Regional Economic Integration

THAPAR UNIVERSITY,
24 July 2019
What is Regional Economic Integration?

• Regional economic integration - agreements between countries in a

geographic region to reduce tariff and non-tariff barriers to the free
flow of goods, services, and factors of production between each other

• Regional trade agreements promote free trade, but the world may be
moving toward a situation in which a number of regional trade blocks
compete against each other
Levels Of Regional Economic Integration

Levels of Economic Integration

Levels Of Regional Economic Integration
1. A free trade area eliminates all barriers to the trade of goods and services among
member countries
• European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein and
Switzerland
• North American Free Trade Agreement (NAFTA) - U.S., Canada and Mexico

2. A customs union eliminates trade barriers between member countries and adopts a
common external trade policy in respect to the non-members
• Andean Community (Bolivia, Colombia, Ecuador, and Peru)

3. A common market has no barriers to trade between member countries, a common

external trade policy, and the free movement of the factors of production
• Mercosur (Brazil, Argentina, Paraguay, Venezuela and Uruguay)
• East African common market (Burundi, Kenya, Rawanda, South Sudan, Tanzania,
Uganda)
• West African common market (15 members)
Levels of Regional Economic Integration
4. An economic union has the free flow of products and factors of production
between members, a common external trade policy, a common currency, a
harmonized tax rate, and a common monetary and fiscal policy
• European Union (EU) adopted euro but differences in tax rates &
regulations across countries still remain. Nine countries out of 28 do not use
Euro

5. A political union involves a central political apparatus that coordinates the

economic, social, and foreign policy of member states
• the EU is headed toward at least partial political union
Should Countries Integrate their Economies?
• All countries gain from free trade and investment
• Linking countries together, making them more dependent on each other
• creates incentives for political cooperation and reduces the likelihood of violent
conflict
• gives countries greater political clout when dealing with other nations
• Economic integration can be difficult because
• while a nation as a whole may benefit from a regional free trade agreement, certain
groups may face loss of jobs
• it implies a loss of national sovereignty
• Regional economic integration is only beneficial if the amount of trade it creates exceeds
the amount it diverts
• trade creation occurs when low cost producers within the free trade area replace
high cost domestic producers or low-cost external producers replace high cost
external producers
• trade diversion occurs when higher cost suppliers within the free trade area replace
lower cost external suppliers
Trade Bloc

• A trade bloc is a type of intergovernmental agreement, often part

of a regional intergovernmental organisation, where regional
barriers to international trade (tariffs and non-tariff barriers) are
reduced or eliminated among the participating states, allowing
them to trade with each other as easily as possible.
Regional Economic Integration in Europe
• Europe has two trade blocs
1. The European Union (EU) with 28 members
2. The European Free Trade Association (EFTA) with 4 members viz.,
Norway, Iceland, Liechtenstein and Switzerland
3. The Central European Free Trade Agreement (CEFTA) with 7 members
viz., Albania; Bosnia and Herzegovina; North Macedonia; Moldova;
Montenegro; Serbia; Kosovo
European Union
Member States of The European Union
 European Union
• The devastation of two world wars on Western Europe prompted the formation of the EU as
members wanted lasting peace and to hold their own on the world’s political and economic stage

• Forerunner was the European Coal and Steel Community (1951) by Belgium, France, West
Germany, Italy, Luxemberg & Netherland

• The European Economic Community (EEC) was formed at the Treaty of Rome (1957) with the
goal of becoming a common market

• The Single European Act (1987)

• committed the EC countries to work towards establishment of a single market by December
31, 1992
• was born out of frustration among EC members that the community was not living up to its
promise
• provided the impetus for the restructuring of substantial sections of European industry
allowing for faster economic growth than would otherwise have been the case
 European Union
• The Maastricht Treaty signed in 1991 & came into force in 1993 committed the EU to adopt a
single currency
• created the second largest currency zone (Eurozone) in the world after that of the U.S.
dollar
• used by 19 of the 28 member states
• Britain, Denmark, and Sweden opted out

• Since its establishment January 1, 1999, the euro has had a volatile trading history with the
U.S. dollar
• Euro notes & coins issued w.e.f. Jan 1, 2002

• The Lisbon Treaty came into force in 2007 changed legal structure of European Union and
created a permanent President of the European Council

• Benefits & Costs of the euro

Political Structure of the European Union
• The main institutions in the EU include:
1. The European Commission - responsible for proposing EU legislation,
implementing it, and monitoring compliance with EU laws by member states.
Headquartered in Brussels, Belgium
2. The European Council - the ultimate controlling authority within the EU. Draft
legislations proposed by European Commission can be introduced in
European Parliament after consent by European Council
3. The European Parliament - debates legislation proposed by the commission
and forwarded to it by the council. Situated in Strasbourg, France
4. The Court of Justice - the supreme appeals court for EU law. Situated in
Luxembourg
EU Membership
• Founding members= West Germany, France, Italy, Netherlands, Belgium, Luxemburg
• 1973- Great Britain, Iceland, Denmark joined , total membership= 9
• 1981- Greece joined, total membership = 10
• 1986- Spain & Portugal joined, total membership = 12
• 1996- Austria, Finland & Sweden joined, total membership = 15
• In 2004, Ten countries joined – Cyprus, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Slovakia, Slovenia, Malta, expanding the EU to 25 states
• In 2007, Bulgaria and Romania joined, total membership = 27
• In 2013, Croatia (ex-Yugoslavia) joined, total membership = 28

Turkey has been denied full membership because of concerns over human rights
 European Union
• Type- Politico- economic union
• Member states- 28
• GDP: USD 18.80 trillion (2018), per capita- USD 36,580 (2018)
• Population: 512.60 million (2018) (7.3% of world population)
• Density-117.3/km2
• Founded: 07 Feb 1992
• Area: 4.476 million km²
• Founders: West Germany, France, Italy, Netherlands, Belgium, Luxemburg
• Headquarters: Brussels, Belgium
• HDI- 0.899 very high (2017)

THAPAR UNIVERSITY,
24 July 2019
EFTA (European Free Trade Association)
• The European Free Trade Association is a common market consisting of
four European countries that operates in parallel with – and is linked to –
the European Union.

• Members - Iceland, Liechtenstein, Norway and Switzerland

• Population: 14.05 million (2017)

• Area: 5,29,600 sq. km.
• GDP: USD 1.2 trillion
• Establishment: May 3, 1960

THAPAR UNIVERSITY,
24 July 2019
CEFTA (Central European Free Trade Agreement)
• The Central European Free Trade Agreement (CEFTA) is a trade agreement
between non- EU countries, members of which are now mostly located
in South-eastern Europe. Once a participating country joins the European
Union, its CEFTA membership ends.

• Members – Albania, Bosnia and Herzegovina, North Macedonia, Moldova,

Montenegro, Serbia, Kosovo

• Population: 21.4 million (2018)

• Area: 2,52,428 sq. km.
• GDP: USD 120 billion
• Establishment: Dec 21, 1992

THAPAR UNIVERSITY,
24 July 2019
 Economic Integration in America
• There is a move towards greater regional economic integration in the America
• The biggest effort is the North American Free Trade Area (NAFTA)
• Other efforts include the Andean Community and Mercosur
• A hemisphere-wide Free Trade of the Americas is under discussion
North American Free Trade
Agreement (NAFTA)
• The North American Free Trade Area includes the United States, Canada, and Mexico
• abolished tariffs on 99% of the goods traded between members
• removed barriers on the cross-border flow of services
• protects intellectual property rights
• removes most restrictions on FDI between members
• allows each country to apply its own environmental standards
• establishes two bodies to impose fines and remove trade privileges when environmental
standards or legislation involving health and safety, minimum wages, or child labor are
ignored

• Supporters of NAFTA claimed that Mexico would benefit from increased jobs as low cost
production moves south and will see more rapid economic growth as a result.

• Supporters of NAFTA claimed that U.S. and Canada would benefit from
• access to a large and increasingly prosperous market
• the lower prices for consumers from goods produced in Mexico
• low cost labor and the ability to be more competitive on world markets
• increased imports by Mexico
North American Free Trade Agreement (NAFTA)
• Critics of NAFTA claimed that
• jobs would be lost and wage levels would decline in the U.S. and Canada
• pollution would increase due to Mexico's more lax standards
• Mexico would lose its sovereignty

• Research indicates that NAFTA’s early impact was subtle, and both advocates
and detractors may have been guilty of exaggeration
• NAFTA is credited with helping create increased political stability in Mexico
• Other Latin American countries would like to join NAFTA
 NAFTA
• Languages- English, Spanish, French
• Type- Free Trade Area
• Member states- Canada, Mexico, United States
• Establishment- January 1, 1994
• Area - 21,578,137 km2
• Population - 490 million (2018)
• Density-22.3/km2
• GDP - USD 24.8 trillion, Per capita $50,700 (2018)

THAPAR UNIVERSITY,
24 July 2019
The Andean Community
• The Andean Pact
• formed in 1969 using the EU model by Bolivia, Chile, Ecuador, Columbia & Peru
• had more or less failed by the mid-1980s
• was re-launched in 1990, and now operates as a customs union. Chile has
opted out, & Venezuela joined but also opted out
• renamed the Andean Community in 1997
• signed an agreement in 2003 with Mercosur to restart negotiations towards the
creation of a free trade area
 The Andean Community
• Type- Customs Union
• Current members: Bolivia, Colombia, Ecuador, Peru
• Associate members: Argentina, Brazil, Paraguay, Uruguay, Chile
• Observer countries: Spain
• Former full members: Venezuela (1973–2006), joined Mercosur
• Chile (full member 1969-1976, observer 1976-2006, associate member
since 2006)

• Population – 110 million (2019)

• GDP- USD 703.23 billion, Per capita- USD 6389 (2019)
• Seat of Secretariat - Lima, Peru

THAPAR UNIVERSITY,
24 July 2019
 Mercosur
• Mercosur
• originated in 1988 as a free trade pact between Brazil and Argentina
• was expanded in 1990 to include Paraguay and Uruguay and in 2005 with the
addition of Venezuela.
• Venezuela suspended in 2017
• may be diverting trade rather than creating trade, and local firms are investing
in industries that are not competitive on a worldwide basis
• initially made progress on reducing trade barriers between member states, but
more recently efforts have stalled
 Mercosur
• Type- Customs Union
• Members: Brazil, Argentina, Paraguay and Uruguay
• Area- Total 13,771, 194 km2
• Population- 264.35 million (2018)
• Density-21/km2
• GDP USD 3.396 trillion, Per capita-USD11,887
• HDI- 0.772 (high)
Central American Trade Agreement And
CARICOM
• There are two other important trade pacts in the Americas

• the Central American Free Trade Agreement –(CAFTA-DR, 2005) - Originally,

the agreement encompassed the United States and the Central American
countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua,
and was called CAFTA. In 2004, the Dominican Republic joined the
negotiations, and the agreement was renamed CAFTA-DR.

• CARICOM (1973) – (Caribbean community) to establish a customs union

among 15 Caribbean nations
 Free Trade of The Americas
• Talks began in April 1998 among 34 countries excluding Cuba to establish a Free
Trade of The Americas (FTAA) by 2005

• The FTAA was not established and now support from the U.S. and Brazil is mixed
• the U.S. wants stricter enforcement of intellectual property rights
• Brazil and Argentina want the U.S. to eliminate agricultural subsidies and tariffs

• If the FTAA is established, it will have major implications for cross-border trade and
investment flows within the hemisphere
• would create a free trade area of 950 million people who accounted for nearly
$21 trillion in GDP
What is the Status Of Economic
Integration In Asia?

• Various efforts at integration have been attempted in Asia, but most exist in name
only. All of the following are intergovernmental organizations:

• Association of Southeast Asian Nations (ASEAN)

• Asia-Pacific Economic Cooperation (APEC)
• Southeast Association of Regional Cooperation (SAARC)
 Association of Southeast
Asian Nations
• The Association of Southeast Asian Nations (ASEAN, 1967)
• currently includes Brunei, Indonesia, Malaysia, the Philippines, Singapore,
Thailand, Vietnam, Myanmar, Laos, and Cambodia
• wants to foster freer trade between member countries and to achieve some
cooperation in their industrial policies

• An ASEAN Free Trade Agreement (AFTA) between members of ASEAN came into
effect in 2003
• ASEAN and AFTA are moving towards establishing a free trade zone
ASEAN
ASEAN Countries
 ASEAN
• Secretariat Jakarta, Indonesia
• Members – 10 countries
• Observers- 3 countries (Timor-Leste, Papua New Guinea, India)
• Establishment date- August 1967
• Area- 4,435,618 km2
• Population- 651 million (2018)
• Density-144/km2
• GDP- USD 3.0 trillion, Per capita- USD 4,600
• HDI – 0.719 (2017)

THAPAR UNIVERSITY,
24 July 2019
Asia-Pacific Economic
Cooperation (APEC)
• The Asia-Pacific Economic Cooperation (APEC)
• has 21 members including the United States, Japan, and China
• wants to increase multilateral cooperation
• member states account for 55% of world’s GNP, and 49% of world trade
APEC
APEC Members
APEC
APEC Members
South Asian Association for Regional
Cooperation (SAARC)
SAARC is an economic and political organization.

SAARC was established on December 8, 1985 with 7

members. In April 2007, at the Association's 14th summit,
Afghanistan became its eighth member

Observer status has been accorded to Australia, China,

European Union, Iran, Japan, Mauritius, Myanmar, South
Korea and United States

It aims to accelerate the process of economic and social

development in Member States.
SAARC-Evolution
• In the late 1970s, Bangladeshi President Ziaur Rahman proposed the creation of a trade bloc
consisting of South Asian countries.
• The foreign secretaries of the seven countries met for the first time in Colombo in April 1981
and identified five broad areas for regional cooperation.
• The Foreign Ministers met in New Delhi in 1983 where they adopted the Declaration on South
Asian Regional Cooperation (SARC). Over a period of time, various areas of regional
cooperation identified include partnership for growth, connectivity, energy, environment, water
resources, poverty alleviation, transport, information and communications technology
development, trade facilitation, terrorism, and other social and cultural issues.
• First SAARC Summit held on 7-8 December in 1985 in Dhaka where the Heads of State or
Government of seven countries adopted the Charter formally establishing the South Asian
Association for Regional Cooperation (SAARC).
• The SAARC Secretariat was established in Kathmandu on 16 January 1987 and was
inaugurated by Late King Birendra Bir Bikram Shah of Nepal. It is headed by a Secretary
General.
• The SAARC Secretariat and Member States observe 8 December as the SAARC Charter
Day.
SAARC-Objectives
• To promote the welfare of the people
• To accelerate economic growth, social progress and cultural development
• To promote and strengthen collective self-reliance
• To contribute to mutual trust, understand and appreciation of one
another's problem;
• To promote active collaboration and mutual assistance
• To strengthen cooperation with other developing countries;
• To strengthen cooperation among themselves
• To cooperate with international and regional organisations with similar
aims and purposes.
SAPTA
(SAARC Preferential Trading Agreement)
• The Agreement on (SAPTA) was signed on 11 April 1993 and entered into
force on 7 December 1995.

• It aims to promote and sustain mutual trade and economic cooperation

within the SAARC region through the exchange of concessions.

• The establishment of an Inter-Governmental Group (IGG) to formulate an

agreement to establish a SAPTA by 1997 was approved in the Sixth
Summit of SAARC held in Colombo in December 1991.
Principles underlying SAPTA
• Overall reciprocity and mutuality of advantages
• Step by step negotiations and extension of preferential trade
agreement in stages
• Recognition of the special needs of the Least Developed
countries and agreement on concrete preferential measures in
their favour
• Inclusion of all products and commodities in their raw, semi-
processed and processed forms

So far, various rounds of trade negotiations have been concluded

under SAPTA covering over 5000 commodities
SAFTA
(South Asian Free Trade Agreement)
• The Agreement on the South Asian Free Trade Area is an agreement
reached at the 12th SAARC summit at Islamabad, capital of Pakistan
on 6 January 2004.

• Free trade area covering people in India, Pakistan, Nepal, Sri Lanka,
Bangladesh, Bhutan and the Maldives.

• The new agreement i.e. SAFTA, came into being on 1 January 2006. It
intended to reduce duties to zero in a series of annual cuts. But, has
failed over a period of time due to political problems among member
states.
Political issues and ineffectiveness

• SAARC has intentionally laid more stress on "core issues" rather than
more decisive political issues like the Kashmir dispute and the Sri
Lankan civil war.

• SAARC is unable to play a crucial role in integrating South Asia.

• Over the years, SAARC's role in South Asia has been greatly diminished
and is now used as a mere platform for annual talks and meetings
between its members.
 SAARC
• Headquarters- Kathmandu
• Member states- 8 members
• Observer states – 9
• Establishment- 8 December 1985
• Area- 5,099,611 km2
• Population - 2015 estimate, 1,713,870,000
• Density- 336.1/km2
• GDP- USD 3.31 trillion

THAPAR UNIVERSITY,
24 July 2019
Economic Integration In Africa
• Many countries are members of more than one of the nine blocs in the
region
• but, since many countries support the use of trade barriers to protect
their economies from foreign competition, meaningful progress is
slow

• The East African Community (EAC) was re-launched in 2001, however so

far, the effort appears futile
What Does Economic Integration
Mean For Managers?
Regional economic integration
• opens new markets
• allows firms to realize cost economies by centralizing production in those
locations where the mix of factor costs and skills is optimal

But
• within each grouping, the business environment becomes competitive
• there is a risk of being shut out of the single market by the creation of a
“trade fortress”