Chapter 9 -Regional Economic Integration

Question 1

Levels of integration

Answer 1

1. Free trade area
2. Customs union
3. Common market
4. Economic union
5. Political union
   The EU is at economic union meaning it has 1,2,3,4 but not political union

Question 2

Regional Economic Integration

Answer 2

WTO must be notified, EU has been most ambitious

Question 3

Free trade area

Answer 3

All barriers to the trade of goods and services among member countries are removed:
no discriminatory tariffs within trade agreement, each country can set its own standards for other countries
most popular form of integration (90%)

Question 4

Customs Union

Answer 4

Eliminates trade barriers between member countries and adopts a common external trade policy. Usually with intent of further integration down the road
EU started as customs union

Question 5

Common market

Answer 5

No barriers to trade among member countries, includes a common external policy, and allows factors of production to move freely among members (no restriction emigration/immigration)
–> requires harmony on fiscal, monetary and employment policies
EU did this

Question 6

Economic Union

Answer 6

Involves the free flow of products and factors of production among member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy

Question 7

EU is an economic union except

Answer 7

• not all countries adopted the EURO
• differences in tax rates and regulations
• some markets like the one for energy still not fully deregulated

Question 8

Political union

Answer 8

A central political apparatus coordinates the economic, social, and foreign policy of the member states (EU is on the way to this, US independent states are example of this)

Question 9

economic case for integration

Answer 9

• all countries gain from free trade and investment
• assumes ideal absence of barriers to the free flow of goods, services, and factors of production among nations
• regional economic integration can achieve better results than under WTO
• easier among limited amount of countries than the world

Question 10

why better when smaller agreement than worldwide

Answer 10

coordination and policy harmonization,
reconciliation of perspectives
motivated by desire to exploit gains from free trade

Question 11

political case for integration

Answer 11

creates incentives for political cooperation, reduce potential violent conflicts, enhance political weight in world when dealing with other countries
–> this is what underlies the EC in 1957, before the EU

Question 12

Impediments to integration

Answer 12

high costs (benefit overall, but could cause losses for certain groups and painful adjustments like job losses)
loss of national sovereignty (give up some extent to control monetary, fiscal and trade policies)

Question 13

Case against regional integration

Answer 13

only beneficial if it creates more than it diverts trade

Question 14

Trade creation

Answer 14

high-cost domestic producers are replaced by low-cost producers within the free trade area. May also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area

Question 15

Trade diversion

Answer 15

Occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area

Question 16

Evolution of EU

Answer 16

1. The devastation of western Europe during two world
   wars and the desire for lasting peace
2. The European nation’s desire to hold their own on the
   world’s political and economic stage
3. Treaty of Rome: provided for the creation of a common
   market

Question 17

Four main institutions of the EU

Answer 17

1. European commission
2. European council
3. European parliament
4. Court of justice

Question 18

European commission

Answer 18

EU legislation, monitoring compliance

Run by commissioners appointed by member countries and approved by Europe parliament

Question 19

European council

Answer 19

Represents the interests of member states
Ultimate controlling authority within the EU because draft legislation from the commission can become EU law only if the council agrees
Composed of one representative from the government of each member state
Ex: When agricultural issues are being discussed, the agricultural ministers from each state attend the council meetings

Question 20

European parliament

Answer 20

751 members, directly voted by population of member states
consultive not legislative
debates legislation forwarded to them by the council and proposed by the commission
propose amendments
veto laws
Treaty of Lisbon: the power of the parliament was increased

Question 21

Court of justice

Answer 21

one judge of each country

like commissioners, required to act as independent officials rather than representatives of national interest

Question 22

The single European act

Answer 22

Born out of frustration among members that the community was not living up to its promise, short on achieve free trade –> EC responded with Delors Commission –> resulted in the act

Question 23

objectives of the Act

Answer 23

Remove all frontier controls
applying mutual recognition to product standards
institute open public procurement to lower costs suppliers to enter the national economy
lift barriers to competition in banking and insurance industry
remove restrictions on foreign exchange transactions
abolish restrictions on cabotage

Question 24

Impact of the Act

Answer 24

restructuring of substantial sections of the European Industry
shifted from national to pan-European production and distribution systems in attempt to realize scale economies and better compete in a single market
faster economic growth
moving towards a single marketplace, but difference in culture, language and laws have made it uneven

Question 25

Establishment of the EURO

Answer 25

Maastricht Treaty → Committed EC members to adopt a common currency by January 1st, 1999. Must fulfill conditions: -> price stability -> sound fiscal situation -> stable exchange rate -> converged long term interest rates requires the countries to give up national sovereignty on monetary policy

Question 26

Benefits of the EURO

Answer 26

1. savings from having to handle one currency 2. easier to compare prices 3. development of highly liquid pan-european market 4. increase range of investments to both individuals and institutions

Question 27

Costs of EURO

Answer 27

1. loss of sovereignty 2. loss control over monetary policy 3. not an optimal currency area i. e. Finland and Portugal have different wage rates, tax regimes, and business cycles, and they may react very differently to external economic shocks - --> to deal with this, EU could pump money from more prosper regions to depressed regions (fiscal transfers)

Question 28

qualifications to become EU

Answer 28

``` Applicants had to privatize state assets Deregulate markets Restructure industries Tame inflation Shrine EU laws into their own system Establish stable democratic governments Respect human rights (Turkey was denied because of human rights concerns) ```

Question 29

British exit from EU

Answer 29

national referendum to leave the EU based on loss of national sovereignty and immigration issues - > the British were often against the decisions taken by EU - > seen as counterweight to economic power Germany - > would allow GB to take control of immigration

Question 30

Regional economic integration in America

Answer 30

Most significant attempt is the North American Free Trade Agreement others are the Andean community and Mercosur

Question 31

Nafta's content

Answer 31

- Abolition by 2004 on tariffs on 99 percent of the goods - Removal of most barriers on the cross-border flow of services, allowing financial institutions - Protection of intellectual property rights - No restrictions on foreign direct investment - National environmental standards - Establishment of two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages or child labour are ignored.

Question 32

The case for NAFTA

Answer 32

opportunity to create enlarged and more efficient productive base - Low cost labour in Mexico allows for Canada and US to compete in globalization - Mexico has comparative advantage in labour intensive low skill - increased imports by mexico

Question 33

The case against NAFTA

Answer 33

- profit from Mexico less strict rules (environmental) - loss of jobs in Canada/US and wage decline - Mexico lose its sovereignty because high paying jobs would be north of their border

Question 34

NAFTA results

Answer 34

small but positive increased trade among three member states strong productivity growth employment effect moderate but small (trump and sanders blame it for job losses)

Question 35

Andean community

Answer 35

based on EU model, but less successful in 1969 Goals failed: internal tariff reduction program, a common external tariff, a transportation policy, a common industrial policy and special concessions for the smallest members NOW: Low economic growth, hyperinflation, high unemployment, political unrest and crushing debt burdens signed with Mercosur to work on those measures again

Question 36

Mercosur

Answer 36

started with argentina and brazil but grew to include others because of its success may be diverting trade instead of creating it

Question 37

CAFTA

Answer 37

Central america free trade agreement (US is included) | lower trade barriers for 6 countries and US

Question 38

CSME, ASEAN and AFTA, EAC

Answer 38

trade agreements elsewhere, and the African is told to be in need of tariffs to protect its fragile economy, so progress is slow