regional_integration

8/7/2019 regional_integration

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Chapter 8

Regional EconomicIntegration


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Introduction

Regional economic integration - Agreementsbetween countries in a geographic region toreduce tariff and non-tariff barriers to the free

flow of goods, services, and factors ofproduction between each other

in theory, regional economic integrationbenefits all members

Over the last two decades, the number ofregional trade agreements has been on the rise


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Levels of Economic Integration

Figure 8.1: Levels of Economic Integration


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There are five levels of economic integration

1. Free trade area - All barriers to the trade of goodsand services among member countries are

removed, but members determine their owntrade policies with regard to nonmembers

the most popular form of integration

Examples include the European Free Trade Association

(between Norway, Iceland, Liechtenstein, andSwitzerland)

the North American Free Trade Agreement


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2. Customsunion - Eliminates trade barriersbetween member countries and adopts acommon external trade policy

most countries that enter a customs uniondesire further integration in the future

Examples include

the Andean Pact (between Bolivia, Columbia,

Ecuador, Venezuela, and Peru)


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3. Common market -No barriers to trade betweenmember countries, a common external tradepolicy, and the free movement of the factors of

production

Examples include

MERCOSUR (between Brazil, Argentina,

Paraguay, and Uruguay) hope to achieve thisstatus


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4. Economic union - Involves the free flow of productsand factors of production between members, theadoption of a common external trade policy, and inaddition, a common currency, harmonization of the

member countries tax rates, and a common monetaryand fiscal policy

involves sacrificing a significant amount of nationalsovereignty

Examples include

the European Union (EU)


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5. Political union - Independent states are combined intoa single union

requires that a central political apparatus coordinate

economic, social, and foreign policy for memberstates

The EU is headed toward at least partial political union,and the United States is an example of even closerpolitical union


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The Case for Regional Integration

There are both economic and political argumentssupporting regional economic integration

Generally, many groups within a country oppose the

notion of economic integration


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The Economic Case for Integration

Regional economic integration is an attempt to achieveadditional gains from the free flow of trade andinvestment between countries beyond those attainableunder international agreements such as the WTO

Since it is easier to form an agreement with a fewcountries than across all nations, there has been a pushtoward regional economic integration


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The Political Case for Integration

Politically, integration is attractive because

by linking countries together, making them moredependent on each other, and forming a structure

where they regularly have to interact, the likelihood ofviolent conflict and war will decrease

by linking countries together, they have greater cloutand are politically much stronger in dealing with othernations


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Impediments to Integration

Integration is not easy to achieve or maintain

There are two main impediments to integration

1. it can be costly - while a nation as a whole maybenefit from a regional free trade agreement, certaingroups may lose

2. it can result in a loss of national sovereignty


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Case Against Regional Integration

Regional economic integration only makes sense whenthe amount of trade it creates exceeds the amount itdiverts

Trade creation occurs when low cost producers withinthe free trade area replace high cost domestic producers

Trade diversion occurs when higher cost suppliers withinthe free trade area replace lower cost external suppliers


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Regional Economic Integration in Europe

Europe has two trade blocs

the European Union with 27 members

the European Free Trade Association with 4

members The European Union is expected to become a

superpower of the same order as the United States


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Evolution of the European Union

The European Union (EU) is the result of

the devastation of two world wars on Western Europeand the desire for a lasting peace

the desire by the European nations to hold their ownon the worlds political and economic stage

The forerunner of the EU was the European Coal andSteel Community (formed in 1951)

The Treaty of Rome established the European Economic

Community in 1957 the name was changed to the EU in 1994


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Evolution of the European Union

Map 8.1: Member States of the European Union in 2010


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Political Structure of the EU

The four main institutions of the EU are

1. the European Commission - proposes EU legislation,implements it, and monitors compliance

2. the European Council - the ultimate controlling authoritywithin the EU

3. the European Parliament - debates legislationproposed by the commission and forwarded to it by thecouncil

4. the Court of Justice - the supreme appeals court for EUlaw


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The Single European Act

The Single European Act (1987) committed EC countriesto work toward establishment of a single market by 1992

The Act proposed to remove all frontier controls between EC countries

apply the principle of mutual recognition to productstandards

open procurement to non-national suppliers lift barriers to competition in retail banking and

insurance

remove all restrictions on foreign exchangetransactions between member countries

abolish restrictions on cabotage


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The Establishment of the Euro

The Maastricht Treaty (1991) committed EU members toadopt a single currency, the euro

the euro is used by 16 of the 27 member states

created the euro zone, the second largest currencyzone in the world after that of the U.S. dollar

countries that participate have agreed to give upcontrol of their monetary policy

Britain, Denmark and Sweden have opted out of theeuro zone


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Question: What are the benefits of the euro?

Answer:

handling one currency, rather than many

easier to compare prices across Europe

increased competition promotes greater efficiencies inproduction

the pan-European capital market should further develop

range of investment options open both to individuals and

institutions should increase


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Question: What are the costs of the euro?

Membership implies a loss of control over monetarypolicy

The European Central Bank (ECB) was established tomanage monetary policy, but some question its abilityto act independently

The EU is not an optimal currency area - an area wheresimilarities in the underlying structure of economic

activities make it feasible to adopt a single currency anduse a single exchange rate as an instrument of macro-economic policy

countries may react differently to changes in the euro


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Since its establishment the euro has had a volatiletrading history with the U.S. dollar

initially, the euro was valued at $1.17, then fell in

value relative to the dollar, but strengthened to an all-

time high of $1.54 in March 2008

in early 2010, the exchange rate was 1=$1.35


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Enlargement of the European Union

Many countries, particularly from Eastern Europe, haveapplied for membership in the EU

Ten countries joined in 2004 expanding the EU to 25states, with population of 450 million people, and a

single continental economy with a GDP of 11 trillion In 2007, Bulgaria and Romania joined bringingmembership to 27 countries

Turkey has also applied for membership, but is notexpected to join until 2013, if at all


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Economic Integration in the Americas

Regional economic integration is on the rise in theAmericas

The most significant attempt is the North AmericanFree Trade Agreement

Other agreements include

the Andean Community

MERCOSUR

There are also attempts to form a Free Trade Area of the

Americas


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NAFTA

The North American Free Trade Agreement (NAFTA)between the U.S., Canada, and Mexico became law in1994 and

abolished tariffs on 99 percent of goods traded

removed barriers on the cross-border flow of services

protects intellectual property rights

allows each country to apply its own environmentalstandards

establishes two commissions to impose fines andremove trade privileges when environmentalstandards or legislation involving health and safety,minimum wages, or child labor are ignored


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NAFTA

Question: What are the benefits of NAFTA?

Answer: Mexico

increased jobs as low cost production moves southand more rapid economic growth

The U.S. and Canada access to a large and increasingly prosperous market

and lower prices for consumers from goods produced

in Mexico U.S. and Canadian firms with production sites in

Mexico are more competitive on world markets


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NAFTA

Question: What are the drawbacks of NAFTA?

Answer:

Jobs could be lost and wage levels could decline in theU.S. and Canada

Mexican workers could emigrate north

Pollution could increase due to Mexico's more laxstandards

Mexico would lose its sovereignty


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NAFTA

Question: How successful has NAFTA been?

Answer: Studies of NAFTAs early impact suggest that both

advocates and detractors may have been guilty ofexaggeration trade between the three countries has increased by

250 percent the members have become more integrated

productivity has increased in member nations employment effects have been small Mexico has become more politically stable


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NAFTA

Question: Should NAFTA accept new members?

Answer:

Several otherL

atinA

merican countries have indicatedtheir desire to eventually join NAFTA

Currently both Canada and the U.S. are adopting a waitand see attitude with regard to most countries


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The Andean Community

The Andean Pact (1969) was based on the EU model the agreement had more or less failed by the mid-

1980s In the late 1980s, Latin American governments began to

adopt free market economic policies In 1990, the Andean Pact was re-launched, and now

operates as a customs union In 2003, it signed an agreement with MERCOSUR to

restart negotiations towards the creation of a free trade

area current members include Bolivia, Ecuador, Peru, andColumbia


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MERCOSUR

MERCOSUR (1988) - a free trade pact between Braziland Argentina

in 1990, it was expanded to include Paraguay andUruguay

MERCOSUR has been successful at reducing tradebarriers between member states

However, critics worry that MERCOSUR is divertingtrade rather than creating trade, and local firms areinvesting in industries that are not competitive on aworldwide basis

current members include Brazil, Argentina, Paraguay,Uruguay, and Venezuela


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OtherTrade Pacts in the Americas

Two other trade pacts in the Americas are

1. the Central American Common Market

Costa Rica, El Salvador, Guatemala, Honduras,Nicaragua, and the Dominican Republic

these countries were joined by the U.S. in 2003 tocreate a free trade agreement, the Central AmericanFree Trade Agreement (2003)

2. CARICOM (1973), a customs union between English-

speaking Caribbean countries six members formed the Caribbean Single Market

and Economy (CSME) in 2006 to lower trade barriersand harmonize macro-economic and monetary policy


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Free Trade of the Americas

Talks began in 1998 to establish a Free Trade ofTheAmericas (FTAA) by 2005

The FTAA was not established as planned

Current support for the agreement by the U.S. and Brazilis limited

If the FTAA is established, it would create a free tradearea of nearly 800 million people


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Economic Integration Elsewhere

There have been various attempts at regional economicintegration throughout Asia and Africa

The success of these attempts have been limited

The most significant efforts are the Association ofSoutheast Asian Nations and the Asia-Pacific EconomicCooperation


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ASEAN

The Association of Southeast Asian Nations (ASEAN)(1967) - foster freer trade between member countriesand to achieve some cooperation in their industrialpolicies

Brunei, Indonesia, Malaysia, the Philippines,Singapore, Thailand, Vietnam, Myanmar, Laos, andCambodia

An ASEAN Free Trade Area (AFTA) (2003) between the

six original members ofASEAN came into full effect toreduce import tariffs among members

Vietnam, Laos, and Myanmar have all joined


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Asia-Pacific Economic Cooperation

Asian Pacific Economic Cooperation (APEC) wasfounded in (1990) to increase multilateral cooperation inview of the economic rise of the Pacific nations and thegrowing interdependence within the region

APEC currently has 21 members including the UnitedStates, Japan, and China


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Regional Trade Blocs in Africa

There are nine trade blocs on the African continent

However progress toward the establishment ofmeaningful trade blocs has been slow

Many countries believe that they need to protect theirindustries from unfair foreign competition making itdifficult to create free trade areas or customs unions


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Opportunities

Formerly protected markets are now open to exports anddirect investment

The free movement of goods across borders, the

harmonization of product standards, and thesimplification of tax regimes mean that firms can realizepotentially enormous cost economies by centralizingproduction in those locations where the mix of factorcosts and skills is optimal


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Threats

Lower trade and investment barriers could lead toincreased price competition within the EU and NAFTA increased competition within the EU is forcing EU

firms to become more efficient, and stronger global

competitors Firms outside the blocs risk being shut out of the singlemarket by the creation of a trade fortress firms may be limited in their ability to pursue the

strategy of their choice if the EU intervenes andimposes conditions on companies proposing mergersand acquisitions

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