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REGIONAL BLOCKS

Introduction
After the Second World War, regional economic
integration of trading blocks emerged as a new
idea for expansion of foreign trade among the
developing countries.
Economic integration:
The term economic integration is commonly
used to refer to agreements between countries
which remove artificial trade barriers, like tariffs
and quantitative restrictions and leads to
liberalization of trade and investment between
countries. At their deepest they have the objective,
judicial and legislative institutions.

Objectives of economic
integration:
Economic integration schemes have several

objectives they are.


1. To obtain economic benefits from achieving a
more efficient production structure by exploiting
economies of scale through spreading fixed costs
over larger regional markets. Increased economic
growth from foreign direct investment (FDI) etc.
2. To pursue non-economic objectives such as
strengthening
political
ties
and
managing
migration flows.
3. To ensure increased security of market access
for smaller countries by forming regional blocks
with larger countries.

Objectives of economic
integration:
4. To improve members bargaining strength in

multilateral trade negotiations or to protest


against the slow pace of trade negotiations.
5. To promote regional infant industries, this
cannot be viable without a protected regional
market.
6. Regional agreements frequently have political
objectives and non-economic dimensions,
including national security and enhancement
of bargaining power {Economic and political}

Forms of integration:
There are different degrees or levels of
economic integration. Bela balassa in the
theory of economic integration [1961]
perceived the following five possible levels or
degree of economic integrations.
1. Free trade area/ association.
2. Customs union.
3. Common market.
4. Economic union.
5. Economic integration.

1-Free trade area /


association:
Free trade area, which is a grouping of countries to

bring about fee trade between them. It abolishes


all restrictions on trade among the member but
each member is left free to determine its own
commercial policy with non-members. North
American Free Trade Agreement

2-Customs union:
It

is more advanced level of economic


integration than the free trade area. It not only
eliminates all restrictions on trade among
members but also adopts a uniform
commercial policy against the nonmember. ( Common external tariff)
Mercosur in South America

3-Common market:
A common market allows free movement of

labour and capital within the common market,


besides free trade among members and
uniform tariff policy towards outsiders.
EU

4-Economic union:
The economic union achieves some degree of

harmonization on national economic policies,


through a common central bank, unified
monetary and fiscal policy etc. example:
Belgium- Luxumberg Economic Union

5.POLITICAL UNION
The

political union achieves further more


degree of harmonization in the form of political
integration along with national economic
policies, through a common central bank,
unified monetary and fiscal policy etc.
example: 13 separate colonies operating
under the Article of Confederation grew into
uSA

Advantages of regional blocks


or grouping
The positive effects of regional economic
integration are as follows.
1-Economics of scale: A regional trading block
provides much larger market as compared to the
domestic market of a single country. When the
markets of several countries are integrated,
economics of scale, both internal and external,
become possible with the widened size of the
market

Advantages of regional blocks


or grouping
2-High degree of specialization: Large scale
production to fulfill the demands of the
integrated markets would lead to optimum
utilization of resources. Optimum utilization of
resources requires that each country specialized
according
to
the
relative
comparative
advantage. If free trade is allowed within the
region each country will specialize in a certain
sector or area where it enjoys maximum
comparative advantage

Advantages of regional blocks


or grouping
3-Cost and price structure: The increase in
volume of trade as a result of regional groupings
a favourable change in cost and price structure
can also be effected along with favourable
change in the structure and composition of
foreign trade.
4-Increased efficiency: Regional blocks lead
to increased specialization and maximum
utilization of resources, the local inefficiencies
are removed and leads to increased efficiency in
productions and other areas

Advantages of regional blocks


or grouping
5-Trade creation: Trade creation means
substitution of in efficient domestic production
in one country by cheaper imports from another
member
country.
Better
production
and
enhanced competition and a rise in real income
generated by overall growth and development
lead to general welfare of people and
substitution by a less efficient internal producer
by a more efficient external producer.

Implications of regional blocks in international


business:

The following are several ways in which the


regional trading blocks can influence the
international business.
1. Regional groupings lead to substantial trade
creation. The resultant increase in income
and investment can lead to an increase in the
imports of the grouping as whole.
2. Conversely, if the regional lead to trade
diversions the export prospects of the
grouping As a whole are adversely affected.

Implications of regional blocks in international


business:

3. It may be possible that exporters of certain

products find it easier to enter the regional


markets which were inaccessible under the
national tariff walls.
4. The exporting country will have the benefit of

a larger and extended market.

Implications of regional blocks in international


business:

3. Greater uniformity in the marketing approach

will provide economies of scale in product


development, pricing, distributions and
promotion
4. Despite the economic groupings the regional

differences arising out of language culture


and marketing practices do continue.

The European Union (EU)


The Worlds Strongest
Supranational Organization

European Union/ European Economic

Community

EEC also known as the European Common Market

European community {EC} European Union [EU] is the


most successful of the regional economic integration
schemes.
Because of the political and economic destruction left
by world war II European political leaders realised that
greater co-operation among their countries would help
speedy european recovery and thus European Union
was formed.

EEC which originally comprised 6 nations namely,


Belgium, France, Federal Republic of Germany, Italy,
Luxembourg and Netherlands was brought into being
on 1st January 1958, by treaty of Rome, 1957.

European Union/ European Economic

Community

EEC also known as the European Common

Market European community {EC} European


Union [EU] is the most successful of the
regional economic integration schemes.

EEC which originally comprised 6 nations


namely, Belgium, France, Germany, Italy,
Luxembourg and Netherlands was brought
into being on 1st January 1958, by treaty of
Rome, 1957.

European Union/ European Economic

Community

The ECC was expanded in 1973 with the

inclusion of the United Kingdom, Denmark


and Ireland. Greece joined the community in
1981 Spain and Portugal was admitted on
1st January 1986. The community in was
further expanded in January 1995 with the
admission of Australia
,Finland
and
Sweden.At present the EU has 28 members
and is regarded as the worlds biggest and
richest super national block.

The European Union

1951
Founding Members
Belgium
France
Germany
Italy
Luxembourg
Netherlands

The European Union

1973

Denmark
Ireland
United Kingdom

The European Union

1981

Greece

The European Union

1986

Portugal
Spain

The European Union

November 1989
Fall of the
Berlin Wall
sets the
stage for
unifying
Europe and
EU enlargement

The European Union

1995

Austria
Finland
Sweden

The European Union

2004

Cyprus
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia

The European Union

2007

Bulgaria
Romania

The European Union

Candidate Countries
Croatia

Former Yugoslav Republic


of Macedonia
Turkey
Potential
Candidate Countries
Albania
Bosnia & Herzegovina
Montenegro

erbia including Kosovo under


UN Security Council Resolution
1244

GROWTH OF THE EU

Admission of
Romania and
Bulgaria
2007

Croatia and
Macedonia
are new
candidates

Major
debates
about Turkey

European Union/ European Economic

Community

The requirement for joining EU as member are.


The country must be European country and
It must be democratic country with a

combined population of 38 million and with a


GDP of 8.6 Trillion.

European Union/ European Economic

Community

Main objectives of ECC are:


1. Elimination of tariffs, quotas and other
barriers on intra community trade.
2. Devise a common internal tariff policy for
imports from the ret of the world.
3. Progressive reduction and removal of all fiscal and
physical restrictions on the free movement of
goods, capital and labour between member
countries.
4. Harmonization of economic policies of the
member states in order to eliminate competition
among the member countries.

The European Union

Three key players

The European
Parliament

Voice of the people

The Council of the


European Union

Voice of the Member States

The European
Commission
Promoting the
common
interest

Organization of EU

To be successful in Europe, International manager


must understand the organisation of EU along with
the knowledge about individual European Countries
in which they are doing business.The governing
bodies of EU are
European Commission : This is the executive body of
EU. It assist the council. the members are appointed
for a period of 4 yrs. the commission manages
annual budget of EU and also negotiates trade
agreements.
28 Commissioners, each responsible for specific
policy areas, representing the common European
perspective.
Proposes legislation and enforces laws.
Negotiates trade agreements.

European Council

It consist of different ministers of the member


countries. there are more then 25 councils e.g. :
foreign Affairs, Agriculture etc. Agriculture
council comprised f ministers of agriculture of all
member countries. This special council decides
issues relating to agriculture.
The council is presided over by President, this
presidency rotates between member countries
every 6 months.

European Parliament:

It is comprised of 626 members who are elected


every 5 years and its membership is based on
country population. 3 major responsibilities are
legislative power, control over budget and
supervision of executive decisions.
European Court of Justice :
The court of Justice ensures the consistent
application of EU treaties , member states, EC
institutions or individuals and companies may
bring cases to the court.
Highest EU judicial authority.
Ensures all EU laws are interpreted and applied correctly and
uniformly.
Can act as an independent policy maker but unlike the U.S. Supreme
Court, the ECJ can only deal with matters covered by the Treaties.

Euro is the common currency in Europe and is

administered by the European central Bank.


Initially involved all EU member countries
except UK, Denmark, Sweden and Greece. It
was established on January 1 , 1999,resulted in
new bank notes in 2002.

Council of the European Union


voice of the member states

The European Commission


promoting the common interest

The European Court of Justice


upholding the law

The European Court of Auditors


getting value for your money

The European Central Bank


managing the euro

NAFTA - NORTH
AMERICAN FREE TRADE
AREA

NAFTA - NORTH
AMERICAN FREE TRADE
AREA
Members - Canada , USA & Mexico
Came into effect on January 1 1994
Large Trading Block and include country of

different sizes
US-Canadian trade is the largest bilateral trade in
the world
US is Mexicos and canadas largest trading
partner
NAFTA is a good example for trade diversion. After
the formation of this regional block, USA s trade
and investment in Asia is diverted to Mexico.

NAFTA objectives
Elimination of tariff and non tariff barriers,
Harmonisation of Trade rules (Subsidies, anti
dumping etc)
Liberalisation of restrictions on services and
Foreign Investment
Enforcement of Intellectual Property and
Dispute settlement process

Important components of NAFTA


Rules of Origin - Goods and services must

originate in North America to get access to


lower tariffs
Regional content -Atleast 50% of net cost of
most products must come from NAFTA region.
Exceptions - 55%- Footware
60% - Vehicles
62.5% - Passenger automobiles

Other Provisions
Protection of labour rights
Improving working conditions
providing dispute resolution mechanism

ASIA PACIFIC ECONOMIC COOPE

APEC came into existence in 1994 and had 21

members to promote multilateral economic cooperation in trade and investment in the acidic
rim. All the member countries are in the border
of Pacific rim both Asia as well as America.
Include countries like USA,
Japan,china,Australia, canada, Russia,
singapore, Hong kong, Malaysia etc.
member states account for 55% of worlds
GNP, and 49% of world trade

3 pillars of APEC are


Trade and Investment Liberalization
Business Facilitation
Economic and Technical co-operation.
ADVANTAGES
Economic Growth
Benefits to people

To accomplish its objective APEC leaders

committed themselves to achieving free and


open trade by 2010 for industrial nations
(which generates 85% of the regional trade)
and by 2020 for the rest of the members
Problem is its size. Also many countries with

diverse interests.

ASEAN - Association of
South East 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

ASEAN

member
countries
have
developed economically at a faster rate
in the globe. their strength is well
educated and skilled human resources.
Their strength enabled them to achieve
faster industrialisation. Further the
member countries are rich in oil, mineral
resources,
agricultural
goods
and
modern industrial products.

An ASEAN Free Trade Area (AFTA) between the six original members
of ASEAN came into effect in 2003
ASEAN and AFTA are moving towards establishing a free trade zone.
AFTA was able to cut tariffs on all intrazonal trade by about 5% by Jan
2008 and also it encouraged inflow of foreign trade in this region.
ASEAN member countries have a population greater then that of EU or
NAFTA, but their per capita GDP is smaller. However economic growth
rates of ASEAN members are among the highest in the world

Drawback of ASEAN is that some of the

member countries like Malaysia, Singapore,


Thailand are still following the protectionist
measures which decreased the effectiveness
of AFTA.

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
It has been slow in developing a common external tariff
and economic problems of member countries have hampered
growth.
Obj
Establishment of Free trade Zone
A common external tariff
Free movement of capital, labour and services.

SAARC - SOUTH ASIAN


ASSOCIATION FOR REGIONAL
CO-OPERTION.

CURRENT MEMBERS
1. Afghanistan
2007)
2. Bangladesh
3. Bhutan
4. India
5. Maldives
6. Nepal
7. Pakistan
8. Sri Lanka

(joined the organization in

OBSERVERS
1. Australia
2. China
3. European Union
4. Japan
5. Iran
6. Mauritius
7. Myanmar
8. S. Korea
9. USA

POTENTIAL FUTURE
MEMBERS

Myanmarhas expressed interest in


upgrading it's status from an observer to a full
member of SAARC.

Russia has expressed interest in


becoming an observer of SAARC.

OTHERS

South Africa has participated in


meetings.

SAARCs Aims and Objectives:


To promote the welfare of the people of South Asia and to

improve their quality of life.


To accelerate economic growth, social progress and cultural
development in the region and to provide all individuals the
opportunity to live in dignity and to realize their full potential.
To promote and strengthen collective self reliance among the
countries of South Asia.
To contribute to mutual trust, understanding and
appreciations of one another problem.
To promote active collaboration and mutual assistance in the
economic,, social , cultural, technical and scientific fields.
To strengthen cooperation with other developing countries.
To strengthen cooperation among themselves in International
forums on matters of common interest.
To cooperate with International and regional organizations
with similar aims and purposes.

South Asian Preferential Trading Arrangement


(SAPTA):
In December 1991, the Sixth Summit held in Colombo
approved the establishment of an Inter-Governmental
Group (IGG) to formulate an agreement to establish a
SAARC Preferential Arrangement (SAPTA) by 1997.
Given the consensus within SAARC, the Agreement
on SAPTA was signed on 11 April 1993 and entered
into force on 7 December 1995 well in advance of the
date stipulated by the Colombo Summit. The
Agreement reflected the desire of the Member States
to promote and sustain mutual trade and economic
cooperation within the SAARC region through the
exchange of concessions.

South Asia Free Trade Agreement (SAFTA)

The Agreement on the South Asian Free Trade


Area is an agreement reached at the 12th South
Asian Association for Regional Cooperation
(SAARC) summit at Islamabad, capital of
Pakistan on 6 January 2004. It creates a
framework for the creation of a free trade zone
covering 1.4 billion people in India, Pakistan,
Nepal, Sri Lanka, Bangladesh, Bhutan and the
Maldives. The seven foreign ministers of the
region signed a framework agreement on SAFTA
with zero customs duty on the trade of
practically all products in the region by end
2016.

SAARC

countries are low-income developing


economies. The relevant economic question of
the hour for these nations is whether agricultural
development or industrial development is the
appropriate strategy for accelerating their
economic development. SAARC nations lean or
tend
to
lean
more
towards
industrial
development than agricultural development,
because of the belief that rich countries are
believed to be rich because they are
industrialised; and poor countries are believed to
be poor because they are primary-producing.
Thus, SAARC nations are keen in expanding and
developing the industrial sectors of their
economies.

Commodity Agreements
These are inter governmental arrangements concerning

the production of certain primary products and trade in


certain primary products with a view to stabilising their
prices.
Countries producing the same products and exporting to
the same countries enter into an agreement to avoid
competition among themselves.
It may take any of the 3 forms
Quota Agreements : They prevent fall in community
prices.under
Quota agreement, export quotas are
determined and allocated to member countries according
to some mutually agreed formula and they undertake to
restrict the export or production by a certain percentage
of basic quota decided by the central committee.

Buffer Stock Agreements


They stabilise commodity prices by maintaining the
demand - supply balance. Buffer stock agreements
stabilise the prices by increasing the market supply
by the sale of the commodity when the price tends
to rise and by absorbing the excess supply to
prevent a fall in the price. International agency has
to set a range of prices and it has to buy the
commodity at minimum price and sell it at a
maximum price.