regional economic integration

REGIONAL ECONOMIC INTEGRATION

• Agreements between groups of countries in a geographic region to reduce and ultimately remove, tariff and non tariff barriers to the free flow of goods, services and factors of production between each other.

• Consistent with the predictions of international trade theory and the theory of comparative advantage

• Produce nontrivial gains from trade for all member-countries.

• Aim to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO.

• General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) seek to reduce trade barriers with a worldwide perspective


• January 1, 1993 - European Union (EU) effectively became the first single market with 360 million consumers • Member-states of the EU have single currency Euro

• North American Free Trade Agreement (NAFTA) - Agreement between Canada, Mexico, and the United States.

• Mercosur – Agreement between Argentina, Brazil, Paraguay and Uruguay

• South American Free Trade Area (SAFTA) – Agreement

• Asian Pacific Economic Cooperation forum (APEC) – Possibility of creation of a pan-Pacific free trade area between 18 Pacific Rim countries, including the NATFA member states, Japan, and China,


1. To explore the economic and political debate surrounding regional economic integration, paying particular attention to the economic and political benefits and costs of integration

2. To review progress toward regional economic integration around the world

3. To map the important implications of regional economic integration for the practice of international business.

OBJECTIVES OF REGIONAL INTEGRATION

• To stimulate the exchange of economic wealth within regions and blocs

• Total trade tends to increase within a region of trading nations due to reduction of interstate controls.

• Enterprises are artificially encouraged to expand their operations into other markets within the region.

• To have an overall positive effect on trade by providing increased understanding within trading blocs and more cooperation among nations.

• To serve as barriers to outsiders.• Each form implies more or less control and/or loss

of sovereignty.• All forms of integration require very careful point-

by-point interstate negotiations.

REGIONAL HARMONIZATION: ECONOMIC INTEGRATION

HIERARCHY OF ECONOMIC INTEGRATION

Give up Most Sovereignty

Give up Most Sovereignty

Give up Least Sovereignty

Shared, free zone

Free trade area

Customs union

Common market

BENELUX

EC (Pre-1993)

EU (Post-1993)

USA, Canada Ex-Soviet

Union

Economic union

Political union

NAFTA

LAFTA

LEVELS OF ECONOMIC INTEGRATION

• Free Trade Area

• Customs Union

• Common Market

• Economic union

• Political Union SAFTA SUBMIT


• Free Trade Area• Customs Union • Common Market • Economic union• Political Union

In free trade area all barriers to the trade of goods and services among member-countries are removed.

Free Trade Area • The most enduring free trade area in the world is the European

Free Trade Association (EFTA). – Established in January 1960– Founded by those Western European countries who initially

were not a part of the EU – Currently has three countries - Norway, Iceland, and

Switzerland down from six in 1995 (on January 1, 1996, three EFTA members, Austria, Finland, and Sweden joined the EU).

– Original members included Austria, Britain, Denmark, Finland, and Sweden, all of whom are now members of the EU.

– The emphasis of EFTA has been on free trade in industrial goods.

– In the main, agriculture was left out of the arrangement, each member being allowed to determine its own level of support.

– Members were free to determine the level of protection applied to goods coming from outside EFTA.

• Other free trade areas include the North American Free Trade Agreement (NAFTA).

FREE TRADE ZONES (FTZ)

• The earliest form of economic cooperation among nations • Small areas of property (a warehouse or fenced field)

designated within the customs territory of a nation, wherein goods might be stored without paying tariff until the goods are entered into the customs territory for consumption.

• No tariff is paid if the goods are re-exported. • Are typically fenced warehouses or even areas surrounding

factories which are under the enforcement of the customs service.

• Goods brought to the zone may be manipulated or otherwise changed prior to entry.

Free trade area/agreement (two or more countries)

• Free trade areas may be bilaterally or multilaterally negotiated

• Contents of the agreement can and do include the harmonization of many conditions that range from customs procedures, to rules of origin, to the range of products to be included (industrial, agricultural, complete exchange)

• Typically the nations involved agree to reduce or abolish mutual import duties and other restrictions which could include some non-tariff barriers (NT), often defining a time period during which duties are gradually changed

• A common internal tariff (CIT) system tends to improve the uniformity and transparency of existing interstate controls

Free trade area/agreement (two or more countries)

• Free trade agreements do not go so far as to harmonize the economic policies of the negotiating nations.

• Doesn’t have a negotiated common external tariff (CXT). • Each member country retains its own tariff and quota system

on trade with a third country. • As a result outside exporters sometimes scheme to send

their goods by way of the country with least tariff for their particular good or service.– These agreements can be defective unless rules of origin are

carefully enforced. • Leads to complaints from exporters and shippers of “having

to go back to the grave” for information on parts or an ingredient’s origin.

FTA composed of four nations

• Examples– European Free Trade Association (EFTA), – North American Free Trade Agreement (NAFTA) – Latin American Free Trade Association (LAFTA), – Australian, New Zealand Free Trade Association

(ANZAC),– Caribbean Free Trade Association (CARIFTA).



• One step further along the road to full economic and political integration

• Eliminates trade barriers between member-countries and adopts a common external trade policy

• Establishment of a common external trade policy necessitates significant administrative machinery to oversee trade relations with nonmembers

• Most countries that enter into a customs union desire greater economic integration

• The EU began as a customs union and has moved beyond this stage

Customs Union• Other customs unions include the Andean Pact (between

Bolivia, Colombia, Ecuador, and Peru). • The aims of the Andean Pact are to establish free trade

between member- countries and to impose a common tariff, of 5 to 20 percent, on products imported from outside.

• A customs union abolishes most protectionism inside the union and sets up a common external tariff (CXT) system with regard to outside countries.

• Includes common non-tariffs (CNT) as well. • Sophisticated level of economic integration, but does not go

so far as to harmonize the economic policy within the negotiated region. – Examples include: Belgium, the Netherlands and Luxemburg

(BENELUX) and the Economic Community of West African States (ECOWAS). Figure 14.5 shows a customs union with its common external tariff.



• Like a customs union, the theoretically ideal common market has no barriers to and a common external trade policy.

• Factors of production also are allowed to move freely between member-countries.

• Thus labor and capital are free to move, as there are no restrictions on immigration, emigration, or cross-border flows of capital between member-countries.

• Hence, a much closer union is envisaged in a common market than in a customs union.

• The EU is currently a common market, although its goal is full economic union.

Common Market• Other than the EU, no successful common market has been

established, although several regional groupings have aspired to this goal.

• Establishing a common market demands a significant degree of harmony and cooperation on fiscal, monetary, and employment policies.

• Achieving this degree of cooperation has proven very difficult.• A common market also allows the free transfer of the factor

endowments: capital, technology, management/know-how, labor, and intelligence, as well as products between member nations.

• Under certain crisis situations, such as massive unemployment or foreign exchange shortages, an individual nation may temporarily erect barriers to the free flow between itself and the other members. – Examples are: European Economic Community (EEC), Central

American Common Market (CACM), and Andean Common Market (ANCOM).



• An economic union entails closer economic integration and cooperation than a common market.

• Involves the free flow of products and factors of production between member-countries and the adoption of a common external trade policy.

• A full economic union also requires a common currency, harmonization of the member-countries tax rates, and a common monetary and fiscal policy.

• Such a high degree of integration demands a coordinating bureaucracy and those member-countries sacrifice significant amounts of their national sovereignties to that bureaucracy.

• There are no true economic unions in the world today, but the EU aims to establish itself as one by the end of the century.



• Political union solves the issue of how to make a coordinating bureaucracy accountable to the citizens of member-nations.

• The EU is already on the road toward political union.

• The European Parliament, which is playing an ever more important role in the EU, has been directly elected by the citizens of the EU countries since the late 1970s.

• In addition the Council Of Ministers (the controlling, decision-making body of the EU) is composed of government ministers from each EU member-country.

• Canada and the United States provide examples of closer degrees of political union ; in each country independent states were effectively combined into a single nation.

• Ultimately, the EU may move towards a similar federal structure.

Trade Integration

• India (I), China (C), and the rest of the world (R) all initially trade with each other and all have tariffs,

• I and C abolish all tariffs on each other’s products but maintain their tariffs on goods from R, whose commercial policy is unchanged.

• In this kind of integration the reduction of tariffs between I and C is a move toward free trade, which we might expect to be beneficial.

• But now goods from R are subjected to a tax in I and C, whereas similar goods from I and C, respectively, are not.

Trade Creation

• The elimination of tariffs between I and C creates trade between these two countries and generates gains.

• Each country concentrates more on producing the goods in which it has a comparative advantage relative to the other country, and trade expands, causing marginal rates of transformation and subtraction in I to equal those in C.

Trade Diversion

• Since I levy a tariff when the same goods are imported from C, residents of I will how buy from C some products that were previously purchased from R.

• Similarly, C residents will divert their trade from R to I.

• This trade diversion is necessarily inefficient because if I residents chose to buy from R suppliers, when then competed on equal terms with C suppliers, it must be that the former could supply the product more favorably.

Balance of Trade Creation and Trade Diversion

• Trade creation is beneficial, and trade diversion is harmful.

• When one dominates depends upon circumstances, based integration may or may not be a good thing.

• If, before integration, most of F’s trade is with C, trade creation will likely dominate because their is not much have with R to be diverted.

• Thus the larger the extent of the integration, the more likely it is to be beneficial.

• Integration of the whole world can involve to trade diversion (in the absence of interplanetary trade).

• If on the other hand, most of the products that I imports can be produced more cheaply in R than in C, integration with C is likely to be harmful.

Trade Modification• Trade modification might mean that integration between C

and I either increase or decreases trade with R, depending upon the relative importance of complements and substitutes.

• There is a more fundamental difference between trade diversion and trade modification.

• Trade Diversion result when integration involves a new distortion: price recrimination. This, by itself, is necessarily had Trade modification by contrast does not involve the introduction of price discrimination but rather the substitution of one pattern of world tariff by another. This may be good or bad.

• Terms of Trade Effects: – If the partners together are sizable in the world markets in which

they deal, integration could alter world prices of products. – If I and C together are significantly more important in world

markets than either separately, integration would enable the two jointly to exercise more monopoly power.

Regionalism Vs Multilateralism

• As defined by Winter, regionalism can be loosely defined as any policy designed to reduce trade barriers between a subset of countries regardless of whether those countries are actually contiguous or even close to each other.

• Regional Trading Arrangements on the other hand are based on the principle of discrimination as it goes for liberalization of trade within a group of country – a discriminating policy towards the rest of the world.

• This is against the most favoured nation treatment of WTO, which says that a country cannot discriminate among its trading partners.

Regionalism Vs Multilateralism

• Multilateralism on the other hand has been defined by Winter as a characteristic of the world economy or world economic system. Winters has defined multilateralism as a function of:-

• The degree to which discrimination is absent and• The extent to which the country’s trading regime

approximates free trade.• Multilateralism is been pursued through multilateral

trade negotiations under the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).

• Multilateralism practiced under GATT/WTO, is based on the principles of non-discrimination in trade. The principle is enunciated in article I (“General Most Favoured Nation Treatment, or MFN) and articles III (“National Treatment on Internal Taxation and Regulation”, or NT) of GATT.

REGIONAL ECONOMIC INTEGRATION IN EUROPE

• Two trade blocs in Europe; – The European Union (EU) – The European Free Trade Association (EFTA)

• EU is by far the more significant, not just in terms of membership (the EU has 15 members, and EFTA has 3), but also in terms of economic and political influence in the world economy.

• Many now see the EU as an emerging economic and political superpower of the same order as the United States and Japan.

Evolution of the European Union

• The EU is the product of two political factors; • the devastation of two world wars on Western Europe

and the desire for a lasting peace• the European nations' desire to hold their own on the

world's political and economic stage. • In addition many Europeans were aware of the

potential economic benefits of closer economic integration of their countries.

• The original forerunner of the EU, the European Coal and Steel Community, formed in 1951 by Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands.

• Its objective was to remove barriers to intragroup shipments of coal, iron, steel, and scrap metal.

• With the signing of the Treaty of Rome in 1957, the European Community (EC) was established.

• The name changed again in 1994 when the European Community became the European Union following the ratification of the Maastricht treaty.

Evolution of the European Union

• The Treaty of Rome provided for the creation of the common market. • Article 3 of the treaty calls for the elimination of internal trade

barriers and the creation of a common external tariff and requires member-states to abolish obstacles to the free movement of factors of production among the member-states.

• To facilitate the free movement of goods, services, and factors of production, the treaty provides for any necessary harmonization of the member-states' laws.

• The treaty committed the EC to establish common policies in agriculture and transportation.

• The first enlargement of the community occurred in 1973, when Great Britain, Ireland, and Denmark joined.

• These three A-ere followed in 1981 by Greece, in 1986 by Spain and Portugal, and in 1996 by Austria, Finland, and Sweden bringing the total membership to 15 (East Germany became part of the EC after the reunification of Germany in 1990).

• With a population of 350 million and a GDP greater than that of the United States, these enlargements made the EU a potential global superpower.

Political Structure of the European Union and Euro-

Currency• Political Structure

– The economic policies of the EU are formulated and implemented by a complex and the European Union still-evolving political structure.

– The five main institutions in this structure are the European Council, the Council of Ministers, the European Commission, the European Parliament, and the Court of justice.

• The Euro Currency– In December 1991 leaders of the 12 EC member-states met in

Maastricht, the Netherlands, to discuss the next steps for the EC. – Need for a common currency discussed as common currency was

required to cement a closer economic union. – The 12 members signed a treaty to adopt a common EC currency by

January 1, 1999.– This also paved the way for closer political cooperation and the

possible creation of a European super state.• The treaty lays down the main elements, if only in embryo. of a

future European government: a single currency, a common foreign and defense policy, a common citizenship, and an EU parliament with teeth.

EU AND INDIAA NEW MOMENTUM FOR THE NEW

MILLENNIUMThe EU’s Objectives1. To promote economic and social progress (the single market

was established in 1993; the single currency was launched in 1999).

2. To assert the identity of the European Union on the international scene (through European humanitarian aid to non-EU countries, common foreign and security policy, action in international crises; common positions within international organizations).

3. To introduce European citizenship (which does not replace national citizenship but complements it and confers a number of civil and political rights on European citizens).

4. To develop an area of freedom, security and justice (linked to the operation of the internal market and more particularly the freedom of movement of persons).

5. To maintain and build on established EU law (all the legislation adopted by the European institutions, together with the founding treaties).

THE INSTITUTIONSThere are five institutions involved in running the

European Union:1. The European Parliament (elected by the

peoples of the Member States),2. The Council (representing the governments

of the Member States),3. The Commission (the executive and the

body having the right to initiate legislation),4. The Court of Justice (ensuring compliance

with the law),5. The Court of Auditors (responsible for

auditing the accounts).

These institutions are supported by other bodies:• The Economic and Social Committee and the

Committee of the Regions (advisory bodies which helps to ensure that the positions of the EU'’ various economic and social categories and regions, respectively, are taken into account),

• The European Ombudsman (dealing with complaints from citizens concerning maladministration at European level),

• The European investment Bank (EU financial institution) and

• The European Central Bank (responsible for monetary policy in the euro-area).

Major items of import with India

30%

37%

14%

9%

4%

6%

Chemical andallied products

Metal and MetalProducts

TransportEquipment

Others

Gems & Jewellery

EngineeringGoods

Major items of export with India

9%9%

19%

32%

12%

11%8%

Agriculture &Allied Products

EngineeringGoods

Others

Textile &Clothing

Gems &Jewellery

Leather &Leather Goods

Chemical &Allied Products

FIRST EU-INDIA SUMMIT AT LISBON: AGENDA FOR ACTION1. Enhancing bilateral dialogue by holding further regular Summits, Foreign

Ministers’ meetings every year and Senior Officials and experts’ meetings each semester, which will address foreign policy and security issues of common concern.

2. Coordinate efforts to promote and protect all human rights and fundamental freedoms referred to in the Joint Declaration.

3. Initiate dialogue on preventing and combating terrorism and to strive for a Comprehensive Convention on International Terrorism.

4. Strengthen co-operation to combat international drug trafficking and drug abuse.

5. Cooperate closely in identifying and furthering common interests in international organizations.

6. Continue to work together to eradicate chemical and biological weapons.7. Work together for the complete elimination of nuclear weapons, proliferation

and their means of delivery.8. Launching of the India-EU Round Table.9. Launching of the EU-India Think Tank Network .

10. Continue to strengthen the High Level Economic and Commercial Dialogue on bilateral and multilateral trade, economic and financial issues.

11. Commence joint initiatives in the fields of information technology and telecommunications.

12. Work towards on Agreement on Co-operation in Science & Technology.13. Draw up plans on co-operation in culture and education and for exchange of

expertise in the field of management.14. Endeavor to complete the elaboration of a new sector programme in elementary

education within the year.15. Join efforts towards setting up on Institute of Environment Technology in India.16. Promote bilateral initiatives in the field of environment and facilitate coordination on

multilateral environmental issues.17. Further enhance economic cooperation for rapid development of infrastructure,

including telecommunications, energy and transport in India.18. Work jointly to promote and increase flows of goods and services between the EU

and India.19. Address all obstacles with a view to stimulate EU investment in India.20. Facilitate industry and business links.21. Consult each other within the existing fora on anticipated regulatory and other

measures affecting the flow of trade, investment and services with a view to resolve problems at an early stage.

22. Establish a regular high-level dialogue on WTO issues.

THE NAFTA AGREEMENT

NAFTA became law in January 1, 1994. The contents of the agreement include the following:

• NAFTA would mean abolition within 10 years of tariffs on 99 percent of the goods traded among Mexico, Canada, and the United States.

• NAFTA would remove most of the barriers on the cross-border flow of services, allowing financial institutions, for example, unrestricted access to the Mexican marketplace by 2000.

• NAFTA contains provisions to protect intellectual property rights.• NAFTA removes most restrictions on foreign direct investment between the three

member countries, although special treatment (protection) will be given to Mexican energy and railway industries, U.S. airline and radio communications industries, and Canadian culture.

• Under NAFTA each country is allowed to apply its own environmental standards, provided such standards have a scientific basis. Lowering of standards to lure investment is described as being inappropriate.

• NAFTA established 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 labor are ignored.

NAFTA ARGUMENTS

• Arguments for NAFTA– One likely short-term effect of

NAFTA will be that many U.S. and Canadian firms will move some of their production to Mexico to take advantage of lower labor costs.

– Proponents argue that NAFTA should be viewed as an opportunity to create an enlarged and more efficient productive base for the entire region .

– In addition the international competitiveness of U.S. and Canadian firms that move production to Mexico to take advantage of lower labor costs will be enhanced, enabling them to better compete with Asian and European rivals.

• Arguments against NAFTA– Those who opposed NAFTA claimed

ratification would be followed by a mass exodus of jobs from the United States and Canada into Mexico as employers sought to profit from México lower wages and less strict environmental and labor laws

– The short-run outcome is bound to be painful economic restructuring and unemployment in Mexico. But if economic theory is any guide, in the long run there should be dynamic gains in the efficiency of Mexican firms as they adjust to the rigors of a more competitive marketplace

ASEAN (Association of South East Asian Nations)

• Formed in 1967.• The basic objectives of ASEAN are to foster freer trade

between member-countries and to achieve some cooperation in their industrial policies.

• Presently has six members including Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand.

• These ASEAN countries are characterized by abundance of natural resources, large international trade sectors, and an emphasis on free market economic policies.

• Singapore and Thailand are two of Southeast Asia's most successful economies.

ASEAN IN INDIA

• ASEAN countries continue to command special attention of India as growing markets for India's exports.

• The ASEAN countries will also find the relatively large Indian Market of at least 300 million rich people to be an attractive market for exports and as location for their possible foreign investment.

• The Indian economy is opening up and wishes to be more closely linked to the global economy. It has already liberalized imports of products and technology.

• Recognizing the economic importance of India, the ASEAN has already accorded India the status of a “ sectoral dialogue partner”.

OPPURTUNITIES

• The creation of a single market offers significant opportunities as markets that were protected from foreign competition are opened.

• These markets are now much more open to foreign competition in the form of both exports and direct investment.

• Free movement of goods across borders, harmonized product standards and simplified tax regimes make it possible for firms based in the EU and the NAFTA countries to realize potentials enormous cost economies by centralizing production in those EU and NAFTA locations where the mix of factor costs and skills is optimal.

• The removal of barriers to trade and investment, enduring differences between nations in culture and competitive practices often limit the ability of companies to realize cost economies by centralizing production in key locations and producing standardized product for the single multicountry market.

THREATS

• The Business Environment within both groups will become more competitive.

• The lowering of barriers to trade and investment between countries is likely to lead to increased price competition throughout the EU and North America. To survive in the tougher single market environment, firms must take advantage of the opportunities offered by the creation of a single market to rationalize their production and reduce their costs.

• The creation of a single market and the resulting increased competition in the EU can be expected to result in serious attempts by many EU firms to reduce their cost structure by rationalizing production.

• A final threat to non-EU and/or non-North American firms inherent in the creation of a single market, This is the threat of being shut out of the single market by the creation of 'Fortress Europe' or “Fortress North America” .

Thank you!

regional economic integration

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