECOWAS)
African Union (AU)
Bottom Line for Business
A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 8. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material.
Lecture Outline
INTRODUCTION
This chapter focuses on regional efforts to encourage free trade and investment. Regional integration is defined and its benefits and drawbacks are identified. The chapter also explores several long-established trading agreements and some agreements in the earliest stages of development.
LEVELS OF INTEGRATION AND THE DEBATE
Regional Economic Integration is countries of a region cooperating to reduce or eliminate barriers to the international flow of products, people, or capital. A regional trading bloc is a group of nations in a geographic region undergoing economic integration.
The goal is greater cross-border trade and investment and higher living standards. Specialization and trade allow more choice, lower prices, and increased productivity. Regional trade agreements help nations accomplish these objectives and protect intellectual property rights, the environment, or even eventual political union.
There are five levels. Free trade area is the lowest extent of national integration, political union the greatest. Each level of integration incorporates the properties of those levels that precede it (See Figure 8.1).
Free Trade Area
Countries remove all barriers to trade among members, but each country determines its own barriers against nonmembers.
Policies differ greatly against nonmember countries from one country to another. Countries in a free trade area also establish a process to resolve trade disputes among members.
Customs Union
Countries remove all barriers to trade among members but erect a common trade policy against nonmembers.
Differs from a free trade area in that members treat all nonmembers similarly. Countries might also negotiate as a single entity with other supranational organizations such as the WTO.
Common Market
Countries remove all barriers to trade and the movement of labor and capital among themselves, but erect a common trade policy against nonmembers.
Adds the free movement of important factors of production such as people and cross-border investment. It can be difficult for nations to cooperate on economic and labor policies.
Economic Union
Countries remove barriers to trade and the movement of labor and capital, erect a common trade policy against nonmembers, and coordinate their economic policies.
Requires members to harmonize their tax, monetary, and fiscal policies, create a common currency, and concede a certain amount of sovereignty to the supranational organization.
Political Union
Countries coordinate aspects of economic and political systems.
Members accept a common stance on economic and political policies regarding nonmember nations. Nations are allowed a degree of freedom in setting certain political and economic policies within their territories.
The Case for Regional Integration (See Table 8.1)
There are debates over effects on people, jobs, companies, culture, and living standards. Nations engage in specialization and trade because of the gains in output and consumption. Higher levels of trade among nations should increase specialization, efficiency, and consumption, and raise standards of living.
Trade creation
Increase in trade that results from regional economic integration.
Gives consumers and industrial buyers a wider selection of goods and services not available beforehand.
Buyers can acquire goods and services more cheaply following the lowering of trade barriers such as tariffs. Lower costs lead to higher demand for goods because people have more money after a purchase to buy other products.
Greater consensus
Eliminating trade barriers in smaller groups of countries may make it easier to gain consensus as opposed to working in the far larger WTO.
Political cooperation
A group of nations can have significantly greater political weight than nations have individually. The group may have more clout in negotiating in a forum such as the WTO. Integration involving political cooperation reduces the potential for military conflict among members.
Employment opportunities
Regional integration can expand employment by enabling people to move from country to country for work, or to earn a higher wage.
Corporate savings—agreements allow companies to alter their strategies. Companies that do business throughout the region could save millions of dollars annually from the removal of import tariffs under an eventual agreement, and they could also save money from supplying entire regions from just a few regional factories.
The Case Against Regional Integration
Trade diversion
Diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after formation of a trading bloc because of the lower tariffs charged among member nations.
Can result in reduced trade with a more efficient nonmember nation in favor of trade with a less efficient member nation. Unless there is other internal competition, buyers will pay more due to inefficient production methods.
Shifts in employment
Because trading blocs reduce or eliminate barriers to trade, the producer of a particular good or service will be decided by relative productivity. Industries requiring unskilled labor shift production to low-wage nations within a trading bloc.
Figures on jobs lost or gained vary with the source. But job dislocation allows a nation to upgrade the economy toward higher-wage-paying industries that can increase competitiveness due to a more educated and skilled workforce.
Loss of national sovereignty
Successive levels of integration require nations to surrender more sovereignty. Political union requires nations to give up a high degree of sovereignty in foreign policy.
Because some members have delicate ties with nonmember nations whereas others have strong ties, the setting of a common foreign policy is difficult.
INTEGRATION IN EUROPE
European efforts at integration began shortly after the Second World War among a small group of countries and involved a few select industries. Regional integration now encompasses practically all of Western Europe and all industries.
European Union
Early Years
Europe in 1945 faced two challenges: (1) to rebuild itself and avoid further conflict, and (2) to increase its industrial strength to stay competitive with the United States.
Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands signed the Treaty of Paris in 1951, creating the European Coal and Steel Community to remove barriers to trade in coal, iron, steel, and scrap metal.
Members of the European Coal and Steel Community signed the Treaty of Rome in 1957, creating the European Economic Community (EEC), which outlined a future common market.
In 1967 the Community’s scope was broadened to include additional industries, notably atomic energy, and changed its name to the European Community. Enlargement continued and in 1994 the bloc changed its name to the European Union (EU).
Today the 28-member European Union has a population of about 500 million people and a GDP of around $1 trillion (See Map 8.2) After the United Kingdom completes its planned exit there will be 27 members.
Single European ACT (SEA)
Remove remaining barriers, increase harmonization, and enhance competitiveness of EU companies. M&A’s swept Europe as large firms combined their understanding of European needs, capabilities, and cultures with economies of scale.
Maastricht Treaty
The 1991 Maastricht Treaty (effective in 1993): (1) created single, common currency; (2) set monetary and fiscal targets for countries taking part in monetary union; and (3) proposed eventual political union—including a common foreign and defense policy and common citizenship.
European Monetary Union
The 19 EU member nations that adopted the single currency are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. EU members not using euro : Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania, Sweden, and the United Kingdom .
The euro eliminates exchange-rate risk for business deals among member nations using the euro. Transparency in prices harmonizes prices across markets.
Enlargement of the European Union
Expansion in 2004 and 2007 from 15 to 27 members today.
Croatia was the most recent country to join the EU in 2013. Albania, Montenegro, Serbia, the Former Yugoslav Republic of Macedonia, and Turkey remain candidates for EU membership.c. New members must meet the Copenhagen Criteria.which requires that each country: (a) Has stable institutions, which guarantee democracy, the rule of law, human rights, and respect for and protection of minorities. (b) Has a functioning market economy, capable of coping with competitive pressures and market forces within the EU. (c) Is able to assume the obligations of membership, including adherence to the aims of economic, monetary, and political union. (d) Has the ability to adopt the rules and regulations of the community, the rulings of the European Court of Justice, and the treaties.
Structure of the EU
European Parliament
Composed of 736 members elected by popular vote within each member nation every five years.
Parliament acts as a consultative rather than a legislative body by debating and amending legislation proposed by the European Commission.
Council of the EU
The legislative body of the EU. Council members change depending on the topic under discussion (e.g., for agriculture, the Council is comprised of agriculture ministers of each member).
No proposed legislation becomes EU law unless the Council votes it into law. Some legislation today requires only a simple majority to win approval.
European Commission
The executive body of the EU whose commissioners are appointed by each country—larger nations get two commissioners, smaller countries one.
Drafts legislation, manages and implements policy, and monitors compliance with EU law.
Court of Justice
Acts as the EU court of appeals and is composed of 28 members (one from each member nation).
One type of case heard is when a member nation is accused of not meeting its treaty obligations.
Justices are required to act in the interest of the EU as a whole, not in the interest of their own countries.
Court of Auditors
Composed of 28 members (one from each member nation) appointed for six-year terms.
Duty is to audit EU accounts and implement EU budget, improve EU financial management, and report to member nations’ citizens on the use of public funds.
European Free Trade Association (EFTA)
Some nations wanted the benefits of a free-trade area but were wary of a full common market. In 1960, they formed the European Free Trade Association (EFTA) to focus on trade in industrial goods. Today members are Iceland, Liechtenstein, Norway, and Switzerland (See Map 8.2).
EFTA has 13.5 million people and a combined GDP of $800 billion.
The EFTA and EU cooperate on the free movement of goods, persons, services, and capital. They also cooperate in other areas, including the environment, social policy, and education.
INTEGRATION IN THE AMERICAS
Latin American countries began forming regional trading arrangements in the early 1960s but made substantial progress only in the 1980s and 1990s. North America is taking major steps toward economic integration.
North American Free Trade Agreement (NAFTA)
NAFTA (January 1994) seeks to eliminate most tariffs and nontariff trade barriers on most goods originating from North America.
Calls for liberalized rules regarding government procurement practices, the granting of subsidies, and the imposition of countervailing duties (See Chapter 6).
Other provisions deal with trade in services, intellectual property rights, and standards of health, safety, and the environment.
1. Local content requirements and rules of origin
a. Producers and distributors must determine if their products meet NAFTA rules to qualify for tariff-free status. The producer or distributor must also provide a NAFTA “certificate of origin” to an importer to claim an exemption from tariffs.
b. Four criteria to meet NAFTA rules of origin: (1) goods wholly produced or obtained in the NAFTA region; (2) goods containing non-originating inputs but meeting origin rules; (3) goods produced in the NAFTA region wholly from originating materials; and (4) unassembled goods with sufficient North American regional value content.
2. Effects of NAFTA
a. Trade among Canada, Mexico, and the United States has grown from $297 billion in 1993 to around $1.6 trillion.
b. Mexico’s exports to the United States rose to about $280 billion, and U.S. exports to Mexico grew to more than $226 billion.
c. Canada’s exports to the United States more than doubled to approximately $332 billion, and U.S. exports to Canada grew to $300 billion.
d. Canada’s exports to Mexico grew to $3.9 billion, and Mexico’s exports to Canada grew from $1.5 billion to $5.2 billion.
e. The agreement’s effect on employment and wages is not easy to determine. The U.S. Trade Representative Office and the AFL-CIO group of unions debate NAFTA’s effect on jobs.
3. Expansion of NAFTA
a. Continued ambivalence about NAFTA delays its expansion.
b. A boost would be if the U.S. Congress grants trade promotion authority to successive U.S. presidents.
c. The Americas will experience further integration and North American economies could even adopt a single currency.
B. Central American Free Trade Agreement (CAFTA-DR)
1. Established in 2006 between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.
2. CAFTA nations represent a U.S. export market larger than India, Indonesia, and Russia combined. And nearly 80 percent of exports from the Central American nations and the Dominican Republic already enter the United States tariff-free.
3. Central American nations have already cut average tariffs from 45 percent in 1985 to around 7 percent today.
4. Combined value of goods traded among the United States and the six CAFTA countries is around $50 billion.
5. Benefits to the United States: (1) lower tariff and nontariff barriers; (2) ensures U.S. companies are not disadvantaged by Central American nations’ trade agreements with other countries; (3) requires Central American nations and Dominican Republic to encourage competition and investment, protect intellectual property rights, and promote transparency and the rule of law; (4) supports U.S. national security interests by advancing regional integration, peace, and stability.
C. Andean Community (CAN)
1. Formed in 1969 and today includes Bolivia, Colombia, Ecuador, and Peru. It comprises a market of around 100 million consumers and a combined GDP of about $600 billion.
2. Objectives include tariff reduction, a common external tariff, and common policies in both transportation and certain industries.
3. But each member is given exceptions in the common tariff structure for trade with nonmembers. The group has yet to create a customs union.
D. Southern Common Market (MERCOSUR)
1. MERCOSUR was established in 1988 between Argentina and Brazil but expanded to include Paraguay and Uruguay in 1991 and Venezuela in 2006. Venezuela’s membership was later suspended in 2016. Associate members of MERCOSUR (www.mercosur.int) include Bolivia, Chile, Colombia, Ecuador, Peru, and Suriname (see Map 8.1). Mexico has been granted observer status in the bloc.
2. Acts as customs union and liberalizing trade and investment—emerging as the most powerful trading bloc throughout Latin America. It is a market of more than 290 million consumers and a GDP of around $4 trillion.
3. In the future, it could incorporate all of South America into a South American Free Trade Agreement and link up with NAFTA.
4. Different trade agendas, various macroeconomic policy frameworks, and economic problems of Argentina and Brazil hamper integration.
E. Central America and the Caribbean
Integration efforts here have been modest.
1. Caribbean Community and Common Market (CARICOM)
a. Formed in 1973. There are 15 full members, 5 associate members, and 8 observers active in CARICOM (_www.caricom.org_). Bahamas is a member of the Community but does not belong to the Common Market. Has combined GDP of nearly $30 billion and a market of almost 16 million people.
b. A key CARICOM agreement called for the establishment of a single market, but the problem is that members trade more with nonmembers than with one another.
2. Central American Common Market (CACM)
a. Intended to create a common market between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Progress was constrained by civil wars and wars among members. Comprises a market of 30 million and combined GDP of $200 billion.
b. Not yet a customs union, but officials say goal is integration, closer political ties, and a single currency—likely the dollar. El Salvador adopted the dollar as its official currency in 2000, and Guatemala already uses the dollar alongside its own currency, the quetzal.
G. Free Trade Area of the Americas (FTAA)
1. Intends to create a trading bloc stretching from Alaska to Tierra del Fuego in South America. The FTAA would comprise 34 nations and 830 million consumers—with Cuba being the only Western Hemisphere nation excluded.
2. Would remove tariffs and nontariff barriers among members, but continues to face opposition from labor organizations, environmentalists, and others against globalization.
INTEGRATION IN ASIA AND ELSEWHERE
A. Association of Southeast Asian Nations (ASEAN)
1. Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the Association of Southeast Asian Nations (ASEAN) in 1967. Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar (Burma) in 1997, and Cambodia in 1998 (see Map 8.1). Together, the 10 ASEAN (www.asean.org) countries comprise a market of nearly 600 million consumers and GDP of nearly $2.4 trillion.
2. Objectives: (1) promote economic, cultural, and social development; (2) safeguard economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully.
3. Adding Cambodia, Laos, and Myanmar, may help counter China’s strength and resources of cheap labor and abundant raw materials.
B. Asian Pacific Economic Cooperation (APEC)
1. It initially was an informal forum among 12 trading partners, APEC (www.apec.org) now has 21 members (see Map 8.1), and it comprises more than 44 percent of world trade and a GDP of more than $36 trillion.
2. Aims to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade and investment procedures.
3. Hopes to have completely free trade and investment throughout the region by 2020.
4. Record of APEC
a. Succeeded in halving members’ tariff rates from an average of 15 to 7.5 percent. The early years saw the greatest progress, but liberalization received a setback when the Asian financial crisis struck in the late 1990s.
b. Is a political body as much as it is a movement toward free trade. Open dialogue and cooperation should encourage progress toward APEC goals, however slowly.
c. Grants region-wide business visas without requiring multiple visas, and recommends regional recognition of national qualifications for professionals.
C. Closer Economic Relations (CER) Agreement
1. Australia and New Zealand created a free trade agreement in 1966 that slashed tariffs and quotas 80 percent by 1980.
2. The agreement’s success encouraged the pair to form the Closer Economic Relations (CER) Agreement in 1983 to advance free trade and further integrate their two economies.
3. The two nations totally eliminated tariffs and quotas in 1990, five years ahead of schedule.
4. Each nation allows goods (and most services) to be sold within its borders that can be legally sold in the other country. Each nation also recognizes most professionals who are registered to practice their occupation in the other country.
D. Gulf Cooperation Council (GCC)
1. Members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Formed to cooperate with the increasingly powerful trading blocs in Europe.
2. Main achievements: allowing citizens to travel freely among member nations, and allowing citizens to own land, businesses, and other property in fellow member nations without the need for local partners.
E. Economic Community of West African States (ECOWAS)
1. Intends to form a customs union and an eventual common market and monetary union among its members. The ECOWAS nations comprise a large portion of the economic activity in sub-Saharan Africa.
2. Progress on market integration is almost nonexistent, but ECOWAS has made progress in the free movement of people, construction of international roads, and development of telecommunication links.
3. Problems for ECOWAS arise because of political instability, poor governance, weak national economies, poor infrastructure, and poor economic policies.
F. African Union (AU)
1. Group of 55 nations joined forces in 2002 to create the African Union.
2. Aims: (1) rid vestiges of colonialism and apartheid; (2) promote unity and solidarity; (3) coordinate and intensify cooperation for development; (4) safeguard members’ sovereignty and territorial integrity; (5) promote international cooperation within the United Nations.
3. Although it is too early to judge the success of the AU, there is no shortage of opportunities for it to demonstrate its capabilities.
INTEGRATION AND BUSINESS OPERATIONS
This chapter describes regional integration efforts occurring today. There is much debate about the merits and demerits of regional trade agreements. Some governments and independent organizations act to counter the negative effects of integration. Although there are drawbacks to integration, governments will continue to be enticed by the potential gains from increased trade and by the desire to raise standards of living. Regional economic integration will likely continue to roll back barriers to trade among nations and among existing trading blocs of nations.
INTEGRATION AND EMPLOYMENT
Perhaps most controversial is the impact of regional integration on jobs. Companies can affect the job environment by contributing to dislocations in labor markets. The nation that supplies a particular good or service within a trading bloc is likely to be the most-efficient producer. When that product is labor intensive, the cost of labor in that market is likely to be quite low. Competitors in other nations may shift production to that relatively lower-wage nation within the trading bloc to remain competitive. This can mean lost jobs in the relatively higher-wage nation. Yet job dislocation can be an opportunity for workers to upgrade their skills and gain more advanced training. This can help nations increase their competitiveness because a more educated and skilled workforce attracts higher-paying jobs. An opportunity for a nation to improve its competitiveness, however, is little consolation to people finding themselves suddenly out of work.
Quick Study Questions
Quick Study 1
1. Q: What is it called when countries in a region cooperate to reduce or eliminate barriers to the international flow of products, people and capital?
A: Regional economic integration is the process whereby countries in a geographic region cooperate with one another to reduce or eliminate barriers to the international flow of products, people, or capital. The ultimate goal is to raise living standards by expanding cross-border trade and investment.
2. Q: What are the names of the lowest and highest levels of regional economic integration?
A: The first (and lowest) level of regional integration is a free trade area—economic integration whereby countries remove all barriers to trade among themselves but each country determines its own barriers against nonmembers. Each country is able to maintain whatever policy it sees fit against nonmember countries. These policies can differ widely from country to country.
The second level of regional integration is a customs union—economic integration whereby countries remove all barriers to trade among themselves, but erect a common trade policy against nonmembers. What makes it different from a free trade area is that members treat all nonmembers similarly.
The third level of regional integration is a common market—economic integration whereby countries remove all barriers to trade and the movement of labor and capital among themselves, but erect a common trade policy against nonmembers. Common markets integrate the elements of free trade areas and customs unions while adding the free movement of important factors of production such as people and cross-border investment.
The fourth level of regional integration is an economic union—economic integration whereby countries remove barriers to trade and the movement of labor and capital, erect a common trade policy against nonmembers, and coordinate their economic policies. Economic union requires that member countries harmonize their tax, monetary, and fiscal policies, create a common currency, and concede a certain amount of sovereignty to the supranational organization to which they belong.
The fifth (and highest) level of regional integration is a political union—economic and political integration whereby countries coordinate aspects of their economic and political systems. A political union requires member nations to accept a common stance on economic and political policies regarding nonmember nations.
3. Q: An increase in trade between nations as a result of regional economic integration is called what?
A: Trade creation is the increase in the level of trade among nations that results from regional economic integration. Trade diversion is the diversion of trade away from nations not belonging to a trading bloc and toward member nations.
4. Q: Trade shifting away from nations not belonging to a trading bloc and member nations is called what?
A: Trade diversion is the diverting of trade away from nations not belonging to a trading bloc and toward member nations.
Quick Study 2
1. Q: What is the name of the official single currency of the European Union?
A: The Euro is the name of the official single currency of the European Union.
2. Q: A country may receive membership in the European Union once it meets what is called the what?
A: A country can receive membership if it meets certain demands down by the EU called the Copenhagen Criteria which requires each country to demonstrate that it: (a) Has stable institutions, which guarantee democracy, the rule of law, human rights, and respect for and protection of minorities. (b) Has a functioning market economy, capable of coping with competitive pressures and market forces within the EU. (c) Is able to assume the obligations of membership, including adherence to the aims of economic, monetary, and political union. (d) Has the ability to adopt the rules and regulations of the community, the rulings of the European Court of Justice, and the treaties.
3. Q: Why did nations belonging to the European Free Trade Association not want to join the European Union?
A: Certain nations did not want to join the EU fearing destructive rivalries and a loss of national sovereignty.
Quick Study 3
1. Q: Canada, Mexico, and the United States belong to the regional trading bloc called what?
A: The three nations belonging to the North American Free Trade Agreement (NAFTA) are Canada, Mexico, and the United States.
2. Q: What countries belong to the regional trading bloc called CAFTA-DR?
A: CAFTA-DR was established in 2006 between the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.
3. Q: What is the name of Latin America’s most powerful regional trading bloc?
A: MERCOSUR is the most powerful trading bloc in all of Latin America. It acts as a customs union and boasts a market of more than 275 million consumers (nearly half of Latin America’s total population) and a GDP of around $3.5 trillion.
Quick Study 4
1. Q: What are the stated aims of the Association of Southeast Asian Nations (ASEAN)?
A: Main objectives of ASEAN are to: (1) promote economic, cultural, and social development in the region; (2) safeguard the region’s economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully.
2. Q: The stated aims of which organization is not to build a trading bloc but instead to strengthen the multilateral trading system?
A: The organization for Asia Pacific Economic Cooperation (APEC) includes 21 nations. Its aim is not to build another trading bloc. Its purpose is to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade and investment procedures among member nations.
3. Q: What is the name of the grouping of 55 nations across the continent of Africa?
A: A group of 55 nations on the African continent joined forces in 2002 to create the African Union.
Ethical Challenge
The Caribbean nations do not participate in NAFTA and CAFTA-DR. Many people in southern U.S. states complain that NAFTA and CAFTA-DR are unfair to their extended families living on the Caribbean islands. Some experts argue that the term free trade agreement is misleading. They say these agreements are really “preferential trade agreements” that offer free trade only to members and relative protection against nonmembers. They argue that these trade agreements have cost jobs, market share, and income from apparel factories in Jamaica to sugar cane fields in Trinidad.
8-5 Given the impact on nonmembers, do you think such trade agreements are ethical?
A: Student responses will vary. The key issues that could be included in their review should address whether the trade agreement pay enough attention to the quality of the jobs? What impact do they have on workers’ rights and working conditions? Are they set up mainly for the benefit of government or businesses? How do they require countries to protect and require businesses to respect human rights?
8-6 Why do you think the Caribbean islands are not part of NAFTA or CAFT-DR?
A: Student responses will vary. However, some Caribbean nations may be excluded because they lack sufficient economic and/or political development to ensure that they will meet the rules and requirements of being a member of the free trade agreement.
8-7 What arguments would you make for including the Caribbean in the expansion of NAFTA or CAFTA-DR?
A: One question to be addressed here is the responsibility that the United States has to its neighbors. Certainly, many Caribbean nations have strong economic and cultural ties to the United States. The “free trade” versus “preferential trade” ethical debate is nothing new. There is no practical way of ever creating a regional trading bloc that does not cause displacement of workers in other countries. However, governments must do all they can to minimize this byproduct. For example, they could establish a quota system that limits the amount of textiles allowed to pass from Mexico to Canada and the United States while guaranteeing market access for a certain amount of textiles from the Caribbean.
Teaming Up
Debate Project. Two groups of four students each will debate the merits of extending NAFTA to more advanced levels of economic (and political) integration. After the first student from each side has spoken, the second student will question the opponent’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. A fourth student will present a summary of each side’s arguments. Finally, the class will vote to determine which team offered the more compelling argument.
A: There would be many economic and political obstacles in expanding NAFTA to more advanced levels of integration and to include other countries. First, there is the problem of unequal levels of development of the three existing members’ economies. It will be quite a long time before Canada and the United States will allow Mexican workers to travel freely to their countries to find work. The disparity in wages between those countries and Mexico would literally cause a flood of workers to flee northward. Second, each subsequent country entering NAFTA would need to be given time and exceptions to ensure the smooth transitions of their economies. This would be a very long-term affair taking many years. Third, the problem that political integration faces is the fear among many countries that this would mean surrendering their national sovereignty to the United States—which through its enormous economic and political muscle could dictate what the bloc’s political position should be. One need look only at the difficulties facing political integration in the EU to see how problematic this can be. Not that it is impossible, but that it would take a very long time if it could ever be accomplished. At any rate, students should be prepared to defend their positions with conceptual information and facts from countries and companies affected by regional integration.
Practicing International Management Case
Global Trade Deficit in Food Safety
8-16 Q: How do you think countries with a high volume of exports to the United States, such as Mexico, would respond to stricter food-safety rules? Do you think such measures are a good way to stem the tide of food-related illnesses? Why or why not?
A: They will clearly be opposed to it. How would the U.S. government react if Mexico wanted to send its federal investigators around the United States to inspect its farming methods and safety systems? It would rightly say that the Mexican government is meddling in its domestic affairs. Education of farmers in the safe handling and shipping of agricultural products and closer inspections at U.S. borders would seem to be a better approach that would not smack of heavy-handedness and arrogance.
8-17 Q: Some people believe that free trade agreements force consumers to trade the health and safety of their families for free trade. What are the benefits and drawbacks of putting food safety regulations into regional trade pacts?
A: It is probably not necessary to place food-safety regulations within the free trade agreement itself. Free trade means that goods can enter other member nations tariff-free, not inspection free. All that governments need to do is enforce the food-safety regulations on the books, or pass more stringent ones if current ones are unacceptable. It would be a far better approach than exploiting food contamination for political purposes.
8-18 Q: The lack of harmonized food-safety practices and standards is just one of the challenges faced by the food industry as it becomes more global. What other challenges face the food industry in an era of economic integration and opening markets?
A: Perhaps the most important issue is whether relatively less efficient farmers will be able to compete with the large farming operations existing in developed nations. Throwing the doors to trade wide open without protection for small family-operated farms can spell disaster for the rural farming communities of relatively less developed countries.
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