Regional Economic Integration

Trade Blocs
 Regional Economic Integration
• REI Also referred as
– Regional Integration Agreements / Regional Trade
Agreements

• Type of arrangement that removes artificial trade

barriers, like tariffs and quantitative restrictions,
between integrating economies.
• Arrangement where two or more countries can
agree to draw their economies closer together.
• Designed to achieve various economic, social
and political purposes

• Most countries are part of one or more trade

blocs. Exception are Japan and Korea

• One third of world trade already takes place

within existing RIAs.
 Rationale / Objectives
• Achieving economies of scale by spreading fixed
cost over larger regional markets

• Strengthening the political ties and manage

migration issues (non economic objectives)

• Increased security of market access for smaller

countries by forming trading blocs with larger
countries
• To improve members’ bargaining power in
multilateral trade negotiations

• To promote regional infant market which will not

be viable without a protected regional market

• To prevent damage to their trading strength due to

further trade diversion from third countries
 Types of Integration
• Different forms of integration represent different levels
of integration.

• Important forms of integrations are:

– Free Trade Area

– Custom Union

– Common Market

– Economic Union

– Economic Integration
 Free Trade Area

• Grouping of countries to bring about free trade between them.

• The free trade are abolishes all restrictions in trade among

members.

• Each member is left free to determine its own commercial policy

with non members

• Example : SAFTA ( South Asia’s FTA : SAARC Countries have formed)

 Custom Unions

• More Advanced level of economic integration

than FTA

• It eliminates trade restrictions on trade among

members

• Also adopts a uniform commercial policy

against the non members
 Common Market

• Step ahead to custom union

• Allows free movement of labor and capital within the common
market besides free trade and uniform tariff policy towards
outsiders.
• Eg: East African Common Market, West African Common
market
 Economic Union
• Apart the satisfying conditions of the
common market :

• Economic Union achieves some degree of

harmonization of national economic
policies , through a common central
bank, unified monetary and fiscal policy.

• Eg: the European Union

 Economic Integration
• Ultimate form is full economic integration

• Removal of all barriers on movement of goods

and factors

• Unification of social as well as economic

policies
• All the members are bound by decisions of super national
authority consisting of executive , judicial and legislative
branches.

• European countries are trying to achieve the same

 Effects of
Custom Union

Dynamic
Static effects
effects

Competition
Scale of
Production Consumption economies
Effect Effect Technological
Trade Creation Positive Change
Consumption
Trade Diversion
Negative
Consumption
• Static Effect
– Reallocation of resources among existing industries,
using existing supplies of the factors and existing
technology.
– Some industries expand, others contract , and
consumers enjoy lower price on certain products

• Dynamic Effect
– Refers to certain developments like increased
competition, stimulus to technological change, stimulus
to investment, increased economies of scale that make
union dynamic

• Static are primary effect and dynamic are

consequential effects
 Static Effect
• Production Effect
– Trade Creation - Positive
– Trade Diversion – Negative

• Consumption Effect
– Positive Consumption effect
– Negative Consumption effect
European Union
 European Union
• European Economic Community ( EEC) also
known as European Common Market / European
Union

• Progressed through the different phases of

integration , is the most advanced and successful
RIA

• Started with 6 nations in 1957 , currently 28

members are there.
• Basic Objective

– Eliminate tariffs, quotas and other barriers within the

region
– Common tariff structure for imports from rest of the
world
– Free movement of factors of production within
country
– Harmonies their taxation, monetary and social
security policies
– Common policy on agriculture, transport and
competition in industry
• EU as a bloc, is India’s largest trading partner

• India’s main exports to EU

– Textiles, jute, leather, polished diamonds, engineering
goods, chemicals, marine products

• India’s main imports to EU

– Edible oil, fertilizers, dairy products, steel etc.
• The Euro
– Common currency in EU
– EU official currency notes and coins came into
circulation in 2002
– Currently it is currency of 19 countries

• The single currency bring a single interest rate

and eliminate currency risk

• The monetary policy of the bloc is done by

European central bank ( ECB) along with
National Central Banks
 North American Free Trade Agreement
( NAFTA)
• Had it origin in Canada – US FTA which came in
existence in 1989, Mexico became partner in
1994.
• Covers following Areas
– Market Access
– Trade Rules
– Services
– Investment
– Intellectual Property
– Dispute Settlement
• Apart from trade liberalization it also focuses on
labor standards and environmental standards
• Trade between USA and Canada and USA and
Mexico is substantial. Trade between Canada and
Mexico after treaty is growing ,still its marginal
• There are different thoughts prevailing for impact
of NAFTA on participating countries as far as
Unemployment and fair competition are
concerned
South Asian Association for Regional Cooperation
(SAARC)

• Involves Seven countries

– India, Bangladesh, Pakistan, Nepal, Bhutan, Sri
Lanka, Maldives

• Launched in 1985

• Secretariat of association is at Kathmandu,

Nepal
• Main Objectives
– Promote welfare of people and improvise their quality
of life

– Accelerate economic growth, social progress and

cultural development

– Promote and strengthen collective self reliance among

the south Asian countries

– Strengthen cooperation among themselves in

international forums on matters of common interest
• A major share of world’s poor live in these
countries, All these are low income economies

• Intra Regional Trade has been declined in each

country in last decade

• Possible reason may be some of the countries are

competitors in international market.
 SAPTA & SAFTA
• SAPTA : SAARC Preferential Trading Arrangements
came into existence during sixth SAARC summit at
Colombo.
• Basic objective was step by step negotiations and
extension of preferential trade arrangement in
stages
• SAPTA is a landmark development in progress of
SAARC
• SAFTA ( South Asian Free Trade Area) came in
force from June 2006

• Basic goal was to gradually eliminate most

tariffs and other trade barriers on intra regional
trade of products and services.
 Indo Lanka FTA
• Bilateral trade Agreement between India and Sri
Lanka done in 1998
• A Large number of items will be eligible for duty
free trade
• India has offered to permit 1000 items on zero
duty from Sri Lanka and Sri Lanka will allow duty
free imports of 900 items from India
• The Main objectives
– Promote harmonious development of economic relations between
India and Sri Lanka

– To provide fair conditions of competition of trade between countries

• Safeguard Measures
• Against trade practices which can hamper the importing country ,
country allowed to suspend the trade

• In case of unfair trade practices like dumping importing country may

take up legislative actions also
• India is a large market compared to Sri Lanka, Benefits to Sri
Lanka is more , Sri Lanka being a small market benefits to India
will not be much

• Presently there is substantial growth in trade between India

and Sri Lanka
Association of South East Asian Nations
(ASEAN)
• Established in 1967 by founding members Indonesia,
Malaysia, Philippines, Singapore and Thailand

• Headquarter at Jakarta

• At Present 10 Members : Brunei, Cambodia,

Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, Vietnam
• Objective was to foster economic, social Progress,
cultural development through joint endeavors.

• Promote regional peace and stability

• To provide assistance to each other in form of training

and research facilities in the educational, professional,
cultural, technical, scientific and administrative fields

• To maintain close and beneficial cooperation with

existing international and regional organizations with
similar aims and purposes
 ASEAN and India
• ASEAN is more globally integrated for trade than India
• It accounts for one –tenth of India’s foreign trade
• Among ASEAN - Singapore is major trade partner. Other
countries with India has significant trade relations are :
Malaysia, Indonesia, Thailand
 ASEAN India Free Trade Agreement
(AIFTA)
• Came into effect from 2010
• Seeks to eliminate tariffs for about 4000 products.
• Beneficiaries in India – exporters of the machinery, steel,
wheat, auto components, synthetic textiles, Pharma, gems &
Jewellery.
• This treaty may adversely affect China’s exports to India as well
as ASEAN