Economic integration

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the combined economic productivity of the states. The trade stimulation effects intended by means of economic integration are part of the contemporary economic whatsoever. Free trade is treated as an idealistic option, and although realized within certain

developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist.

Definition of 'Economic Integration'

An economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, as well as to increase trade between the countries taking part in the agreement.

Etymology
In economics, the word integration was first employed in industrial organisation to refer to combinations of business firms through economic agreements, cartels, concerns, trusts, and mergers horizontal integration referring to combinations of competitors, vertical integration to combinations of suppliers with customers. In the current sense of combining separate economies into larger economic regions, the use of the word integration can be traced to the 1930s and 1940s.[1] Fritz Machlup credits Eli Heckscher, Herbert Gaedicke and Gert von Eyern as the first users of the term economic integration in its current sense. According to Machlup, such usage first appears in the 1935 English translation of Hecksher's 1931 book Merkantilismen (Mercantilism in English), and independently in Gaedicke's and von Eyern's 1933 twovolume study Die produktionswirtschaftliche Integration Europas: Eine Untersuchung ber die Aussenhandelsverflechtung der europischen Lnder.[2]

Objective
1. The increase of trade between member states of economic unions is meant to lead to higher productivity. This is one of the reasons for the global scale development of economic integration, 2. A phenomenon now realized in continental economic blocks such as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic Community; and proposed for intercontinental economic blocks, such as the Comprehensive Economic Partnership for East Asia and the Transatlantic Free Trade Area. 3. To get the benefit of comparative advantage.

4.

To get the advantage of economies of scale.

Comparative advantage refers to the ability of a person or a country to produce a particular good or service at a lower marginal and opportunity cost over another. Comparative advantage was first described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal.[3] In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other. Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producers average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.[4]Economies of scale is also a justification for economic integration, since some economies of scale may require a larger market than is possible within a particular country for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market. A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local market.

Stages
Economic and Monetary Union (CSME/EC$, EU/) Economic union (CSME, EU) Customs and Monetary Union (CEMAC/franc, UEMOA/franc) Common market (EEA, EFTA, CES) Customs union (CAN, CUBKR, EAC, EUCU, MERCOSUR, SACU) Multilateral Free Trade Area (AFTA, CEFTA, CISFTA, COMESA,GAFTA, GCC, NAFTA, SAFTA, SICA, TPP)

The degree of economic integration can be categorized into seven stages: 1. Preferential trading area 2. Free trade area, Monetary union 3. Customs union, Common market 4. Economic union, Customs and monetary union 5. Economic and monetary union 6. Fiscal union

7. Complete economic integration

Preferential trading area

A Preferential trade area (also Preferential trade agreement, PTA) is a trading bloc which gives preferential access to certain products from the participating countries. This is done by reducing tariffs, but not by abolishing them completely. A PTA can be established through atrade pact. It is the first stage of economic integration. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade. These tariff preferences have created numerous departures from the normal trade relations principle, namely that World Trade Organization(WTO) members should apply the same tariff to imports from other WTO members.[1] As a free trade areas is basically a preferential trade area with increased depth and scope of tariffs reduction all free trade areas, customs unions, common markets, economic unions, customs and monetary unions and economic and monetary unions are considered an advanced forms of a PTA.

Multilateral

Asia-Pacific Trade Agreement (1976)[2] Economic Cooperation Organization (ECO) (1992) Generalized System of Preferences Global System of Trade Preferences among Developing Countries (GSTP) (1989) Latin American Integration Association (LAIA/ALADI) (1981)[3] Melanesian Spearhead Group (MSG) (1994) Protocol on Trade Negotiations (PTN) (1973) South Asian Preferential Trade Arrangement (SAPTA) (1999) South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) (1981)[4]

Bilateral

European Union ACP countries, formerly via the trade aspects of the Cotonou Agreement, later via Everything But Arms (EBA) agreements

India Afghanistan (2003) India Mauritius India Nepal (2009) India Chile (2007) India MERCOSUR (2009) ASEAN PR China (2005) Laos Thailand (1991)

Free trade area

A free-trade area is a trade bloc whose member countries have signed a free-trade agreement (FTA), which eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be considered an open border. It can be considered the second stage of economic integration. Countries choose this kind of economic integration if their economical structures are complementary. If their economical structures are competitive, it is likely there will be no incentive for a FTA, or only selected areas of goods and services will be covered to fulfill the Economic interestsbetween the two signatories of FTA.

Description
Members of a free-trade area do not have a common external tariff, which means they have different quotas and customs, as well as other policies with respect to non-members. To avoid tariff evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by the free trade area provisions. Cumulation is the relationship between different FTAs regarding the rules of origin sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free-trade area is a result of a free-trade agreement (a form of trade pact) between two or more countries. Free-trade areas and agreements (FTAs) are cascadable to some degree if some countries sign agreements to form a free-trade area and choose to negotiate together (either as a trade bloc or as a forum of individual members of their FTA) another free-trade agreement with another country (or countries) then the new FTA will consist of the old FTA plus the new country (or countries). Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country. The aim of a free-trade area is to reduce barriers to exchange so that trade can grow as a result of specialisation, division of labour, and most importantly via comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free-trade area. But the theory refers only to aggregate wealth and says nothing about the distribution of wealth; in fact there may be significant losers, in particular among the recently protected

industries with a comparative disadvantage. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.

Qualifying for a free-trade agreement

To determine eligibility for a free-trade agreement, importers must obtain product information from all the suppliers within the supply chain. An automated solution should be in place for an importer to solicit his/her suppliers. Once supplier documentation is received the importer must determine the eligibility of the product based on the many rules of origin surrounding the product's Harmonized System number. Each free trade agreement will qualify an importer's products in different ways, however the basis of the qualification surrounds the idea that the finished product must have a minimum percentage of local/regional content. Under the North American Free Trade Agreement (NAFTA), qualifying rules include De Minimis, Regional Value Content, and Tariff Shift.

De Minimis states that a finished good will not be disqualified from preferential treatment if the nonoriginating content of that finished good is 7% or less of the transaction value of the good on an FOB basis (or its weight, depending on the type of good). * Regional Value Content is a calculated percentage of the value of the product that represents its North American content * Tariff Shift is a substantial transformation that takes place in a NAFTA country A finished good must qualify under one of these rules to be eligible for free trade under NAFTA. This is just one example of a qualification for a free-trade agreement. If a certificate of origin is present from a supplier demonstrating that the good originated in a country under the associated free trade agreement, no further calculations are needed. When qualifying products for an FTA, the use of an automated system allows importers to stay up-todate on international compliance regulations, as well as solicit suppliers via the web instead of manually. A functional solution should also perform the required calculations for the associated FTA during the Bill of Material(BOM) analysis, ensuring correct eligibility.

Customs union
A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency. NOTE:-

1. A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states 2. Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies.

3. In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services
Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration. Customs unions are established through trade pacts.

List of customs unions

Every Economic union, Customs and monetary union and Economic and monetary union has also a Customs Union

Agreement

Date (in force)

Recent reference

Andean Community (CAN)

1988-5-25

L/6737

East African Community (EAC)

2005-1-1

[1]

WT/COMTD/N/14

Customs Union of Belarus, Kazakhstan and Russia 2010-07-1

[2]

EU Andorra

1991-7-1

WT/REG53/M/3

EU San Marino

2002-4-1

EU Turkey

1996-1-1

WT/REG22/M/4

Israel Palestinian Authority

1994

[3]

Southern Common Market (MERCOSUR)

1991-11-29

WT/COMTD/1/Add.17

Southern African Customs Union (SACU)

1910

[4]

WT/REG231/3

Switzerland Liechtenstein

1924

Additionally the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de-facto customs union, common market and currency union (or combinations thereof) with the mainland and in regards to third countries trough the trade pacts signed by the mainland state.[5]

Proposed

2010 Common Market for Eastern and Southern Africa (COMESA) 2010 Southern African Development Community (SADC) 2011 Economic Community of Central African States (ECCAS) 2012 Gulf Cooperation Council (GCC) 2015 Arab Customs Union (ACU) 2015 Economic Community of West African States (ECOWAS) 2019 or before Union of South American Nations (UNASUR) 2019 African Economic Community (AEC) ca 2020 Closer Economic Relations of Australia and New Zealand Central American Common Market (CACM)

These differ in the degree of unification of economic policies, with the highest one being the political union of the states. IN SHORT A "free trade area" (FTA) is formed when at least two states partially or fully abolish custom tariffs on their inner border. To exclude regional exploitation of zero tariffs within the FTA there is a rule of certificate of origin for the goods originating from the territory of a member state of an FTA. A "customs union" introduces unified tariffs on the exterior borders of the union (CET, common external tariffs). A "monetary union" introduces a shared currency. A "common market" add to a FTA the free movement of services, capital and labor. An "economic union" combines customs union with a common market. A "fiscal union" introduces a shared fiscal and budgetary policy. In order to be successful the more advanced integration steps are typically accompanied by unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the trade barriers, introduction of supranational bodies, and gradual moves towards the final stage, a "political union".

Success factors
Among the requirements for successful development of economic integration are "permanency" in its evolution (a gradual expansion and over time a higher degree of economic/political unification); "a formula for sharing joint revenues" (customs duties, licensing etc.) between member states (e.g., per capita); "a

process for adopting decisions" both economically and politically; and "a will to make concessions" between developed and developing states of the union. A "coherence" policy is a must for the permanent development of economic unions, being also a property of the economic integration process. Historically the success of theEuropean Coal and Steel Community opened a way for the formation of the European Economic Community (EEC) which involved much more than just the two sectors in the ECSC. So a coherence policy was implemented to use a different speed of economic unification (coherence) applied both to economic sectors and economic policies. Implementation of the coherence principle in adjusting economic policies in the member states of economic block causes economic integration effects.

Obstacles to economic integration

Obstacles standing as barriers for the development of economic integration include the desire for preservation of the control of tax revenues and licensing by local powers, sometimes requiring decades to pass under the control of supranational bodies. The experience of 1990-2009 has shown radical change in this pattern, as the world has observed the economic success of the European Union. So now no state disputes the benefits of economic integration: the only question is when and how it happens, what exact benefits it may bring to a state, and what kind of negative effects may take place.