Regional Integration

Reminder
• 20 Oct is presentation day
• Week 8 work on trade organizations is self-read
Introduction
• Most favoured nation (MFN) clause: exception
• Preferential treatment needs to be extended to other WTO/GATT members
• Except under regional integration
• As this is seen as a movement in the right direction of free trade
Stages of Regional Economic Integration
• Preferential trade agreement (PTA)
• Tariffs and trade restrictions reduced on selected goods and services amongst
members
• No general reduction on internal tariffs
• No common external tariff
• Free trade area (FTA)
• Elimination of internal tariffs and other measures which restrict trade
amongst its members
• No common trade policy with other countries (Non-Members)
• Therefore need certification for goods crossing borders..why?
• Prevent importing from country with lowest barriers to towards other members
• Customs Union
• In addition to FTA there is a common trade policy e.g. common external tariffs
• Common market
• Free movement of goods and services
• Free movement of factors of production
• Could be become one internal market if concealed barriers from national
policy is removed e.g. product standards and taxation
• Harmonise or amended national regulation
• Economic Union
• Harmonization of institutional framework (competition policy and
procurement)
• Regional Bank
• Policy coordination (first with monetary then maybe fiscal)
• Could lead to one currency (lowers transaction costs-exchange rates uncertainty)
Theory of economic integration:
Trade creation
• Figure 13.2
• Customs union with most efficient producer
• Country A is small country
• Country B is the one it enters into trade agreement
• Country C least efficient producer
• Matters to discuss
• Reduction in producer surplus
• Reduction in government revenue
• Increase in consumer surplus
• Net positive change is the harberger triangles
Trade diversion
• Figure 13.3
• Customs union with least efficient producer
• Country A is small country
• Country B is the one it enters into trade agreement
• Country C most efficient producer
• Matter to discuss
• Producer loss
• Consumer gain
• Government revenue
• Net positive or negative loss of triangles vs horizontal government revenue
Some Regional Trade Agreements
• Africa
• COMESA (COmmon Market of Eastern and Southern Africa)
• Established in 1994
• 20 members
• 385 million people
• Task of peace and security and enhance economic prosperity through economic integration
• Asia
• ASEAN (Association of South-East Asian Nations)
• Established in 1967
• 10 members
• 500 million members
• Political, economic, cultural and social goals and further integration
• America
• Small domestic markets therefore integrate (trade agreements) to increase
size of local markets
• CACM (Central American Common Market)
• NAFTA (North American Free Trade Agreement)
• Canada, Mexico and USA
Self-read
• Regionalism and the new trade theory