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Meaning of Economic Integration Economic integration has emerged as an alternative to the policy of free trade . It is an arrangement in which certain countries having common economic interests and political system, agree upon to reduce or remove tariff and other trade barriers among themselves while retaining them against the rest of the world. In recent decades, the movement towards the formation of regional economic groups has gained considerable momentum. In its broadest sense, economic integration refers to the unification of distinct economies into a single lager economy. Some of the definitions of the term economic integration are as under: (1) According to D. Salvatore, economic integration means the "commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together". (2) In the opinion of J.Timbergen, economic integration refers to "the creation of the most desirable structure of international economy removing artificial hindrances to the optimum operation and introducing deliberately all desirable elements of coordination and unification". (3) B. Balassa defines economic integration "as a process and as a state of affairs". As a process, economic integration consists of measures which aim at abolishing discrimination between economic units belonging to different nations. As a state of affairs, it can be represented by the absence of various forms of discrimination between countries. Economic integration is characterized by two important features: (i) Re-introduction of free trade among the member nations. (ii) Imposition of a common external tariff policy against the non-member countries. In the light of these two features, economic integration may be viewed as a synthesis between free trade and protection. Objectives The following are the main objectives of economic integration: (1) To reap economic benefits from achieving a more efficient production structure by exploiting economies of scale. (2) To pursue non-economic objectives such as strengthening political relations and managing migration flows. (3) To ensure increased security of market access for smaller countries by the formation of regional trading blocs.
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(4) (5)

To develop regional infant industries which cannot survive without a protected regional market. . To prevent further damage to their trading strength due to further trade diversion from third countries. It may be noted that regional agreements have political objectives and even noneconomic dimensions, including national security, increasing of bargaining strength etc. Types of Economic Integration The essence of economic integration is the economic co- operation among the participating countries. Hence, on the basis of the degree of cooperation, economic integration assumes the following forms: (i) Preferential trade area or association (ii) Free trade area (ill) Customs union (iv) Common Market, and (v) Economic union (vi) Economic integration Now we have to explain the above different forms of economic integration. Preferential Trade Area or Association This is considered to be the most loose form of economic integration. In this case, the member countries lower tariffs on imports from each other. That is, they offer preferential treatment to the member countries. As regards the non-member countries, they ikpose their individual tariffs. The classic example of this form of economic integration is the Commonwealth System of Preferences established in 1932. It is headed by Britain and comprises of all Commonwealth countries countries which were the colonies of Britain. Free Trade Area Under this system, the member countries abolish completely both tariff and quantitative restrictions among themselves. But each country has the freedom to maintain its own trade barriers against the non-member countries. Examples of this kind of arrangement are - European Free Trade Association (EFTA) formed in 1959 and Latin American Free Trade Association (LAFTA) formed in 1961. Customs Union Customs union constitutes a more formal type of economic integration. In a customs union, the following features are found: (a) Member countries abolish all tariffs and other trade barriers among themselves.
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5.2

(i)

(ii)

(iii)

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(b)

They adopt a common external tariff and commercial policy to the non members. (c) Customs union and free trade area are similar with regard to the abolition of all trade barriers for the member countries. But the customs union differs from the free trade area in respect of common external tariff to the non-member countries. (d) The customs union is a more close form of economic integration than a free trade area. In a customs union, all the member countries act as a single economic unit against the non-member countries. The most well-known customs union is the European Economic community (EEC) formed in 1957 by West Germany, France, Italy, Belgium, Netherlands and Luxemberg. It was Jacob Viner who put forth the theory of customs union for the first time. Other writers who contributed to the theory of customs union include J.E.Meade, R.G.Lipsey, H.G.Johnson, J.Vanek and others. (iv) Common Market The Common Market represents a more unified arrangement among group of countries than a customs union. Its features are as under: (a) Abolition of tariff and trade restrictions among the member countries. (b) Adoption of common external tariff. (c) Free movement of labour and capital among member countries. There is a free and integrated movement of goods and factors among. the member countries. The best example of the common market is the European Common Market. Economic Union Economic union constitutes the most advanced form of economic' integration. Its features are as follows: (a) Two or more countries form a common market. (b) Member countries try to harmonise and unify their fiscal, monetary, exchange rate, industrial and other socio-economic policies. (c) Member countries seek to have a common currency and banking system. The best example of an economic union is the European union, earlier known as the European Economic Community. Economic Integration: It is the ultimate and full form of economic integration. It is characterised by the completion of the removal of all barriers to intra-bloc movement of goods and factors and unification of social as well as economic policies. All the members are bound by super national authority consisting of executive, judicial and legislative branches.
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(v)

(vi)

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5.3

Advantages of Economic Integration The following are the advantages of economic integration: (i) Economies of Scale In the case of individual countries, having small internal market have limited capacity to expand production. As a result of economic integration, there will be unrestricted access of the products produced by any member country. This induces expansion of production and helps the full exploitation of the economies of scale. (ii) International Specilisation Economic integration leads to the attainment of a greater degree of specilisatton in both production and processes. Specialisation, based on the principle of comparative cost advantage stimulates production on a large scale. (iii) Qualitative improvement in output Regional economic co-operation among a number of countries fosters quick technological Changes. It facilitates larger and easier capital movements. This helps the member countries to bring about qualitative improvement in production. . (iv) Expansion of Employment The advantage of economic integration lies in that it expands employment. This is due to the unrestricted flow of labour within the region. Expansion of employment leads to an increase in income also. (v) Employment in Terms of Trade As a result of economic integration, there will be an increase in the bargaining strength of the member countries vis-a-vis the rest of the world. This contributes to a considerable improvement in the terms of trade of the member countries. (vi) Increase in economic efficiency Economic integration encourages competition in the region. Competition helps to maintain a higher level of economic efficiency of the group as a whole. (vii) Improvement in living standard Economic integration goes a long way in improving the living standards of the people of the member counties. This is made possible by availability of superior varieties of goods at reasonable or competitive prices. The increase in employment rise income also helps to improve the living standards of the people of he member countries. (viii) Better allocation of resources Since economic integration involves removal of trade restrictions it leads to better allocation of resources in the countries concerned.
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(ix) Achievement of common goals Economic integration helps the member countries to achieve common goals like full employment, high rates of economic growth, reduction in income inequalities etc. (x) Trade creation: Trade creation effect of a customs union refers to the expansion of trade between the member countries owing to the elimination of inter -union tariffs. By shifting the production from a higher cost sources to a lower cost source, trade creation effect constitutes a movement towards freer trade within the union. 5.4 Benefits of Economic integration to the developing economies: In the context of the developing economies, economic integration has a crucial role to play in accelerating their pace of economic development. The developing economies enjoy the following benefits from economic integration. (1) Expansion of trade: By removing trade barriers, economic integration helps the member countries to expand their trade. (2) Trade creation: The formation customs union brings about trade creation in the developing economies. It means that goods which were produced b~ ~gh-cost partners are now replaced by low-cost producers within the region. (3) Increase in Gains from Trade: By facilitating the movement of resources from less efficient to more efficient lines of production, economic integration increases the gains from trade to the developing economies. (4) Expansion of Market: Economic integration contributes much to the development and expansion of markets in the developing economies. (5) Advantages of Competition: Economic integration confers advantages of competition to the developing countries. They include - increase in efficiency, innovation, reduced costs etc. (6) Economies of scale: By integrating their economies, the developing economies can reap economies of scale. This is made possible by the establishment of new industries and expansion of the existing industries. (7) Foreign Investment: Economic integration helps the developing economies to attract foreign
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(8)

investment in the new manufacturing industries that enjoy economies of scale. Improvement in Terms of Trade: It is a well known fact that the developing economies suffer from adverse terms of trade. Economic integration is helpful to them to improve their commodity terms of trade. This is possible by the production of import substitutes and increasing exports to the non-member countries.

5.5

Effects of Economic Integration Economic integration, especially the formation of a customs union, brings about significant and farreaching effects on the countries concerned. These effects are classified into Static Effects and Dynamic Effects. I. Static Effects Static Effects of it customs union "involve a reallocation of resources among existing industries, using existing supplies of the factors and existing technology". Static effects are classified into Production Effects and Consumption Effects. Production Effects: These effects were analysed by Jacob Viner. They refer to the changes in the sources of supply or production bases of a commodity resulting from the formation of the customs unions. Jacob Viner has analysed the Production Effects in terms of the Trade Creation Effect and the Trade Diversion Effect. Trade Creation Effect: It refers to the beneficial effect of the customs union of shifting supply from a high-cost domestic source of a partner. The concept of Trade Creation is illustrated with the help of the following example. Let us assume that the home country A is the least efficient country and its unit cost of producing a calculator is Rs.300. In its partner country, let us say country B, which has greater efficiency, the unit cost production of the calculator is Rs.240. The rest of the world is represented by non-member country C, which is the most efficient and the average cost of producing the same calculator is 200. If before the formation of the trade union, the home country A imposes 100 percent tariffs on all imports, the unit costs in Band C become Rs.480 and Rs.400 respectively, as shown in the following table: Trade Creation

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Country A B C

Unit Cost (in Rs.) 300 240 200

Unit Cost (in Rs.) After 100% import tariff 300 480 400

Unit Cost (in Rs.) After formation of customs union. 300 240 400

In this context, it is desirable for the home country A to produce calculators at home. If the customs union is formed and duty is removed on imports from B, while it remains enforced on imports from C, the partner country B becomes the least cost country. Now, the home country will prefer to import calculators from B rather than produce it domestically. So the formation of the customs union results in trade creation. Trade Diversion Effect: It refers to the diversion of trade in a commodity from one country to another as a result of the formation of customs union. It is illustrated with the help of the following table: Trade Diversion Unit Cost Unit Cost (in Rs.) (in Rs.) After 50% Uniform duty 300 300 240 180 360 270 Unit Cost (in Rs.) After formation of customs union. 300 240 270

Country A B C

It is clear from the above table that before the formation of the customs union, country C was the least cost or the most efficient country and home country. A was the highest cost country. As the home .countr y A imposes 50 percent tariff on all imports, the unit costs In A, B and C become Rs.30D, Rs.360 and Rs.270 respectively. Since C is the least cost country calculators will be imported by A from this country. After the formation of the customs union, the import duty is abolished on imports from B while it remains in the non-member country C. In this situation, the unit cost in A, B and C will be Rs.300, Rs.240 and 270 respectively. With result, country A will prefer to import calculators from country B rather than from country C. Thus, the formation of trade union results in the diversion of trade from an outside country to the Partner Country. This is called trade diversion effect. Consumption Effects:
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Consumption Effects of the formation of customs union were recognized by Meade, Lipsey, Johson and other. The formation of a customs union may have both positive and negative consumption effects. The formation of the customs union facilitates the access to the low-cost source of supply of products. This increases the real income of the consumer because a given amount of money income can buy more goods as prices decline. This is what is called Positive Consumption Effect of a customs union. The Negative Consumption Effect is parallel to the negative production effect. The formation of the customs union requires a uniform tariff on import of a commodity from non-members. Before the formation of the customs union, if a member country was importing a commodity duty free from a non-member, it will now have to impose a duty on it resulting in the diversion of the consumer purchases from low-cost out side producers to high-cost producers inside the customs union. This fall in consumer welfare resulting from the decline in the real income due to rise in price is known as the Negative Consumption Effect of the formation of the customs union. II. Dynamic Effects The Dynamic Effects of the Customs Union have been stressed by writers like TScitovsky, B.Balassa, W.M.Corden and others. These effects relate to some developments that increase the economic efficiency of resource utilisation. The following are the important dynamic effects of the formation of customs union: (1) Increased Competition The most significant dynamic effect of the formation of a customs union is the increase in the intensity of competition within the union. Competition stimulates managerial efficiency and technological progress. (2) Economies of Scale The formation of a customs union creates economies of scale made possible by expansion in the size of market, competition, increased specilisation etc. the experience of the formation of EEC is a clear example of the economies of scale created by a customs union. (3) Encouragement to Investment Economies of scale, competition, technological process, expansion of the size of market etc. stimulate the rate of investment. Even foreign investment is attracted. (4) Mobility of Production Factors The formation of customs union or the common market facilitates the mobility of labour, capital and enterprise among the countries concerned. This leads to optimum utilisation of resources.
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(5)

(6)

(7)

Technological Progress B.Balassa argues that the expansion of the market and competition stimulate research and development. There will be important technological changes. Risk and Uncertainty Economic integration helps to reduce risk and uncertainty in the economic intercourse of the member countries. As a result, development is fostered. Improvement in Terms of Trade The formation of customs union results in raising of external tariffs against the non-member countries leading to a reduction in imports. This strengthens the bargaining power of the member countries leading to an improvement in their terms of trade. It has been pointed out by several writers that the above dynamic effects have been responsible for the economic integration of the European Countries. Further empirical studies have indicated that the dynamic effects of economic integration are five to six times larger than the static gains.

5.6

EUROPEAN UNION European Union (EU) or. the European Economic Community (EEC) has been the most prominent development in the field of economic integration with a population One-third larger than that of the United States, the EU represents the most successful of the regional economic integration schemes. The EU accounts for roughly a quarter of the world trade. Historical Background: The genesis of the present European Union could be traced back to the European Coal and Steel community formed in 1951 by the Treaty of Paris. This community was formed by West Germany, France, Italy and the BENELUX countries - Belgium Netherlands and Luxumburg. It removed all import duties and quota restrictions on coal, iron ore, steel and scrap on intra-community trade. The main objective of the formation of ECSC was to reap the economies of scale in iron ore, coal and steelindustries in order to effectively compete with the U.S. and other foreign producers of these commodities. The second stage in the establishment of the EU goes back to the year 1957 in which the Treaty of Rome was signed leading to the establishment of the European Economic Community (EEC). This Treaty was signed by six countries - West Germany, France, Italy and the three BENELUX countries. The Treaty of Rome may be considered as a turning point as it was the foretunner of the present EU. This Treaty came into force from January 1958. In the year 1973, the membership of the EEC increased from six to nine, with the inclusion of Denmark, Ireland and United Kingdom. Greece joined the Community in 1981 increasing the strength of the membership to

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ten. Further, in 1986, Portugal and Spain became the members of the Community. The next enlargement of the Community took place in 1995 with the inclusion of Austria, Finland and Sweden. In 2004 the membership of the Community increased to 25 when the following countries joined it: (a) Cyprus (b) Lithuania (c) Czech Republic (d) Estonia (e) Hungary (f) Latvia (g) Malta (h) Poland (i) Stovakia (j) Slovenia With the inclusion of Bulgaria and Romania in 2007, the Community's strength is now 27. The European Community was renamed as the European Union by the famous Maastricht Treaty in 1992. Objectives of EU: According to the Treaty of Rome, the following are the broad objectives of the EEC or EU: (i) The abolition of tariff and non-tariff quantitative and other restrictions in regard to the import and export of goods between the member states; (ii) The abolition of all restrictions upon the free movement of persons, services and capital between the member states; (iii) The establishment of common customs tariff and of a common commercial policy towards the non-member countries; (iv) The establishment of a common farm policy' (v) The adoption of a common transport policy; (vi) The establishment of a system ensuring that competition shall not be distorted in the common market; (vii) The application of the procedures for ensuring the coordination of the economic policies of the member states and for remedying their balance of payments disequilibria; (viii) The creation of a European Social Fund for improving the possibilities of
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employment for the workers and for ensuring a rise in their standard of living; (ix) The establishment of a European Investment Bank to facilitate the economic expansion of the Community by opening up fresh resources; and(x) The approximation the legislations of the member states for the efficient functioning of a common market. It is, therefore, c ar from the above, that the cardinal objectives of the EEC sought to realize the, elimination of all restrictions from the movement of goods, labour, capital and services, maintenance of common external tariffs against the non-member countries, the establishment of common policies in the spheres of transport and agriculture and closer integration in the fields of monetary and fiscal matters in the entire region. 5.7 Organisation of European Union: The organizational set up of the EU consists of the following bodies and institutions: (i) The Executive Commission (ii) The Council of Ministers (iii) The European Parliament (iv) The Court of Justice (v) The Economic and Social Committee (vi) The Monetary Committee (vii) The Court of Auditors A brief explanation of the above organs of the EU is necessary. (i) The Executive Commission It is the key institution of the EU. It functions autonomously of the national governments of the member countries. The following are the functions of the Executive Commission: (a) Initiating, evolving and execution of the economic policies of the Community. (b) Ensuring the proper compliance of agreed policies by the member countries. The Commission's directives are binding upon all the members. The Commission is constituted by commissioners, appointed by the member countries. The Commission has a significant achievement in the field of antitrust legislations. (ii) The Council of Ministers The Council of Ministers constitutes an important decision-making intergovernmental body. Its functions are: (a) Taking decisions relating to political issues which impinge upon the economic and commercial policies. (b) Taking decisions upon important technical matters. (c) Laying guidelines for political and economic policies.
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(iii)

(iv)

(v)

(vi)

(vii)

All issues are decided by the Council of Ministers through majority decision. The European Parliament Its role is of a general consultative. and informative nature. It comprises of members elected by the member countries. It has the power to approve or reject the draft budget prepared by the Commission. It can also dismiss the Commission. Generally, the European Parliament holds eight sessions a year. The Court of Justice It is based in Luxurnburg. It settles any dispute arising out of the different provisions of the Treaty of Rome. It has the power to overrule the decisions taken by the national courts on matters related to EU policies and actions. The Economic and Social Committee It is constituted by the representatives of workers, employers and professional organizations of the member countries of the EU. It is essentially a consultative body. The Monetary Committee It is constituted by experts and central bank officials of the member countries of the EU. It advises the Executive Commission and the Council of Ministers on international monetary issues. The Court of Auditors It audits the budget of the EU, monitors its expenditure and lays down procedures for the collection of duties and levies.

5.8

Working and achievements of the EU The EU has emerged as the most successful economic integration in the post-war period. Its working and achievements are discussed below: (i) Formation of Customs Union The main objective of the EC was the creation of a customs union. For this purpose, the Treaty of Rome provided 12 years for the elimination of internal tariff s and other trade barriers and the adoption of a common external tariff for industrial goods. Both these goals were achieved on 1 July 1968 and thus the objective of the creation of a Customs Union was achieved. (ii) Common Agricultural Policy (CAP) The salient features of CAP are as under: (a) All the member countries now adopt a common policy related to agriculture. (b) Support prices are now fixed by the Council of Ministers. (c) There is a "green rate" at which the support prices are converted into national prices. (d) There is no barrier on the movement of agricultural products from one
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member country to another. (e) If there is a shortage of farm products, imports are permitted from the non-member countries. (f) A variable import levy is imposed to restrict imports of agricultural products. (g) In the case of a surplus of farm products, subsidies are given to the farmers to export these products. Thus, the adoption of the CAP has contributed in making the EU self-sufficient in agriculture. (iii) Common Fisheries Policy (CFP) The EU adopted the CFP in February 1971. It is related to the marketing of fresh, frozen and preserved fish. It provided for equal access to fishing areas for all the member countries, off-shore fishing facilities and common marketing standards. (iv) Common Transport Policy (CTP) The need to adopt a CTP was laid down by the Treaty of Rome. The EU has succeeded in removing the obstacles in transport in the way of the establishment of common market as a whole. But certain problems persist. (v) Factor Mobility The achievements in this area are: (a) Workers and their families can move from one member country to another without a permit; (b) They have the same rights to work and social security; (c) They are subject to same taxation on par with the nationals. (vi) Regional Development Policy (RDP) The EU has evolved an integrated RDP to promote equitable and balanced regional development. The EU has adopted the policy of providing necessary financial assistance to the relatively backward regions within the Community. The EU provides regional development assistance through the European Investment Bank (EIB), the European Social Fund (ESF) and the European Regional Development Fund (ERDF). The EIB performs three important functions: (a) Giving loans and guarantees to improve basic infrastructure in the underdeveloped regions; (b) Providing financial aid to projects for modernization, conversion or development; and (c) Helping finance projects in which member countries have a
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common interest. The ESB provides financial assistance for reemployment of workers thrown out of work as a result of EC policies. The ERDF lends and grants money for the development of the backward regions of the Communlty. (vii) Trade creation and Trade Diversion Effects A significant achievement of the EU has been a substantial increase in trade creation. Trade diversion effect became significant in agriculture after Britain joined the Community in 1973. (viii) Reduction in Unemployment There has been a reduction in unemployment in the EU. This has been made possible by the expanded market, utilisation of productive capacity, adoption of latest technology etc. (ix) Common Social Policy (CSP) The achievements in this area became significant after the adoption of the Social Charter in 1989. CSP relates to laws covering health, employment, safety at work, equal for pay for men and women for the same work etc. (x) Monetary Union The developments in this field are as under: (a) The establishment of the European Monetary system following the Bremen Declaration of 1978; (b) The creation of the European Currency Unit (ECU) (c) The establishment of the European Monetary Co-operation Fund to act as a clearing house to the EEC Central banks. (d) The establishment of the European Central Bank on June 30, 1998 at Frankfurt. (e) The adoption of a single currency 'Euro', in place of ECU, from 1 January 1999. (f) The circulation of Euro notes and coins from 1 July 2002. The Euro is the official currency of the Eurozone, adopted now by 13 member countries of the EU. (xi) Single or Common Market On January 1, 1993 the EU emerged as a single frontier - free market. It became fully operational from January 1 1995. Thus EU is not only a customs union but also a common market. There are 282 proposals, applicable to various areas, in the Single European Act adopted throughout the union. Thus the achievements of the EU are many and varied. But, there are certain defects of the working of the EU which are as under: (a) Unequal expansion of trade
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(b)

(c)

(d)

(e)

(f)

(g)

The disturbing feature of the expansion of EU trade is that while trade involving new members has increased rapidly, the same is not true of the original member countries. Inability to harmonise The member countries of the EU have failed to harmonise properly their monetary, transport and fiscal policies. Defects of CAP The Common Agricultural Policy has led to huge surpluses and high storage costs. The subsidy issue has been a bone of contention between the United States and the EU. It has not been able to enncourage farmers to seek alternative occupations. It has led to income inequalities. The policy of high farm prices has adversely affected the interests of the consumers, Adverse effect of Trade Diversion The EU trade diversion has been at the expense of the countries of Latin America, Middle East, U.S.A., Japan etc. Imbalances in Regional Development The EU has failed to reduce or avoid imbalances or inequalities in regional development. While some regions have attained high level of economic development, other regions such as Southern Italy, the south of France, east of Germany etc. Problems in Common Transport Policy Problems relating to evolving a Common transport Policy include problems involved in infrastructure pricing, entry controls and rate controls of the individual member countries relating to handing of goods by rail and road transport etc. Sacrifice of Sovereignty In the EU some countries are required to sacrifice their sovereignty in decision - making. In fact, some of the member countries have ratified the Maastricht Treaty but have declined to participate in some parts of this Agreement. Failure to achieve a complete union It may be observed that even after five decades of its establishment, the EU is yet to achieve a complete economic and political union. In conclusion, it may be observed that despite the above deficiencies, the achievements of the EU have been quite significant. The EU has considerably succeeded in realizing its objectives. It has made a definite positive contribution in the rapid economic development of its member countries.

(h)

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5.9

World Trade Organisation (WTO) The WTO came into existence on January 11995 as a result of the culmination of the Uruguay Round of Talks. The WTO has fully replaced GATT. The agreement to establish WTO was signed by 117 countries. WTO now serves as a single institutional frame work encompassing GATT and all the results of the Uruguay Round. The WTO is directed by a Ministerial Conference that will meet at least once in 2 years. The WTO Secretariat is based in Geneva, Switzerland. Differences between GATT and WTO (1) While GATT had no legal status, WTO has a legal Status. (2) While GATT was ad hoc and provisional, WTO and its agreements are permanent. (3) GATT had contracting parties while WTO has members. (4) While GATT was less powerful WTO is more powerful. (5) Under GATT dispute settlement system was slow. But under WTO dispute settlement is quicker and more efficient. (6) In the case of the GATT dispute settlement system was not binding on the parties to the dispute. But the WTO dispute settlement mechanism is automatic and binding on the parties to the dispute .. (7) The GATT rules applied mainly to trade in goods, but the WTO rules apply to trade in goods and services. (8) The GATT had a small secretariat managed by a Director General, but the WTO has a large secretariat and an elaborate organizational set - up. Objectives of WTO The WTO agreements have three main objectives: (1) To help free flow of trade as much as possible. (2) To achieve further liberalization of trade gradually through liberalization. (3) To set - up an important means of settling disputes. Organisational Structure In the WTO, decisions are made by all the members. They are based on 'consensus, Though there is provision for a majority vote, it has not been used so far. The organizational structure of the WTO is as under: (1) Ministerial Conference In the WTO, Ministerial Conference constitutes the apex decision- making body. It comprises of representatives of all WTO members. This body meets at least once in every 2 years. It has the authority to take decisions on all matters relating to Multilateral Trade Agreements. (2) General Council This body also comprises of all the members of the WTO. It oversees the
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(3)

(4)

operation of the WTO Agreement and ministerial decisions on a regular basis. It acts also as a Dispute Settling Body and a Trade Policy Review Body. The General Council meets in Geneva at least once in a month. The Secretariat The Secretariat of the WTO, based in Geneva, is headed by the Secretary General. The Ministerial Conference appoints the Secretary General and sets out his powers, duties, conditions of service and terms of office. Specialised Committees The following are the various Specialized Committees of the WTO: (a) Committee on Budget (b) Committee on Trade and Development (c) Committee on Balance of Payments (d) Council for Goods (e) Council for Services etc. The above Committees and Councils are established by the Ministerial Conference. In addition, there are various Working Groups and Working Committees.

5.11

Functions The broad functions of the WTO are as under: (1) Administering the WTO agreements. (2) Providing the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the agreements. (3) Administering the mechanism for settling trade disputes between the member countries. (4) Monitoring national trade policies. (5) Providing technical assistance and training for developing countries. (6) Extending cooperation to other international organizations like IMF, World Bank etc. (7) Facilitating the implementation, administration and operation of the objectives of the Agreement and of the Multilateral Trade Agreements. The WTO Agreements The rules and agreements of the WTO are the result of negotiations between the members. The current set of rules and agreements are the outcome of the Uruguay Round held between 1986 - 1994. The WTO Agreements Cover the followingareas: (1) Trade in Goods Trade in goods was the focus of GATT till 1994. GATT was the forum for
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(2)

negotiating lower customs duty rates' and other trade barriers. GATT specified some important rules in this area, especially the principle of nondiscrimination. Since 1995, the updated GATT has become the WTO'S umbrella agreement for trade in goods. Various issues covered here include agriculture and textiles, state trading, product standards, subsidies, actions taken against dumping etc. Services As per the WTO agreements, service firms such as banks, insurance firms, tour operators, transport companies etc. enjoy the same principles of fairer trade that earlier applied only to trade in goods. An important agreement relating to trade in services is the General Agreements on Trade in Services (GATS). It covers all internationally traded services. Under GATS, foreign services and service suppliers would be treated, on par with their domestic counterparts. International payments and transfers relating to trade in services will not be restricted, except in the event of BoP difficulties. GATS covers area like movement of natural persons, financial services, telecommunications, air craft repair and maintenance services etc. Important obligations on the part of the member countries, under GATS are: (a) Most Favoured Nation (MFN) Obligation (b) Transparency requirements (c) Negotiated commitments on access to technology (d) National treatment (e) Progressive liberalization of trade in services etc Though GATS is expected to benefit the developing economies; there have been technical, organizational, financial and legal constraints. Immigration laws of the developed countries constitute another constraint that restricts the manpower flow from the developing to developed countries.

(3)

Trade Related Investment Measures (TRIMS) TRIMS refer to certain conditions or restrictions imposed by a government with regard to foreign investment in the country. Developing countries have made much use of TRIMS. The Agreement on TRIMS provides that no contracting party shall apply any TRIM. which is inconsistent with the WTO Articles. For example, the following TRIMS are considered as inconsistent: (a) Local content requirement
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(4)

(b) Trade balancing requirement (c) Trade and foreign exchange balancing requirements (d) Domestic sales requirements The TRIMS Agreement requires the notification of all WTO - inconsistent TRIMS and their phasing out within the stipulated transition period. Of course, the transition period can be extended for less developed and developing countries if they have problems in eliminating TRIMS. Trade Related Aspects of Intellectual Property Rights (TRIPS) TRIPS constitutes one of the most controversial outcomes of the Uruguay Round. It is related to the protection of intellectual property rights. IPRs are defined as "information with commercial value". They comprise of patents, trade marks, copy rights, geographic indications, trade secrets etc. The objectives behind the protection of IPRs include the following: − encouraging and rewarding creative work − encouraging innovation − promoting fair competition − helping consumer protection − facilitating transfer of technology TRIPs specifies enforcement procedures, remedies and dispute resolution procedures. It requires member countries to provide strong protection for IPRs. Protection of IPRs encourage investment, both domestic and foreign, in the developing economies. It encourages Rand D countries like India. Further, it helps the developing economies to safeguard indigenous property rights and traditional knowledge. Dispute Settlement The Dispute Settlement System of the WTO is as under: (a) A Disputs Settlement Body has been established. (b) The first stage in the settlement of disputes is the holdinq of consultations between the concerned members. . (c) If consultations fail and if both of the parties agree, the Director General of WTO intervenes, conciliates and mediates. The complainant member can ask the DSB to establish a panel of three experts within 30 days. (d) Further, there is also the provision of the appellate review by a standing Appellate Body of 7 members to be established by the DSB who will report to the DSB between 60 - 90 days. (e) Finally, the DSB will adopt the report-within 30 days which will be unconditionally accepted by the parties to the dispute.
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(5)

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5.13

Ministerial Conferences The different Ministerial Conferences held by WTO are as under: (1) First Ministerial Meeting The first ministerial Meeting of WTO took place in 1996 in Singapore. The highlights of this Meeting were: (a) 128 members attended the meeting. (b) There were disagreements between the developed and less developed countries over the "Singapore Issues" - investment, competition policy, trade facilitation, transparency in government procurement, environment, agriculture and trade related aspects of intellectual property rights. (c) Developing countries like India held that the Implementation Issues should be resolved before a new Round. India had to almost single handedly fight against the developed countries. (2) Second Ministerial Conference The Second Ministerial Meeting of the WTO was held in Geneva in 1998. Important issues and decisions of this Meeting were: (a) Setting up of a mechanism to ensure full and faithful implementation of existing multilateral agreements. (b) Rejection of protectionist meastires and acceptance of open and transparent rule based trading system. (3) Third Ministerial Conference This Conference took place in Seattle, Washington, U.S.A. in 1999. The Conference was attended by 135 member countries attended the meeting. But this Conference was a failure because of large street protests outside the venue of the Conference. (4) Fourth Ministerial Conference This Conference was held in Doha in November 2001. This Conference was attended by 142 ember countries. This Conference acquired importance because of conflict of interests of the developed and developing economies. India took the lead in opposing the stand of the developed countries. This Conference concluded by drawing up the 'Doha Development Agenda’ for new trade liberalization talks. The Conference adopted three major declarations: (a) On the negotiating agenda for the new WTO stand (b) On some 40 implementation concerns of the developing countries, and (c) On the political statement dealing with patents and public health. A significant achievement of the Doha Conference for the developing countries
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(5)

(6)

was on in the case of TRIPs and Public health. The Conference allowed waiver of the patent law to face a national emergency. It recognized that IPRs were subservient to public health concerns. In the case of agriculture, it was felt that subsidies had to be reduced and ultimately phased out. Fifth Ministerial Conference The venue of this conference was in Cancun, Mexico, in 2003. This Conference lasted only four days because there were differences of opinion on form subsidies and access to markets. Key Subjects that were discussed were agriculture, industrial goods" trade in services and updated customs codes. Sixth Ministerial Conference This Conference took place in Hongkong from December 13 to December 18, 2005. The highlights of this conference were: (a) Countries agreed to phase out all their agricultural export subsidies by the end of 2013. (b) It was resolved to terminate Cotton export subsidies by the end of 2006. (c) Concessions to developing countries included an agreement to introduce duty free, tariff free access for goods from the Least Developed Countries.

INDIA AND WTO India has been a founder member of the WTO. The decisions of the WTO have tremendous impact on the Indian economy. But, let us examine the India's commitments to WTO before examining the impact of WTO on the Indian economy. India's Commitments to WTO: The main commitments made by the Government of India are as under: 1. Tariff Lines: As a member of the WTO, India bound about 67 percent of its tariff lines whereas prior to the uruguary round only 6 per cent of the tariff lines were bound. For nonagricultural goods, with a few exceptions. Ceiling bindings of 40 per cent ad valorem on finished goods and 25 percent on intermediate goods, machinery and equipment were undertaken. The phased reduction to these bound levels was required to be undertaken over the period March 1995 to the year 2005. 2. Quantitative Restrictions (OOS): QRS on imports maintained on balance of payments grounds were notified to WTO in 1947. An agreement was reached between USA and India which provided for phasing out all the QRs by India by April 1, 2001. According to this agreement, India removed QRs on 714 items in the EXIM Policy announced on March 31, 2001. 3. TRIPs: In order to meet its commitment to the WTO to introduce product patents by
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4.

5.

6.

January 1, 2005 the Government of India promulgated an Ordinance on December 23, 2004. This was followed by the adoption of Patents (Amendment) Act in March, 2005. The new Patent regime provides for product patents in drugs and farm products. TRIMs: Under the TRIMs Agreement, the Government of India notified two TRIMs - that relating to local content requirements in the production of pharmaceutical products and dividend balancing requirement in the case of investment in 22 categories of consumer items. GATs: Under GATS, India has made commitments in 33 activities. Foreign service providers will be allowed to enter these activities. The choice of the activities has been guided by considerations of national benefit. Customs Valuation Rules: India's legislation on customs Valuation Rules, 1998, has been amended to bring it in conformity with the provisions of the WTO Agreement.

Impact of WTO on Indian Economy: The effects of WTO Agreements on Indian Economy are as under: 1. Benefits on Trade Expansion: It is estimated that India will gain from global trade expansion arising out of the implementation of WTO Agreements. It is assumed that India's market share in world exports from 0.5 per cent to 1 per cent. It is estimated that trade gains will be 2.7 billion U.S. dollars extra exports per year. 2. Benefits from phasing out the MFA: It has been pointed out that the phasing out of the Multi Fibre Arrangements by 2005 will benefit India as the exports of textiles and clothing will increase. The new quota- free regime in textiles and clothing (existing since January 1, 2005) will increase India's exports of these products and will flood the U.S. and European markets. 3. Improved Prospects for Agricultural Exports: Observers argue that Indian Agricultural exports will gain as a result of likely increase in the world prices of agricultural products due to reduction in domestic subsidies and trade barriers India hopes that the reduction of subsidies in the USA and European Community will enable it to increase its export earnings from agriculture. 4. Benefits from Multilateral Rules and Disciplines: Indian will gain from multinational rules and disciplines strengthened by the Uruguay Round Agreement. It will create a favourable environment for India in the
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new world economic order. In spite of the above positive effects, WTO Agreements have the following negative effects on the Indian economy: 1. It has been argued that the opening of Indian markets to foreign consumer goods has been seriously damaging Indian industry. 2. The impact of import of second hand cars into India has adversely affected out automobile industry. 3. The import of Chinese goods is also adversely affecting the Indian producers of these goods battery cells cigarette lighters, toys, fans etc. 4. The entry of multinationals in ordinary consumer goods has hit our small scale sector very hard. 5. The extension of intellectual property rights to agriculture has " serious consumers for India Patenting of Plant varieties will transfer all the gains to multinational companies. 6. Inclusion of trade in service is bound to benefit developed countries much more than developing countries like India. 7. There is also the possibility of cross-retaliation against our exports of goods and services. 8. The worst fears expressed about WTO Agreement relate to the steep like in prices of drugs and agricultural inputs. 9. It has also been pointed out that technological dependence on foreign firms will increase. 10. There will be increased outflow of foreign exchange due to commitments undertaken in the field of TRIPS, TRIMS and GATS. 5.14 Evaluation of WTO A critical appraisal of the working of the WTO throws light on its following merits and demerits: Merits The following are the significant achievements of the WTO: \ (1) The WTO (earlier the GATT) has made substantial achievements in reducing the tariff and non-tariff barriers to trade. (2) Liberalization of investments has contributed to the economic growth of many countries. (3) Liberalization of trade and investment has resulted in increase in competition, efficiency of resource utilisation, improvement in quality and productivity etc. (4) Another benefit of WTO lies in that it provides a forum for multilateral discussion of economic relations between nations. (5) The WTO provides for a system to settle trade disputes among nations.
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(6) (7) (8)

It has a system or mechanism to handle violation of trade agreements. The WTO undertakes considerable research in the area of global trade and in the process disseminates a wealth of information. All the member countries have praised the WTO for the transparency in its working .

Drawbacks The working of the WTO has been subject to severe criticism. The following are the main demerits of WTO: (1) Its working has been controlled and dominated by developed countries. (2) Many of the developing economies do not possess the financial and knowledge resources to effectively participate in the WTO negotiations and discussions. (3) The developing countries are very much at the mercy of the developed countries and hence the latter exploit the former. (4) Many a time, policy decisions are taken by the developed countries without taking the developing countries into confidence. (5) The WTO has failed to impose the organization's discipline on the developed countries. (6) In general, the developing countries have been getting a raw deal from the WTO. (7) There are many problems relating to the implementation of various decisions and agreements concluded in the Ministerial Conferences. (8) Most of the criticisms leveled against GATT and UR Negotiations hold good to WTO also. In conclusion, it may be agreed that the developing countries have to organise themselves and remain united if they have to reap the benefits of WTO. The developed countries, on their part, should have concern for the less developed countries and work in the interests of the latter.

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1. 2. 3. 4.

MODEL QUESTIONS SECTION - A (Four Marks each) Meaning and objectives of economic integration. Types of economic integration. Objectives of European Union. Doha Ministerial Conference. SECTION - B (Eight Marks each) Briefly explain the benefits of economic integration. Briefly explain the different types of economic integration. Briefly explain the objectives and organisation of the European Union. Write a note on the achievements of the European Union. Briefly explain the merits and demerits of WTO. SECTION - C (Sixteen Marks each) What is economic integration? Explain the effects of economic integration. Explain the objectives and working of the European Union. Discuss the achievements of the European Union. Explain the objectives and working of the WTO. Critically examine the working of WTO.

1. 2. 3. 4. 5.

1. 2. 3. 4. 5.

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
Rx = index of this utility caused per unit of resources employed in the production of export goods.

Rx = index of this utility caused per = ..h. x Fx, real cost terms of trade can be Pm unit of expressed as: employed in the resources production of export goods. = ..h. x Fx, real cost terms of trade can be Pm expressed as:

Rx = index of this utility caused per unit of resources employed in the production of export goods. = ..h. x Fx, real cost terms of trade can be Pm expressed as:

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