reg by swapnil jain ipsa indore

8/7/2019 REG by Swapnil Jain IPSA INDORE

1/21

Regional Economic

Integration


2/21

Point of discussion

Introduction

Levels of regional economic integration

Regional integration pros & cons

Major trade blocks of the world

Implications for business

Question & Answer


3/21

Regional economic integration refersto agreements among countries in a

geographic region to reduce, andultimately remove, tariff and nontariffbarriers to the free flow of goods,services, and factors of production

between each other.


4/21


5/21

Free Trade Area

1. Free Trade Area:

1) No barriers to trade

among members

2) With different trade policies

to nonmembers


6/21

E.g.EFTA

(The European Free Trade Association)

(1) established in1960

(2) Initially there were 7 countries now only 4countries remaining.

(3) free trade in industrial goods

(4) with different policy inagriculture and to outsiders


7/21

Customs Union

A customs union eliminates tradebarriers between member countries and

adopts a common external trade policy.

Desiring greater integration

e.g. earlier EU , Andean Pact


8/21

Common Market

A common market has no barriers totrade between member countries,includes a common external trade policy,

and allows factors of production to movefreely between members.

Harmony and cooperation on fiscal, monetary

and employment policies


9/21

Economic Union

1) Free flow of products and factorsof production

2) Common external trade policy

3) A common currency, tax rates, monetary andfiscal policy

e.g. EU


10/21

Political Union

The move toward economic union raises

the issue of how to make a coordinating

bureaucracy accountable to the citizens of

member nations. The answer is through

political union.

1) More integrated than an economic union

2) A coordinating bureaucracy


11/21

Pros & Cons of R.E.I.Pros & Cons of R.E.I.

Potential

benefits

Potential

drawbacks

Trade creation

Greater consensus

Political cooperation

Creates jobs

Trade diversion

Shifts in employment

Loss of sovereignty


12/21

European Union

The European Union (EU) is an economic andpolitical union of 27 member states which arelocated primarily in Europe.

Committed to regional integration, the EU wasestablished by the Treaty of Maastricht in 1993upon the foundations of the EuropeanCommunities.

With over 500 million citizens, the EU generatedan estimated 28% share (US$ 16.5 trillion) ofthe nominal and about 21% (US$14.8 trillion) of

the PPP gross world product in 2009


13/21

Regional Economic Integration

AmericasNAFTA 1989 US & Canada 1994 & Mexico Remove tariffs on 99% of goods in 10 years Removal of barriers to cross-border flow of

services Protection of intellectual property rights Removal of most restrictions on FDIApplication of national environmental standards

(scientific basis) Establishment of 2 commissionsy Monitor environmental standards & health/safety,

minimum wage or child labor laws

y Impose fines & remove trade privileges for


14/21


Amer

ica

sForNAFTA

Opportunity to createan enlarged & efficient

production base forregion Mexico would benefit

from inwards FDI US & Canada benefit

y increased Mexicanincomes importingy consumers benefit

lower pricesy Competitiveness of

firms that moveproduction to Mexico

Against NAFTA

Mass exodus of jobsfrom US & Canada toMexico

Mexicos lower wage& less strictenvironmental laws

Impact Expose Mexico to more

competitive US &Canadian firms

Trade grew by 109% Increase in productivity

growth

Increase in politicalstability in Mexico


15/21


Amer

ica

sAndean Community 1969 & 1997 Customs Union of Bolivia, Chile, Ecuador,

Colombia, Peru Internal tariff reduction, common external tariff, transportation

policy, common industrial policy

Political (radical/socialist) & economic (hyperinflation,unemployment & debt) problems

MERCOSUR

1988 Brazil & Argentina; 1990 Paraguay & Uruguay Aim for free trade area then common market 200 million people Critics trade diversion effects greater than trade creation

fastest growing sectors most inefficient


16/21

Regional Economic IntegrationASEAN

1967 Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,Philippines, Singapore, Thailand & Vietnam

500 million people & GDP $740 B Foster free trade & cooperate in industrial policies

APEC Asia-Pacific Economic Cooperation

1990 -21 Members (US, Japan, China, Australia) > 50% GDP & 41% of world trade Increase multilateral cooperation in light of interdependence of Pacific

nations

Regional Trade Blocs in Africa

9 trade blocs on continent Hard to establish free trade areas because are less developed &

diversified need to be protected by tariff barriers from unfaircompetition


17/21

Implications for Business

Creation of single market through regionaleconomic integration offers opportunities byopening markets to exports & FDI

Lower cost of doing business in a single market -

y Free movement of goods across bordersy Harmonized product standards

y Simplified tax regimesy Centralizing production where mix of factor costs & skills

are optimal


18/21

Regional Shares of World Merchandise

Exports (%)

WTO,International Trade Statistics 2000; alsoAnnual Report 2000.

0

10

2030

40

50

N.Ame

rica

L.Am

erica

W.Europe

C.&E.

Europe Africa

Mid-East Asia

1980

1999


19/21

Economic Case forIntegration

Unrestricted free trade will allow countries tospecialize in the production of goods/services thatthey can produce most efficiently

Greater world production than is possible withrestrictions

Stimulates economic growth creating dynamicgains from trade

FDI can transfer technological, marketing &managerial know-how to host nations

Positive-sum game


20/21

Case Against

Regional Integration

Benefits of regional integration have beenoversold & the costs have often been ignored

Trade creation (high-cost domestic producers arereplaced by low-cost producers within a region) vs.trade diversion (low-cost external suppliers arereplaced by higher-cost suppliers within theregion)

Regional trading blocs could emerge whosemarkets are protected by high non-tariff barriers


21/21

Political case for integration

Linking economies & making themincreasingly dependent on each othercreates incentives for political cooperation

& reduces potential for violent conflict

By grouping economies, countries canenhance their political weight in the world

reg by swapnil jain ipsa indore

Documents