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ADM 3318Final NotesChapter 8Regional Economic IntegrationRegional economic integration agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods and services and factors of production between each otheroMust notify the WTO of any trade barriers of which countries participateAn economic union entails even closer economic integration and cooperation than a common marketoInvolves the free flow of products and factors of production between member countriesoCauses a sacrifice of national sovereigntyoA political union would make its members more accountable to its citizens of member nationsThe economic case for integrationoAllows countries to specialize in production of goods and services that they can produce most efficientlyoIt is very difficult to remove barriers to trade and increase the free flow of goods services and factors of productionoInternational agreements such as those made by the WTO helpoProblems of coordination and policy harmonization are largely a function of the number of countries that seek agreementoMotivated by a desire to exploit the gains from free trade and investmentThe political case for integration oCreates involved political cooperation between states reducing the risk of violent conflict oEnhances global political weightImpediments of integrationoEconomic integration has costsoConcerns over national sovereignty The case against regional integrationoTrade creation trade created due to regional economic integration occurs when highcost domestic producers are replaced by low cost foreign producers in a free trade areaoTrade diversion trade diverted due to regional economic integration occurs when lowcost foreign suppliers outside a free trade area are replaced by highercost foreign suppliers in a free trade areaThe single European Act was created in 1992 oRemove all frontier controls between EC countries reducing delays to comply with trade policyoApply the principle of mutual recognition to product standardsoLift barriers to competitionoRemove restriction on foreign exchange transactions between member statesThe establishment of the EurooCommon currency cemented a closer unionoJanuary 1 1999 it was adopted but not until January 1 2002 that the Euro was put into circulationoBritain Sweden and Denmark are excludedoAdvantagesBusinesses will realize significant savingsLower foreign exchange costs and hedging costsEasier to compare prices across Europe thus increasing competitionEuropean manufacturers will be forced to look for ways to reduce production costsIncrease the development of a highly liquid panEuropean capital marketIncreases the range of investment options in EuropeoDisadvantagesNational parties have lost control over monetary policyCountries are very dissimilar with different structures of economic activityPossibility of lower economic growth and higher inflationThe EU may adopt a protectionist state against external tradeNAFTAoJanuary 1 1989oEliminate tariffs on bilateral trade between Canada and the United StatesBy 1993 Mexico was includedoAbolition of 99 of tariffs between the countriesoRemoval of barriers to cross border flow of services foreign direct investmentoProtection of intellectual property rightsoApplication of national environmental standardsoAdvantagesCheaper production costsFocus on competitive and comparative advantages between nationsoDisadvantagesLoss of jobs to Mexico Could hurt the Mexican economy because of new competitionLoss of national sovereigntyIncreased pollutionAndean PactoEstablished in 1969oFaced a great deal of political and economic problemsoEstablished a free trade area customs union and common market by 1995MERCOSURoInitial aim to establish a free trade areaoBetween South American countries
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