Chapter 4

Regional Economic Integration

9-1
• There are three ways to approach economic integration in which
countries decide to cooperate:
 Bilateral/ b/n two countries

 Regional and

 Global/multilateral integration.

• In theory, trade agreements promote free trade, but the world

may be moving toward a situation in which a number of regional
trade blocks compete against each other.
9-2
 5.1 The Levels or
Types of Regional Economic Integration
• From least integrated to most integrated, they
are:
1.Free trade area
2. Customs union
3. Common market
4.Economic union, and
5. Political union/fully integrated.

9-3
The Levels/ Types of Regional Economic Integration

9-4
 KINDS OF ECONOMIC INTEGRATION

o Free Trade Area: Group of countries agreeing to abolish all trade restrictions
o Customs Union: (i) Member countries abolish all restrictions (ii) They adopt a
uniform commercial policy of barriers and restrictions
o Common Market: (i) Member countries abolish all restrictions (ii) They adopt a
uniform commercial policy of barriers and restrictions (iii) They allow free
movement of human resource and capital
o Economic Union: i) Member countries abolish all restrictions (ii) They adopt a
uniform commercial policy of barriers and restrictions (iii) They allow free
movement of human resource and capital (iv)Achieve uniformity in monetary and
fiscal policy

9-5
1. A free trade area eliminates all barriers to the trade of goods and
services among member countries.
 In the theoretically ideal, no discriminatory tariffs, quotas,
subsidies, or administrative impediments are allowed to distort trade
between members.
– North American Free Trade Agreement (NAFTA) - U.S.,
Canada, and Mexico
– European Free Trade Association (EFTA) - Norway, Iceland,
Liechtenstein, and Switzerland
2. A customs union is one step beyond FTA, eliminates trade barriers
between member countries and it imposes common external policies
on nonparticipants in order to combat trade diversion.
– Andean Community (Bolivia, Columbia, Ecuador, and Peru) in
South America. 9-6
3. 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,
– Labor and capital are free to move because there are no
restrictions on immigration, emigration, or cross-border
flows of capital between member countries.
– MERCOSUR (Brazil, Argentina, Paraguay, and
Uruguay).
4. 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), through the adoption of the euro.
9-7
5. A political union involves a central political
apparatus that coordinates the economic, social,
and foreign policy of member states
– The EU is headed toward at least partial
political union

9-8
 Summary of Major Trading Blocs
• A trade bloc is a type of intergovernmental agreement, often part of a
region.

Form of
Abbreviation Title Trade type Participating nations
Integration

North American Free Canada, Mexico and the

NAFTA Multilateral Free Trade Area
Trade Agreement United States

Brunei, Cambodia, Indonesia,

Association of
Laos, Malaysia, Burma,
ASEAN Southeast Asian Multilateral Free Trade Area
Philippines, Singapore,
Nations
Thailand and Vietnam
Economic&Politic 28 member countries that are
EU European Union Multilateral
al Union located primarily in Europe
Argentina, Brazil, Paraguay,
Southern Common
MERCOSUR Multilateral Customs union Uruguay, Venezuela and
Market
Bolivia

9-9
5.2 Regional Economic Integrations in the world

5.2.1 Regional Economic Integration in Europe

Europe has two trade blocs
o European Union (EU) with 27 members
o European Free Trade Area (EFTA) with 4 members (Norway,
Iceland, Liechtenstein, and Switzerland)
• The EU is seen as the world’s next economic and political
superpower

9-10
The main institutions in the EU include:

1.The European Commission is responsible for proposing

EU legislation, implementing it, & monitoring compliance
with EU laws by member states.
o Headquartered in Brussels, Belgium, the commission
has more than 24,000 employees.
o It is run by a group of commissioners appointed by each
member country for five-year renewable terms.
o There are 25 commissioners, one from each member
state.
o A president of the commission is chosen by member
states, and the president then chooses other members in
consultation with the states. 9-11
2. The Council of the European Union represents the
interests of member states.
 It is clearly the ultimate controlling authority within
the EU since draft legislation from the commission
can become EU law only if the council agrees.
 The council is composed of one representative from
the government of each member state.

9-12
3. The European Parliament, which now has 732 members, is
directly elected by the populations of the member states.
• It debates legislation proposed by the commission and
forwarded to it by the council.
• It can propose amendments to that legislation.

• The European Parliament now has the right to vote on the

appointment of commissioners as well as veto some laws
(such as the EU budget and single-market legislation).
9-13
4.The Court of Justice, which is comprised of one judge
from each country, is the supreme appeals court for EU law.
• Like commissioners, the judges are required to act as
independent officials rather than as representatives of
national interests.
• The commission or a member country can bring other
members to the court for failing to meet treaty obligations.
• Similarly, member countries, companies, or institutions
can bring the commission or council to the court for
failure to act according to an EU treaty.
9-14
 5.2.2 Economic Integration In The Americas

• There is a move toward greater regional economic

integration in the Americas
• The biggest effort is the North American Free Trade Area
(NAFTA)
• Other efforts include the Andean Community in South
America.
• MERCOSUR originated in 1988 as a free trade pact
between Brazil and Argentina.
• A hemisphere-wide Free Trade of the Americas is under
discussion.
9-15
The North American Free Trade Area (NAFTA)

– Includes the United States, Canada, and Mexico

– abolished tariffs on 99% of the goods traded between members

– removed barriers on the cross-border flow of services

– protects intellectual property rights

– removes most restrictions on FDI between members

– 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.
9-16
The Andean Community

• The Andean Community is a customs

union comprising the South American countries
of Bolivia, Colombia, Ecuador, and Peru.
• The trade bloc was called the Andean Pact until
1996 and is renamed the Andean Community in
1997.
• In 2003, it signed an agreement with MERCOSUR
to restart stalled negotiations on the creation of a
free trade area between the two trading blocs.
9-17
 MERCOSUR
• originated in 1988 as a free trade pact between Brazil and
Argentina.
• It was expanded in 1990 to include Paraguay and Uruguay and
in 2005 with the addition of Venezuela.
• May be diverting trade rather than creating trade, and local
firms are investing in industries that are not competitive on a
worldwide basis.
• Initially made progress on reducing trade barriers between
member states, but more recently efforts have stalled.

9-18
 5.2.3 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)

– ASEAN Free Trade Area (AFTA)

9-19
1. 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.
2. 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
9-20
3. South Asian Association for Regional Cooperation (SAARC)
• Which was established on 8 December 1985, Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka &
Afghanistan. Objectives:
• to promote active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields.
• to promote the welfare of the people of South Asia and to
improve their quality of life;

9-21
5.2.4 The Asia-Pacific Economic Cooperation

• The Asia-Pacific Economic Cooperation

(APEC)
– has 21 members including the United States,
Japan, and China
– wants to increase multilateral cooperation
– member states account for 55% of world’s
GNP, and 49% of world trade

9-22
 5.2.5 Economic Integration In Africa

• In Africa are both numerous and ineffective.

• Because one country often has memberships in multiple
regional deals.
• While various African countries are interested in reaping
the benefits from regional economic integration, there is
relatively little trade within Africa (amounting to less than
10% of the continent’s total trade) whereby protectionism
often prevails.
• Because these countries have less developed and less
diversified economies, they need to be protected by tariff
barriers from unfair foreign competition. 9-23
• Envisioning the creation of the African
Economic Community(AEC) , many regional
economic integration arrangements were
developed .
• Founded through the Abuja Treaty signed in
1991 and entered into force in 1994, the AEC
was to be created in six stages:

9-24
1. Creation of regional blocs in regions where such do not yet exist by
1999;
2. Strengthening of intra-REC integration and inter-REC
harmonization by 2007;
3. Establishing of a free trade area and customs union in each regional
bloc by 2017;
4. Establishing of a continent-wide customs union and thus also a free
trade area by 2019;
5. Establishing of a continent-wide African Common Market or ACM
by 2023;
6. Establishing of a continent-wide economic and monetary union (and
thus also a currency union) and pan-African Parliament by 2028.
9-25
• Currently, there are eight RECs recognised by the AU, each
established under a separate regional treaty:
o Economic Community of West African States (ECOWAS)
o Common Market for Eastern and Southern Africa
(COMESA)
o Economic Community of Central African States (ECCAS)
o Community of Sahel-Saharan States (CEN-SAD)
o East African Community (EAC)
o Arab Maghreb Union (UMA)
o Intergovernmental Authority on Development (IGAD)
o Southern African Development Community (SADC)
9-26
 BRICS
• is a grouping of the world economies of Brazil, Russia,
India, China, and South Africa formed by the 2010
addition of South Africa to the predecessor

• The BRICS bloc of nations (Brazil, Russia, India, China

and South Africa) has announced that six new countries
will be joining the grouping, effective from January 2024.
• The new additions to the bloc are: Argentina, Egypt,
Ethiopia, Iran, Saudi Arabia and the United Arab
Emirates (UAE).

27
9-27
 5.3 Benefits and challenges of economic integration

Benefits
 Formerly protected markets are now open to exports and direct
investment
• Promotes peace by fostering closer economic ties and building
confidence.
• Disputes are handled constructively.
• Consistent rules make life easier and discrimination impossible
for participating countries within one region.
• Free trade and investment raise incomes and stimulate economic
growth.
• It may bring a larger market, simpler standards, and economies of
scale for firms based in that region.

9-28
Challenges
• Economic integration can be difficult because:
– While a nation as a whole may benefit from a regional free
trade agreement, certain groups may lose
– It implies a loss of national sovereignty
– The lowering of barriers to trade and investment between
countries is likely to lead to increased price competition
within the EU and NAFTA.
– Firms outside the blocs risk being shut out of the single
market by the creation of a “trade fortress”

9-29
 Reading Assignment
• Stages of Internationalization
• Approach to International Business
• Foreign exchange
• WTO

30
9-30
END OF CHAPTER

9-31