This chapter pursued three main objectives: to examine the economic and political debate surrounding regional economic integration; to review the progress toward regional economic integration in Europe, the Americas, and elsewhere; and to distinguish the important implications of regional economic integration for the practice of international business. This chapter made the following points:

1. A number of levels of economic integration are possible in theory. In order of increasing integration, they include a free trade area, a customs union, a common market, an economic union, and full political union.

2. In a free trade area, barriers to trade between member countries are removed, but each country determines its own external trade policy. In a customs union, internal barriers to trade are removed and a common external trade policy is adopted. A common market is similar to a customs union, except that a common market also allows factors of production to move freely between countries. An economic union involves even closer integration, including the establishment of a common currency and the harmonization of tax rates. A political union is the logical culmination of attempts to achieve ever-closer economic integration.

3. Regional economic integration is an attempt to achieve economic gains from the free flow of trade and investment between neighboring countries.

4. Integration is not easily achieved or sustained. Although integration brings benefits to the majority, it is never without costs for the minority. Furthermore, concerns over national sovereignty often slow or stop integration attempts.

5. Regional integration will not increase economic welfare if the trade creation effects in the free trade area are outweighed by the trade diversion effects.

6. The Single European Act sought to create a true single market by abolishing administrative barriers to the free flow of trade and investment between EU countries.

7. The Maastricht Treaty aims to take the EU even further along the road to economic union by establishing a common currency. The economic gains from a common currency come from reduced exchange costs, reduced risk associated with currency fluctuations, and increased price competition within the EU.

8. Although no other attempt at regional economic integration comes close to the EU in terms of potential economic and political significance, various other attempts are being made in the world. The most notable include NAFTA in North America, the Andean Pact and MERCOSUR in Latin America, ASEAN in Southeast Asia, and (perhaps) APEC.

9. The creation of single markets in the EU and North America means that many markets that were formerly protected from foreign competition are now more open. This creates major investment and export opportunities for firms within and outside these regions.

10. The free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes make it possible for firms based in a free trade area to realize potentially enormous cost economies by centralizing production in those locations within the area where the mix of factor costs and skills is optimal.

11. The lowering of barriers to trade and investment between countries within a trade group will probably be followed by increased price competition.