LECTURE 5

REGIONAL ECONOMIC
INTEGRATION

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LEARNING OBJECTIVES

 define the different forms of regional economic

integration
 describe the benefits and costs of regional economic
integration

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What is Regional economic integration?

 Regional economic integration is an

agreement between countries in a
geographic region to reduce tariff and
non-tariff barriers to allow the free flow of
goods, services , and resources
between each other

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The Levels Of Regional Economic Integration

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The Levels Of Regional Economic Integration

A free trade area eliminates all barriers to the trade of

goods and services among member countries
– North American Free Trade Agreement (NAFTA) -
U.S., Canada, and Mexico

A customs union eliminates trade barriers between

member countries and adopts a common external trade
policy
– Andean Pact (Bolivia, Columbia, Ecuador and Peru)

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The Levels Of Regional Economic Integration

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, and
Uruguay)

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)

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The Levels Of Regional Economic Integration

A political union involves a central political

apparatus that coordinates the economic,
social, and foreign policy of member
States.
The United States is an example of even
closer political union

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The European Union ( EU)

• represents the most advanced regional trade and

investment bloc in the world today
• Started with 6 members in 1951 and now, there are 27
members.

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1979: The first European Parliament was elected.
1990: The first phase of European Monetary Union came
into effect; Germany was unified.
1999: The single European currency [EURO] came into
effect.

Source: http://europe.eu.int/abc/history.

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 Many countries have applied for EU
membership
 Turkey has been denied full membership
because of concerns over human rights

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Shade/colour/circle the correct answer
Members of European Union :
1. United Kingdom True False

2. Russia True False

3. Turkey True False

4. Germany
True False
5. United States of America
True False
6. France
True False
7. Romania
True False
8. Greece
True False

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What Is The Status Of Economic Integration In The
Americas?
 The biggest effort is the North American Free
Trade Area (NAFTA)

 Other efforts include the Andean Community

and MERCOSUR

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What Is The North American Free Trade
Agreement?

 The North American Free Trade Area (NAFTA, 1994)

– includes the United States, Canada, and Mexico
– abolished tariffs on 99% of the goods traded between members
– removes most restrictions on FDI between the three member
countries
– allows each country to apply its own environmental standards
– establishes two commissions to impose fines and remove trade
privileges when environmental standards or legislation involving
health and safety, minimum wages, or child labor are ignored

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Is The North American Free Trade Area
Beneficial?
 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
 the 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

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Is The North American Free Trade Area Beneficial?
 Critics of NAFTA claimed that
– jobs would be lost and wage levels would decline
in the U.S. and Canada
– Mexican workers would emigrate north
– pollution would increase due to Mexico's more lax
standards

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Shade/colour/circle the correct answer
Members of NAFTA :
1. United Kingdom
True False
2. Paraguay
True False
3. United States of America
True False
4. Uruguay
True False
5. Mexico
6. Chile True False

True False

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Who Was Right?

 NAFTA is credited with helping create increased

political stability in Mexico
 Within NAFTA, trade grew from $127.5 b in
1990 to $528.9 b in 2006
 Other Latin American countries would like to
join NAFTA

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What Is MERCOSUR?
 MERCOSUR
– originated in 1988 as a free trade pact between Brazil and
Argentina
– was expanded in 1990 to include Paraguay and Uruguay
 However some critics have argued that rather than
creating trade, MERCOSUR, by establishing high
tariffs to outside countries, is actually diverting trade in
some industries, and that companies in these industries
would be unable to compete in global markets.

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What Is The Status Of Economic Integration In
Asia?
 Various efforts at integration have been
attempted in Asia, but most exist in name only
– Association of Southeast Asian Nations
(ASEAN)
– Asia-Pacific Economic Cooperation (APEC)

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Regional Economic Integration in Asia: ASEAN
The Association of Southeast Asian Nations
(ASEAN)
– was established on August 8, 1967, in Bangkok
by 5 original members – Indonesia, Malaysia,
Phillipines, Singapore and Thailand.
– is now comprised of Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam

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Objective of ASEAN
To accelerate economic growth, social progress
and cultural development in the region.
To strengthen the foundation for a prosperous
and peaceful community of Southeast Asian
nations.
To promote regional peace and stability.

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Regional Economic Integration in Asia: ASEAN
– formed the ASEAN Free Trade Area (AFTA) on January 1,
1993, for the purpose of cutting tariffs on inter-regional trade
to a maximum of 5% by 2008
– In 1997, the ASEAN leaders adopted the ASEAN Vision
2020, aimed at :
• forging closer economic integration
• Create a stable, prosperous and highly competitive ASEAN
Economic Region in which there will be free flow of goods,
services, investments, equal economic development, reduced
poverty.

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Regional Economic Integration in Asia: ASEAN
– ASEAN has resulted in greater regional integration.
The share of intraregional trade rose from $81, 929m
in 1999 to $352, 771m in 2006, an increase of 23%
– Within ASEAN, exports grew from $29b in 1990 to
$193b in 2006.
– ASEAN has accelerated cooperation with other East
Asian countries such as China, India, Japan and the
Republic of Korea

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Will Regional Trade Blocs Promote Global Free
Trade
– In the EU, quotas were imposed on imports of
Japanese automobiles to protect European
carmakers. In NAFTA, quotas restrict imports of
some types of textile products.

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Will Regional Trade Blocs Promote Global Free
Trade
– Due to discrimination, those countries that are left
out of the trade blocs may seek to form their own
trade blocs.

– Jagdish Bhagwati, in response to NAFTA and

EU,suggests that an Asian bloc may be formed,
possibly centred on Japan, China and India.

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Shade/colour/circle the correct answer
Members of ASEAN :
1. Cambodia
True False
2. Phillipines
True False
3. Singapore
True False
4. Brunei
True False
5. Thailand
6. Vietnam True False

7. Malaysia True False

8. China True False

True False
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What Is The Asia-Pacific Economic Cooperation?

 Another grouping, the Asian Pacific Economic

Cooperation, or APEC, was founded in 1990
with 21 members including the U.S., Japan, and
China.
 The goal of this group is to increase multilateral
cooperation between the countries.


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The Asia-Pacific Economic Cooperation?

 If this group eventually becomes a common

market, it will probably be the world’s largest!
– member states account for 55% of world’s GNP,
and 49% of world trade

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 November 14, 2021

Advantages of Economic Integration

Trade Creation
Consumers and industrial buyers in member
countries have a wider selection of goods and
services.
Buyers can acquire goods and services at a lower
cost after trade barriers such as tariffs are lowered
or removed.
 Trade liberalization enables more trade as low-
cost manufacturers from other member countries
will take over from local high cost manufacturers.
This encourages trade between member countries.
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 November 14, 2021

Advantages of Economic Integration

Greater Consensus
-It is easier to eliminate trade barriers in a small
number of countries compared to in a large
number of countries, such as 147 member
countries in WTO.

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 November 14, 2021

Advantages of Economic Integration

Political Cooperation
There can also be political benefits from efforts
toward regional economic integration A group of
nations can have significantly greater political
influence than each nation would have
individually. Regional integration is an essential
strategy to address the effects of conflict and
political instability that may affect the region.

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 November 14, 2021

Advantages of Economic Integration

Employment Opportunities
Trade liberalization via economic integration
would lead to market expansion more
investment into the country and greater diffusion
of technology. These developments would
create more jobs and expand employment
opportunities by enabling people to move from
one country to another country to find jobs or to
earn higher pay.

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Disadvantages of Economic Integration

Creation of Trading Blocs
Despite trade liberalization among member
countries, economic integration may also
increase trade barriers against no-member
countries. The larger the regional trade area, the
larger that region’s market power in trade. This
could lead to the formation of trading blocs which
limit trading opportunities to countries from other
parts of the world.
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 November 14, 2021

Disadvantages of Economic Integration

Trade Diversion
Trade diversion arises when higher cost
manufacturers from member countries take over
lower-cost manufacturers from non-member
countries due to external tariffs. Trade diversion
means that a particular country has to stop trading
with a low-cost manufacturer in a non-member
country and trade with a manufacturer in a
member country, even though the cost offered is
higher. Trade is turned away from more efficient
manufacturers to less efficient manufacturers.
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 November 14, 2021

Disadvantages of Economic Integration

National Sovereignty
Liberalization of trade regulations among
member countries would lead to reduction of
control in their own countries. Close economic
integration requires member countries to give up
some degree of control over key policies such
as monetary policies, fiscal policies and trade
policies.

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 Match correctly

Buyers can acquire Trade

goods and services
at a lower cost after diversion
trade barriers such
as tariffs are lowered
or removed.

Higher cost Trade

manufacturers from
member countries creation
take over lower-cost
manufacturers from
non-member
countries due to
external tariffs.

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 REFERENCES

 Hill L (2004) International Business: Competing in the

Global Marketplace McGraw Hill Education
 Harrison, A. L., Dalkiran, E and Elsey, E. (2006),
International Business, Oxford University Press

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