Regional Free Trade Zones

Regional economic integration trading agreements between blocs of countries – has intensified in recent years. This development means that companies are more likely to enter entire regions at the same time. Certain countries have formed free trade zones or economic communities – groups of nations organized to work toward common goals in the regulation of international trade. One such community is the European Union (EU).

The European Union: Formed in 1957, European Union set out to create a single European market by reducing barriers to the free flow of products, services, finances and labor among member countries, and by developing trade policies with nonmember nations. Today, the European Union is one of the World’s largest single markets. The 15 member countries making up the EU increased by 10 in May 2004 with the addition of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. The EU now contains more than 454 million consumers and accounts for 23% of the world’s exports. It has a common currency, the euro monetary system.

European unification offers tremendous trade opportunities for non-European firms. However, it also poses threats. European companies will grow bigger and more competitive. Witness the competition in the aircraft industry between Europe’s Airbus consortium and Boeing in the United States. Perhaps an even bigger concern however, is that lower barriers inside Europe will only create thicker outside walls. Some observes envision a “fortress Europe” that heaps favors on firms from EU countries but hinders outsiders by imposing obstacles such as stiffer import quotas, local content requirements, and other non-tariff (non-tax) barriers.

Also, companies that plan to create “pan European” marketing campaigns directed to a unified Europe should proceed with caution. Even as the EU standardizes its general trade regulations and currency, creating an economic community will not create a homogeneous market. Companies marketing in Europe face 14 different languages, 2,000 years of historical and cultural differences, and a daunting mass of local rules.

NAFTA: Closer to home, in North America, the United States and Canada phased out trade barriers in 1989. In January 1994, the North American Free Trade Agreement (NAFTA) established a free trade zone among the United States, Mexico, and Canada. The agreement created a single market of 360 million people who produce and consume $6.7 trillion worth of goods and services annually. As it is implemented over a 15 year period, NAFTA will eliminate all trade barriers and investment restrictions among the three countries. Prior to NAFTA, tariffs on American products entering Mexico averaged 13%, whereas U.S. tariffs on Mexican goods averaged 6%.

Other free trade areas are forming in Latin America. For example, MERCOSUL now links Brazil, Argentina, Paraguay, and Uruguay. Chile and Mexico have formed a successful free trade zone. It is likely that NAFTA will eventually merge with this and other arrangements to form an all Americas free trade zone.

It is the European nations that have tapped Latin America’s enormous potential. As Washington’s efforts to extend NAFTA to Latin America have stalled. European countries have moved in with a vengeance. When Latin American countries instituted market reforms and privatized public utilities, European companies rushed in to grab up lucrative contracts for rebuilding Latin America’s infrastructure. Spain’s Telefonica de Espana spent $5 billion buying phone companies in Brazil, Chile, Peru, and Argentina. In Brazil, seven of the ten largest private companies are European owned, compared to two controlled by Americans. Among the notable European companies operating in Latin America are automotive giants Volkswagen and Fiat, the French supermarket chain Carrefours, and the Anglo-Dutch personal care products group Gessy Lever.

APEC: Twenty one Pacific Rim countries, including the NAFTA member states, Japan and China, are working to create a pan-Pacific free trade area under the auspices of the Asian Pacific Economic Cooperation forum (APEC). There are also active attempts at regional economic integration in the Caribbean, Southeast Asia and parts of Africa.