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Economic Integration

Economic integration is a new reality in the international business market. Business and governments have created a range of institutions, treaties, and agreements that help to
Overcome trade differences Boost the free movement of trade, investment, and services across national boundaries

Economic integration is concerned with:

The removal of trade barriers or impediments between at least two participating nations The establishment of cooperation and coordination between them

Integration creates high levels of globalization and regionalization

What are trading blocs?

Trading bloc: preferential economic arrangement among a group of countries.

Such blocs have liberal rules for member countries while a separate set of rules is laid for non-members. For example, European Union (EU), Association of South East Asian Nations (ASEAN).

Types of Trading Blocs

trade areas Customs Union Common Market Political Unions Economic Union

Free Trade Areas

Simplest form of economic integration which provides the internal free trade between member nations. Each member is allowed to determined its own commercial policy with respect to non-members.

Example: Latin American Free Trade Association (LAFTA)

Customs Union
More advanced form. Internal free trade among the member nations and also adopts a uniform commercial policy against the non-members.

Example: EEC European Economic Community

Common Market
There are no barriers to trade among members and factors of production such as capital, labour and technology are mobile among them. It has common commercial policy is respect to non-members.

Economic Union

Level of integration is more developed. Members adopt common economic policies like; Common Agricultural Policy of the European Union.
Example: European Union has introduced a common currency EURO 2000.

Political Union

It is the ultimate type of economic integration whereby member countries achieve not only monetary and fiscal integration but also political integration.
Example: the Europe Union (EU) is moving towards a political union similar to one created by 52 states of America.

Advantages of Trading Blocs

1. 2.

3. 4. 5.

Access to larger markets leads to internal economies of scale. External economies of scale due to improved infrastructure (e.g. transport and telecoms links) Greater international bargaining power. Increased competition between members. More rapid spread of technology.

Disadvantages of Trading Blocs



3. 4.

Country may lose resources to more efficient members, or to geographical center, and become depressed region. Firms may co-operate, collude and merge, leading to greater monopoly power. Diseconomies of scale if firms become very large. High administrative costs of trading bloc.

European Economic Community (EEC)

Economic integration in Europe from 1948 to the mid 1980s:

Organization for European Economic Cooperation (OEEC) Six member nations: France, Germany, Italy, Belgium, Netherlands and Luxembourg. Now there are 15 members. European Free Trade Association (EFTA) Common agricultural policy (CAP)

Organization of EEC

European Council Heads of State & President of European Commission Resolves major policy issues & sets direction 2x year European Commission Brussels, Belgium Proposing, implementing & monitoring compliance - EU laws Commissioners appointed by each country 5 year renewable terms Competition Commissioner regulator of competition and M&A Council of the European Union Ultimate controlling authority approves proposed laws 1 representative from each state varies with topic Use majority voting rules rather than unanimous agreement European Parliament Strasbourg, France Directly elected by population 732 members Debates legislation Consultative body Court of Justice Supreme appeals court for EU law 1 judge from each state required to act as independent officials

Functions of EEC/EU
Abolition of transnational trade restrictions Increase market opportunities Free movement of goods and services Economic changes Promoting education

North American Free Trade Agreement-NAFTA

North American integration has an interest in purely economic issues and there are no constituencies for political integration.
Came into being in 1994

U.S.-Canada Free Trade Agreement North American Free Trade Agreement (NAFTA) Member Countries: US, Canada and Mexico

Other Aspects of NAFTA

More business opportunities in Mexico. Enhance competitive advantage. Reduce the prices Enhance industrial development. Assist Mexico in earning additional foreign exchange. Improve political relations.

Residents of NAFTA can invest easily in other member nations. Protection of Intellectual Property Rights. Similar Product Standards Pollution Control.

What are the drawbacks?

Most of the US industries shifted to Mexico because Mexico offered less stringent policies. It was implemented without prior preparations.

Free Trade Blocs in America

Association of South-East Asian Nations (ASEAN)

The development in Asia has been different from that in Europe and the Americas Asian interest in regional integration is increasing for pragmatic reasons Asia accounts for 20% of world trade. It has substantial trade liberalisation. There are less formal agreements bilaterally and multilaterally in abundance. Examples are SAARC, and the China Circle. It has also created numerous sub-regional economic trade zones, which are named transnational export processing zones, natural economic territories, or growth triangles

Brief Background of ASEAN

A group of 6 Nations: Singapore, Brunei, Malaysia, Phillipines, Thailand and Indonesia In 1992- established CEPT (Common Effective Preferential Tariffs) Plan
Free trade area in 15 years. Tariff cut from 0.50% to 20% beginning with 15 products. Strength skilled and educated human resource. Created Asean Free Trade Area (AFTA) in 1994.

Contribution of ASEAN
Promotion of culture Improve cooperation in member countries Fight terrorism Rival NAFTA and EU