Economic Integration

1
 Introduction
Economic integration is best
viewed as a spectrum with the
various integrative agreements in
effect today lying in the middle of
this spectrum
The level of integration defines the
nature and degree of economic
links among countries
2
 Levels of Economic
Integration
Trading bloc: Trading blocs may
preferential take various
economic forms:
arrangement Free trade area
among a group of Customs union
countries Common market
Economic union

3
The Free Trade Area and the
Customs Union
The free trade area is Members of a
the least restrictive customs union
and loosest form of dismantle barriers to
trade in goods and
economic integration
services among
among countries themselves
In a free trade area, A customs union
all barriers to trade establishes a
among member common trade policy
countries are with respect to
removed nonmembers

4
The Common Market and the
Economic Union
A common market has The creation of a true
no barriers to trade economic union requires
among members and integration of economic
has a common external policies in addition to the
trade policy free movement of goods,
Factors of production services, and factors of
are mobile among production
members Under this union,
Members of a common members would
market must be harmonize monetary
prepared to cooperate policies, taxation, and
closely in monetary, government spending and
fiscal, and employment a common currency would
policies be used by all members
5
 Arguments Surrounding
Economic Integration
A number of arguments surround
economic integration
These arguments center on:
Trade creation and diversion
The effects of integration on import
prices, competition, economies of
scale, and factor productivity
The benefits of regionalism versus
nationalism

6
Trade Creation and Trade
Diversion
Whereas trade creation
is positive in moving
toward freer trade, and
therefore lower prices
for consumers within the
EU, the impact of trade
diversion is negative

7
 Reduced Import Prices
When a small country imposes a
tariff on imports, the price of the
goods will typically rise, which will
in turn result in lower demand for
the imported goods
When a bloc of countries imposes
the tariff, the fall in demand for the
imported goods will be substantial

8
 Increased Competition
and Economies of Scale
Integration increases market size
and may result in a lower degree
of monopoly in the production of
certain goods and services
Certain industries may not be
economically viable in smaller,
trade protected countries
Internal economies of scale
External economies of scale

9
 Higher Factor Productivity and
Regionalism Versus Nationalism
When factors of The biggest
production are freely impediment to
mobile, the wealth economic integration
of the common
remains the
market countries, in
aggregate, will likely reluctance of nations
increase to surrender a
Factor mobility will measure of their
not benefit each autonomy
country in the
common market
10
 European Integration
Economic integration in Europe
from 1948 to the mid 1980s:
Organization for European Economic
Cooperation (OEEC)
Treaty of Rome
European Free Trade Association (EFTA)
Common agricultural policy (CAP)

11
 European Integration

The European Union

since the mid 1980s:
1992 White Paper
European Union (EU)

12
 Organization of the EU
The executive body of the EU is the
European Commission,
headquartered in Brussels
The Council of Ministers has the
final power to decided EU actions
The future expansion of the EU will
cause changes in the decision
making processes

13
Implications of the Integrated
European Market
Perhaps the most important implication for
Europe is the economic growth that is
expected to result
Several specific sources of increased growth
have been identified:
Gains from eliminating transaction costs
Achievement of economies of scale
More intense competition
Cheaper transaction costs and reduced currency
risks
Many U.S. firms fear a unified Europe
14
 North American Economic
Integration
Although the EU is undoubtedly the most
successful and well-known integrative
effort, integration efforts in North America
has gained momentum and attention
North American integration has an interest
in purely economic issues and there are no
constituencies for political integration
U.S.-Canada Free Trade Agreement
North American Free Trade Agreement (NAFTA)

15
Other Economic Alliances
The world’s developing
countries have perhaps
the most to gain from
successful integrative
efforts
Import substitution

16
Integration in Latin America

Before the signing of the U.S.-Canada

Free Trade Agreement, all of the major
trading bloc activity in the Americas had
taken place in Latin America
One of the longest lived integration
efforts among developing countries was
the Latin America Free Trade
Association (LAFTA), formed in 1961

17
Integration in Asia and Integration
in Africa and the Middle East
The development in Africa’s economic
Asia has been groupings range from
different from that in currency unions among
European nations and
Europe and the
their former colonies to
Americas customs unions among
Asian interest in neighboring states
regional integration Countries in the Arab
is increasing for world have made some
pragmatic reasons progress in economic
integration

18
Economic Integration and
the International Manager
Regional economic integration creates
opportunities and challenges for the
international manager
Economic integration may have an impact on a
company’s entry mode
Decisions regarding integrating markets must be
assessed from four different perspectives
Effects of change
Strategic planning
Reorganization
Lobbying
19
 Cartels and Commodity Price
Agreements
An important characteristic that
distinguishes developing countries from
industrialized countries is the nature of
their export earnings
This distinction is important for several
reasons
A cartel is an association of producers of a
particular good
Commodity price agreements involve both
buyers and sellers in an agreement to
manage the price of a certain commodity

20