1 the european union and other regional trade areas chapter 14 © 2002 west/thomson learning
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1
The European Union and Other Regional Trade Areas
The European Union and Other Regional Trade Areas
Chapter 14
© 2002 West/Thomson Learning
Regional Economic Integration
Agreements among geographically proximate countries to reduce/remove tariff and non-tariff barriers to free flow of Goods Services Factors of production
Impediments to Regional Integration
Painful adjustments in certain segments of economy -- some “losers” low skilled, low tech jobs lost (US
textiles) Threat to national sovereignty --
countries give up control of some key policies
monetary policy, tax policy and trade policy
Debate: Trade creation or trade diversion?
Economic Case for Regional Integration
Stimulates economic growth in countries through FDI and free trade
Countries specialize in those goods and services efficiently produced.
Additional gains from free trade beyond international agreements such as GATT and WTO.
8-2
Political Case for Economic Integration
Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation.
Together, the countries have the economic clout to enhance trade with other countries or trading blocs.
8-3
Free Trade Area (FTA): removes tariffs among members members retain own trade policies toward
others Customs Union (CU): FTA+
common trade policy toward others Common Market (CM): CU+
elimination of intra-market factor of production movements
Economic Union (EU): CM+ full integration of member economies
(common policy) Political Union: US
political and economic integration
Levels of Economic Integration
7
European UnionEuropean Union European Coal and Steel Community (1952) Treaty of Rome (1957) created European
Community Single European Act (1987) set 1992
deadline of achieving single market Maastricht Treaty (1991) European common
currency adopted 1/1/99 Common foreign and defense policy Common citizenship EU parliament with “teeth” created European
Union and set path for monetary union
European Union Treaty of Amsterdam: 1999
(incorporated the principle of freedom of movement from the Schengen Agreement)
Treaty of Nice: 2000, voting rights in preparation for enlargement – target date of 2004
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Euro Timetable Euro Timetable
January 1, 1999: Euro single currency is born
1999-2002: National currencies continue to exist and work in parallel; Euro as “virtual currency”
2002: switch to single currency; Euro in circulation
Benefits of the Euro
Lower transaction costs for individuals / business
Prices comparable across the continent; increased competition
Rationalization of production across Europe to reduce cost
Pan-European capital market Increase range of investment
options available to both individuals and institutions
Costs of the Euro Loss of monetary policy control at national
level ECB sets interest rates and determines monetary
policy ECB is not under political control; issues
instructions to national central banks EU is not an optimal currency area
Not enough similarities in the underlying structure of economic activity (e.g., Finland vs Portugal)
Interest rates may be too high in depressed regions or too low for economically booming regions
May need to deal with this through fiscal transfers from prosperous to depressed regions
Economic issues may come in conflict with political issues
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Monetary Union CriteriaMonetary Union Criteria
Budget deficit no greater than 3% of GDP
Public debt no greater than 60% GDP
Price stability (inflation controlled)
Long term interest rates within 2% of the best 3 countries
Exchange rate stability
Members of the European Union Austria* Belgium* Denmark Finland* France* Germany* Greece* Ireland* Italy* Luxembourg* The Netherlands* Portugal* Spain* Sweden The United Kingdom
Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia* Bulgaria Romania
* Countries that have adopted the Euro as the common currency of the EU
EU Governance
Heads of State and
CommissionPresident
1 representative
from each member
27 Commissioners appointed by members for 4 year terms
European Council
Resolves policy issues Sets policy direction.
European Commission Proposing,
implementing, monitoring legislation.
Council of MinistersUltimate controlling authority. No EU laws w/o approval. European
Parliament
785 directly elected
members
Propose amendments to legislation, veto power over budget and single-market legislation, appoint commissioners.
1 judge from each country
Court of Justice
Hears appeals of EU Laws.
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Law-making within the EULaw-making within the EU
Regulations vs. directives Directive: Binding as to result, but left to
members to choose form and methods Regulation: Binding in entirety, applies directly
to all members Role of
Council: Decides to adopt regulation or directive Commission: Proposes action to Commission Parliament: may amend or reject measures on
single market, consumer protection, environment, health, education, culture
Court of Justice: interprets and applies EU law; reviews member actions for compliance
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Rewe-Zentral AG (Cassis de Dijon) (ECJ 1979)
Rewe-Zentral AG (Cassis de Dijon) (ECJ 1979)
Facts: German law limits importation of spirits with less than 32% alcohol Germany defends law on basis of
public health Issue: Does law amount to
quantitative restriction on imports in violation of Art. 30 & 37 of the Treaty of Rome?
Decision: Yes, Reasons: Germany’s arguments were
not for “purpose in general interest sufficient to take precedence over the principle of free movement of goods
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Commission of EC v. Fed. Rep. of Germany (ECJ
1987)
Commission of EC v. Fed. Rep. of Germany (ECJ
1987) Facts: German law prohibits additives
in beer EC Commission claims law violates
Arts. 30 and 36 Issue: Does law violate Treaty’s
commitment to free movement of goods?
Decision: Yes Reasons: law is not justified on the
basis of health or protection of health (Art. 36) and violates Art. 30
Imperial Tobacco v. European Imperial Tobacco v. European ParliamentParliament (ECJ 2000) (ECJ 2000)
Facts: referral for preliminary ruling on validity of Directive 98/43/EC restricting tobacco advertising
Issue: Does Directive have sufficient legal basis, and does it infringe right of free expression?
Decision: Directive annulled Directive Reasons: Similar issue decided in Germany v.
European Parliament Inadequate legal basis for Directive under
Arts. 100a, 57(2), and 66 Because Directive annulled, no need to give
preliminary ruling
Cotonou Agreement 2000 EU, African, Caribbean and
Pacific countries EU had GSP program since
1971 and in effect until 2007 2007 new “partnerships” will
begin
ANCOM: Andean Pact
Bolivia, Colombia, Ecuador, Peru; Chile is Associate Member
Cartagana Agreement, 1969: One of oldest still in existence
Population: 120 mm (14% of hemisphere)
GDP: 2005: $745.3 billion (includes Venezuela)
Changed from FTA to customs union in 1992
The Mercosur Accord
1988: Argentina, Brazil; 1990: Paraguay, Uruguay; 2006: Venezuela
Associate Membership Granted to Andean Community Members
1995: Agreed to move toward a full customs union.
Population: 220 mm GDP: $1 Trillion Trade doubled in first 3 years
Other Western Hemisphere Associations
Central American Common Market
CARICOM Free Trade Area of the
Americas
Association of Southeast Asian Nations
Created in 1967 400 million citizens Economic, political and social
cooperation Brunei, Indonesia, Malaysia, the
Philippines, Singapore, Thailand and Vietnam, Laos, Myanmar and Cambodia
Asia Pacific Economic Cooperation Founded in 1989 to ‘promote open
trade and practical economic cooperation’. ‘Promote a sense of community’.
18 members GDP: $13 trillion (1995) 50% of total world income 40% of global trade
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African trade areas (AEC, COMESA, SADC)
Arab League Gulf Cooperation Council
Other Trade AreasOther Trade AreasOther Trade AreasOther Trade Areas
Implications for Business
Opportunities Less protectionism; higher economic growth Lower cost of doing business (fewer
borders)
Threats Cultural differences persist Increased price competition within blocks Across-trading-block rivalry can increase
barriers Improvement of competitiveness of many
local firm within the blocks