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Regional Integrations

Module 5
• One of the most notable trends in the global
economy in recent years has been the
accelerated movement toward regional
economic integration

• Regional Economic Integration: Agreements
between groups of countries in a geographic
region to reduce, and ultimately remove, tariff
and nontariff barriers to the free flow of goods,
services, and factors of production between
each other.
• By entering into regional agreements groups of
countries aim to reduce trade barriers more
rapidly than can be achieved under the auspices
of the WTO

 Opportunities are created by avoiding
unnecessary competition

• The specter of the EU and NAFTA turning into
ëconomic fortress”that shut out foreign producers
with high tariff barriers is particularly worrisome
to those who believe in the value of unrestricted
free trade
Advantages of Economic
Integration
 Pooled resources – Factors of production of
the countries are combined, enabling
economies of division of labour &
specialization

 To pool required financial resources for the
large-scale operations

 Reduced the prices of the products/services
LEVELS OF ECONOMIC
INTEGRATION
Free Trade Area:

In a free trade area all barriers to the trade of
goods and services among member countries are
removed. In the theoretically ideal free trade
area, no discriminatory tariffs, quotas, subsidies,
or administrative impediments are allowed to
determine its own trade policies with regard to
nonmembers.
Ex: EFTA and NAFTA
Customs Union:

eliminates trade barriers between
member-countries and adopts a common
external trade policy.

Ex: Andean Pact
Common Market

•The theoretically ideal common market has no
barriers to trade between member-countries and
a common external trade policy.

•Unlike in a customs union, in a common market
factors of production also are allowed to move
freely between member-countries.

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

• An Economic Union 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.
THE CASE FOR REGIONAL INTEGRATION

A - THE ECONOMIC CASE FOR

Unrestricted free trade will allow countries to specialize in
the production of goods and services that they can
produce most efficiently

Opening a country to free trade stimulates economic
growth in the country, which in turn creates dynamic gains
from trade.

Flows of FDI can transfer technological, marketing and
managerial know-how to host nations.

Stimulates Economic Growth
B – POLITICAL CASE FOR INTEGRATION

Incentives are created or political cooperation between
neighboring states

By grouping their economies together, the countries can
enhance their political weight in the world.

C – IMPEDIMENTS TO INTEGRATION
Costs, painful adjustments

Concerns over national sovereignty
THE CASE AGAINST REGIONAL INTEGRATION

A - TRADE CREATION

Occurs when high-cost domestic producers are replaced
by low-cost external suppliers within the free trade
area.
B - TRADE DIVERSION
Occurs when lower-cost external suppliers are replaced by
higher-cost suppliers within the free trade area.

A regional free trade agreement will benefit the world only if
the amount of trade exceeds the amount it diverts.

In theory, GATT and WTO rules should ensure that a free
trade agreement does not result in trade diversion.
REGIONAL ECONOMIC INTEGRATION IN EUROPE

The EU is the product of two political factors:

a) Devastation of two wars
b) Desire to hold their own on the world’s political and
economic stage

TREATY OF ROME – 1957

In 1973, first enlargement of the EC

Other additions, Greece in 1981, Spain and Portugal in
1986, and in 1996 by Finland, Austria and Sweden

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.
In 1994, following the ratification of the Maastricht treaty

Single European Act: The main problem with the EC was
the disharmony of the member-countries technical, legal,
regulatory and tax standards. The rules of the game
differed substantially from country to country, which
stalled the creation of a true single internal market.

The “White Paper” was published in 1985, proposing that
all impediments to the formation of a single market be
eliminated by 1992.

Objectives of the Act: frontier controls, mutual recognition
of standards, public procurement, financial markets, lifting
barriers, exchange controls, freight transport.

“The United States of Europe”
The Treaty of Maastricht

Common currency, lower cost of doing business in Europe,
reduce risks that arise from currency fluctuations.

National authorities would lose control over monetary
policy

Enlargement of the European Union: Eastern European
Countries?

Fortress Europe?
REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS

A - The Nafta Agreement

Nafta became law January 1, 1994.

Guidelines:

- Abolition within 10 years of tariffs on 99% of the
goods traded among Mexico, Canada, and the U.S.
- Remove most of the barriers on the cross-border flow
of services
- Protect intellectual property rights
- Removes most restrictions on FDI among the three
members
- Members are allowed to apply its own environmental
standards
Arguments against NAFTA:

- mass exodus of jobs from the US and Canda (Perot’s
“Sucking Sound”)

- Expose Mexican firms to highly efficient Canadian
and American firms.

- Painful Economic Restructuring and Unemployment in
Mexico

- Loss of National Sovereignty
B - FTAA

Free Trade Area of the Americas - a proposed
agreement to eliminate or reduce the trade
barriers among all countries in the Americas

Enlargement of NAFTA or the creation of two major
trading blocks in the Americas SAFTA and NAFTA
ASIAN AND AFRICAN TRADING
BLOCKS
ASEAN, APEC

AFRICAN COOPERATION

VII - COMMODITY AGREEMENTS

BUFFER-STOCK SYSTEM

MULTIFIBER ARRANGEMENT (MFA)
VIII - THE UNITED NATIONS
UNCTAD

IX - THE ENVIRONMENT

THE RIO EARTH SUMMIT
A Trading Block

 A trade bloc is a large free trade area
formed by one or more tax, tariff and trade
agreements.

 Typically trade pacts that define such a bloc
specify formal adjudication bodies, e.g.
NAFTA trade panels. This may include even
a more democratic and participative system,
as the EU and its parliament.
Trading Blocks

 European Union
 ASEAN
 APEC
 NAFTA
 SAARC
 ANDEAN PACT
 MERCOSUR
EUROPEAN UNION

 The European Union (EU) is a union of
twenty-seven independent states based
on the Euriopean Communities and
founded to enhance political, economic
and social co-operation.

 Formerly known as European
Community (EC) or European Economic
Community (EEC).
 The European Union is composed of 27
independent sovereign countries which are
known as member states:

 Austria, Belgium, Bulgaria, Cyprus, the Czech
Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden, and the
United Kingdom.
 To join the EU, a country must meet the
Copenhagen criteria, defined at the 1993
Copenhagen European Council.
 These require a stable democracy which respects
human rights and the rule of law; a functioning
market economy capable of competition within the
EU; and the acceptance of the obligations of
membership, including EU law.
 Evaluation of a country's fulfillment of the criteria is
the responsibility of the European Council.
 The EU is regulated by a number of
institutions, primarily the Council of the
European Union, the European Commission,
and European Parliament.
Organization of EEC
 European Council is the main administrative body
 Each member country is represented by one
minister in this council
 Each member country holds the presidency of the
council for six-monthly period by rotation
 This committee is also called ‘Corper’
 Corper is the link between the EEC & member
governments
 European Council acts as the executive
agent of the EEC in
 Making routine decisions
 Formulating rules of conduct
 Preparing new legislations
 Enabling members to carry out the provisions of
the treaty
Organization Structure of EEC
 European Commission: assists the European
council, member of the commission are appointed
for a period of four years which can be renewed

 Court of Justice: disputed related to agriculture,
social security for migrants & competition policy

 Court of Auditors: auditing the EEC Budget,
monitoring the EEC expenditure, laying down
improved procedures for collection of duties & levies
 European Parliament: provides consultations
& information to the commission, approve or
reject the draft budget prepared by the
commission & dismiss the commission if
necessary

 Advisory Committees: economic & social
committee, Monetary committee, consultative
committee on coal & steel industry
Functioning of the EEC

 Common Agricultural Policy (CAP)
 Common Fisheries Policy
 European Monetary Union:
 Exchange rate mechanism, European monetary
co-operation fund, factor mobility,
 regional development policy- European
investment bank, European social fund, European
regional development fund
 Common Transport policy
ASEAN
 ASSOCIATION OF SOUTHEAST ASIAN NATIONS

 Established on 8 August 1967 in Bangkok by the five
original Member Countries, namely, Indonesia, Malaysia,
Philippines, Singapore, and Thailand.

 The ASEAN region has a population of about 500 million,
a total area of 4.5 million square kilometers, a combined
gross domestic product of almost US$ 700 billion, and a
total trade of about US$ 850 billion.
OBJECTIVES
 to accelerate economic growth, social
progress and cultural development in the
region and

 to promote regional peace and stability
through abiding respect for justice and the
rule of law in the relationship among
countries in the region and adherence to
the principles of the United Nations
Charter.
ASEAN
Member Countries

 Cambodia
 Brunei Darussalam
 Indonesia
 Laos
 Malaysia
 Myanmar
 Philippines
 Singapore
 Thailand
 Vietnam
APEC
Asia-Pacific Economic Cooperation

 The premier forum for facilitating economic
growth, cooperation, trade and investment in
the Asia-Pacific region
 APEC has 21 members - referred to as
"Member Economies" - which account for
approximately 41% of the world's population,
approximately 56% of world GDP and about
49% of world trade.
APEC's 21 Member
Economies
 Australia;
 Brunei Darussalam;  New Zealand;
 Canada;  Papua New Guinea;
 Chile;  Peru;
 People's Republic of China;  The Republic of the
 Hong Kong, Philippines;
 China;  The Russian Federation;
 Indonesia;  Singapore;
 Japan;  Chinese Taipei;
 Republic of Korea;  Thailand;
 Malaysia;  United States of America;
 Mexico;  Viet Nam.
NAFTA

 The North American Free Trade Agreement
(NAFTA)

 eliminated the majority of tariffs on products
traded among the United States, Canada and
Mexico, and gradually phases out other tariffs
over a 10-year period.
SAARC
 The South Asian Association for Regional
Cooperation

 Established when its Charter was formally adopted
on December 8, 1985 by the Heads of State or
Government of Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka.

 SAARC provides a platform for the peoples of
South Asia to work together in a spirit of
friendship, trust and understanding. It aims to
accelerate the process of economic and social
development in Member States.
ANDEAN PACT
 Type of Agreement
 Free Trade Area with common external tariff.
 Members
 Bolivia, Colombia, Ecuador, Peru, and Venezuela.
 Representative Market
 103 million people.
 Effective Date/Period
 May 25, 1988/Indefinite.
 Objective
 To establish free trade area, a common external tariff,
and eventually a full common market
MERCOSUR
 Mercosur is a

 Regional Trade Agreement (RTA) among Brazil,
Argentina, Uruguay and Paraguay, founded in
1991 by the Treaty of Asunción, which was
later amended and updated by the 1994 Treaty
of Ouro Preto.

 Its purpose is to promote free trade and the
fluid movement of goods, people, and currency.