Regional Economic Integration

DRY
Jurusan Manajemen
Gedung 2, Lt. 1, Kampus Universitas Andalas Limau Manis,
Padang, Sumatera Barat, Indonesia 25163
Telp. +62 751 73530, +62 751 71088, Fax. +62 751 71089,
email: mdfeua@yahoo.com
International Business
Week 4
School of Management Andalas University
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Key Questions on Regional Economic
Integration
What are the different levels of economic
integration between nations?
What are the political and economic
arguments for and against regional
integration?
Discuss the composition of a few
important regional economic agreements
What are the implications of regional
economic integration for business?
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Regional Economic Integration
Agreements among geographically
proximate countries to
reduce/remove tariff and non-tariff
barriers and allow free flow of
Goods
Services
Factors of production, e.g., labor,
capital

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Levels of Economic Integration
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Levels of Economic Integration
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1. Free trade: All barriers to the trade of goods and services
among member countries are removed. No discriminatory
tariffs, quotas, subsidies or administrative impediments. Each
member keeps its own tariffs in regard of third parties.
Ex: AFTA, EFTA

2. Custom union: eliminates trade barriers between member
countries and adopt a common external trade policy.
The EU began as a custom union.
Ex: Andean Pact/Community (Bolivia, Colombia, Ecuador, Peru
and Venezuela)
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3. Common market: has no trade barriers between
member countries, includes a common external trade
policy and allows factors of production to move freely
between members.
Ex: MERCOSUR (South American Grouping of Argentina,
Brazil, Paraguay, Uruguay, Venezuela).

4. Economic union: involves the free flow of products and
factors of production between member countries and
adoption of common external trade policy, but it also
requires a common currency, harmonization of members
tax rate and a common monetary and fiscal policy.
European Union is the closest example.

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5. Political union: coordinates the economic,
social and foreign policy of the member
states.
The EU is on the road toward at least partial
political union.
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Reasons for Regional Integration
Economic development of member states
Free trade and FDI
Political Gains
Linked economies create interdependencies that
reduce political/military conflicts
Grouping gives countries more political clout world-
wide
However, there are a few impediments
Painful adjustments in non-competitive (inefficient?)
segments of the economy
Threat to national sovereignty
Countries benefit when trade creation exceeds trade
diversion (pp.254-255)

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Trade Creation versus Trade Diversion
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Implications for Business
Opportunities
Less protectionism within blocks
Lower cost of doing business (fewer borders)
Higher economic growth
Threats
Political, economic and cultural differences within blocks may
prevent the realization of full economic potential of REI
Increased price competition within blocks good for consumers
But, if mergers and acquisitions increased concentration and
market power high efficiency but reduced competition
negative impact on consumers
Rivalry between trading blocks can increase barriers
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Examples of Regional Blocks
EU www.europa.eu.int
NAFTA www.nafta-sec-alena.org
ASEAN www.aseansec.org
APEC www.apec.org
Q How does the existence of regional
agreements impact on the working of the
WTO?

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Summary: What we learnt today?
Government trade policy instruments
Why governments intervene to influence
import-export flows?
Global trading system (GATT, WTO)
Implications of government intervention
for business

School of Management Andalas University
Summary: What we learnt today?
Levels of economic integration among
nations
Political and economic arguments for and
against regional integration
Key regional economic agreements
Implications of regional economic
integration for business
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Merci
Adios