REGIONAL ECONOMIC INTEGRATION

REGIONAL ECONOMIC INTEGRATION

• Agreements between groups of countries in a
geographic region to reduce and ultimately remove,
tariff and non tariff barriers to the free flow of goods,
services and factors of production between each
other.
• Consistent with the predictions of international
trade theory and the theory of comparative
advantage
• Produce nontrivial gains from trade for all
member-countries.
• Aim to reduce trade barriers more rapidly than
can be achieved under the auspices of the WTO.
• General Agreement on Tariffs and Trade (GATT) and
the World Trade Organization (WTO) seek to reduce
trade barriers with a worldwide perspective
 REGIONAL ECONOMIC INTEGRATION
• January 1, 1993 - European Union (EU) effectively
became the first single market with 360 million
consumers
• Member-states of the EU have single currency Euro
• North American Free Trade Agreement (NAFTA) -
Agreement between Canada, Mexico, and the
United States.
• Mercosur – Agreement between Argentina, Brazil,
Paraguay and Uruguay
• South American Free Trade Area (SAFTA) –
Agreement
• Asian Pacific Economic Cooperation forum (APEC) –
Possibility of creation of a pan-Pacific free trade
area between 18 Pacific Rim countries, including
the NATFA member states, Japan, and China,
OBJECTIVES OF REGIONAL
INTEGRATION

1. To explore the economic and political debate

surrounding regional economic integration,
paying particular attention to the economic
and political benefits and costs of integration
2. To review progress toward regional
economic integration around the world
3. To map the important implications of
regional economic integration for the
practice of international business.
REGIONAL HARMONIZATION:
ECONOMIC INTEGRATION

• To stimulate the exchange of economic wealth

within regions and blocs
• Total trade tends to increase within a region of
trading nations due to reduction of interstate
controls.
• Enterprises are artificially encouraged to expand
their operations into other markets within the
region.
• To have an overall positive effect on trade by
providing increased understanding within trading
blocs and more cooperation among nations.
• To serve as barriers to outsiders.
• Each form implies more or less control and/or loss
of sovereignty.
• All forms of integration require very careful point-
by-point interstate negotiations.
 RIRI Functions
• Strengthening the trade integration in region.
• Creation an appropriate environment for trade.
• Development of infrastructure in support of economic
growth and regional integration.
• Development of industry and governance.
• Social and economical inclusion.
• Contribution to peace and security in the region.
• Strengthening regional interaction.
 Impacts RI
• Reduction of tariffs
• Reduction of non tariff
• Potential greater exchange rate stability
• Greater efficiency in allocation of resources
due to increased in competition.
• Commercial change
• Monetary integration I
• FDI and export
HIERARCHY OF ECONOMIC
INTEGRATION
Give up Most Political
Sovereignty union

USA, Canada
Economic Ex-Soviet
union Union

Common EU (Post-1993)
market

Customs EC (Pre-1993)
union
Give up Most
Sovereignty Free
trade BENELUX
area
Shared, NAFTA
free
zone LAFTA

Give up Least
Sovereignty
 LEVELS OF ECONOMIC
INTEGRATION

• Free Trade Area

• Customs Union
• Common
Market
• Economic union
• Political Union SAFTA SUBMIT
 LEVELS OF ECONOMIC
INTEGRATION

• Free Trade Area In free trade area all

barriers to the trade of
• Customs Union goods and services
among member-
• Common Market countries are removed.
• Economic union
• Political Union
 Free Trade Area
• The most enduring free trade area in the world is the
European Free Trade Association (EFTA).
– Established in January 1960
– Founded by those Western European countries who
initially were not a part of the EU
– Currently has three countries - Norway, Iceland, and
Switzerland down from six in 1995 (on January 1, 1996,
three EFTA members, Austria, Finland, and Sweden
joined the EU).
– Original members included Austria, Britain, Denmark,
Finland, and Sweden, all of whom are now members of
the EU.
– The emphasis of EFTA has been on free trade in industrial
goods.
– In the main, agriculture was left out of the arrangement,
each member being allowed to determine its own level of
support.
– Members were free to determine the level of protection
applied to goods coming from outside EFTA.
• Other free trade areas include the North American Free
Trade Agreement (NAFTA).
 FREE TRADE ZONES (FTZ)

• The earliest form of economic cooperation among nations

• Small areas of property (a warehouse or fenced field)
designated within the customs territory of a nation, wherein
goods might be stored without paying tariff until the goods
are entered into the customs territory for consumption.
• No tariff is paid if the goods are re-exported.
• Are typically fenced warehouses or even areas surrounding
factories which are under the enforcement of the customs
service.
• Goods brought to the zone may be manipulated or otherwise
changed prior to entry.
 Free trade area/agreement
(two or more countries)

• Free trade areas may be bilaterally or multilaterally

negotiated
• Contents of the agreement can and do include the
harmonization of many conditions that range from customs
procedures, to rules of origin, to the range of products to be
included (industrial, agricultural, complete exchange)
• Typically the nations involved agree to reduce or abolish
mutual import duties and other restrictions which could
include some non-tariff barriers (NT), often defining a time
period during which duties are gradually changed
• A common internal tariff (CIT) system tends to improve the
uniformity and transparency of existing interstate controls
 Free trade area/agreement
(two or more countries)
• Free trade agreements do not go so far as to harmonize the
economic policies of the negotiating nations.
• Doesn’t have a negotiated common external tariff (CXT).
• Each member country retains its own tariff and quota system
on trade with a third country.
• As a result outside exporters sometimes scheme to send
their goods by way of the country with least tariff for their
particular good or service.
– These agreements can be defective unless rules of origin are
carefully enforced.
• Leads to complaints from exporters and shippers of “having
to go back to the grave” for information on parts or an
ingredient’s origin.
FTA composed of four nations

• Examples
– European Free Trade Association (EFTA),
– North American Free Trade Agreement (NAFTA)
– Latin American Free Trade Association (LAFTA),
– Australian, New Zealand Free Trade Association
(ANZAC),
– Caribbean Free Trade Association (CARIFTA).
 LEVELS OF ECONOMIC
INTEGRATION
• One step further along the road to full
economic and political integration
• Free Trade Area
• Eliminates trade barriers between
• Customs Union member-countries and adopts a common
external trade policy
• Common Market
• Establishment of a common external
• Economic union trade policy necessitates significant
• Political Union administrative machinery to oversee
trade relations with nonmembers

• Most countries that enter into a customs

union desire greater economic integration

• The EU began as a customs union and

has moved beyond this stage
 Customs Union
• Other customs unions include the Andean Pact
(between Bolivia, Colombia, Ecuador, and Peru).
• The aims of the Andean Pact are to establish free
trade between member- countries and to impose a
common tariff, of 5 to 20 percent, on products
imported from outside.
• A customs union abolishes most protectionism
inside the union and sets up a common external
tariff (CXT) system with regard to outside
countries.
• Includes common non-tariffs (CNT) as well.
• Sophisticated level of economic integration, but
does not go so far as to harmonize the economic
policy within the negotiated region.
– Examples include: Belgium, the Netherlands and
Luxemburg (BENELUX) and the Economic Community of
West African States (ECOWAS). Figure 14.5 shows a
customs union with its common external tariff.
 LEVELS OF ECONOMIC
INTEGRATION
• Like a customs union, the
theoretically ideal common market
• Free Trade Area has no barriers to and a common
external trade policy.
• Customs Union • Factors of production also are
allowed to move freely between
• Common Market member-countries.
• Thus labor and capital are free to
• Economic union move, as there are no restrictions on
• Political Union immigration, emigration, or cross-
border flows of capital between
member-countries.
• Hence, a much closer union is
envisaged in a common market than
in a customs union.
• The EU is currently a common
market, although its goal is full
economic union.
 Common Market
• Other than the EU, no successful common market has been
established, although several regional groupings have aspired
to this goal.
• Establishing a common market demands a significant degree
of harmony and cooperation on fiscal, monetary, and
employment policies.
• Achieving this degree of cooperation has proven very difficult.
• A common market also allows the free transfer of the factor
endowments: capital, technology, management/know-how,
labor, and intelligence, as well as products between member
nations.
• Under certain crisis situations, such as massive
unemployment or foreign exchange shortages, an individual
nation may temporarily erect barriers to the free flow
between itself and the other members.
– Examples are: European Economic Community (EEC), Central
American Common Market (CACM), and Andean Common Market
(ANCOM).
 LEVELS OF ECONOMIC
INTEGRATION
• An economic union entails closer economic
• Free Trade Area integration and cooperation than a common
market.
• Customs Union • Involves the free flow of products and
factors of production between member-
• Common Market countries and the adoption of a common
external trade policy.
• Economic union • A full economic union also requires a
common currency, harmonization of the
• Political Union member-countries tax rates, and a common
monetary and fiscal policy.
• Such a high degree of integration demands a
coordinating bureaucracy and those
member-countries sacrifice significant
amounts of their national sovereignties to
that bureaucracy.
• There are no true economic unions in the
world today, but the EU aims to establish
itself as one by the end of the century.
 LEVELS OF ECONOMIC
INTEGRATION
• Political union solves the issue of how to make
a coordinating bureaucracy accountable to the
• Free Trade Area citizens of member-nations.
• The EU is already on the road toward political
• Customs Union union.
• The European Parliament, which is playing an
• Common Market ever more important role in the EU, has been
directly elected by the citizens of the EU
• Economic union countries since the late 1970s.
• In addition the Council Of Ministers (the
• Political Union controlling, decision-making body of the EU)
is composed of government ministers from
each EU member-country.
• Canada and the United States provide
examples of closer degrees of political union ;
in each country independent states were
effectively combined into a single nation.
• Ultimately, the EU may move towards a
similar federal structure.
 Trade Integration

• India (I), China (C), and the rest of the world (R)
all initially trade with each other and all have
tariffs,
• I and C abolish all tariffs on each other’s products
but maintain their tariffs on goods from R, whose
commercial policy is unchanged.
• In this kind of integration the reduction of tariffs
between I and C is a move toward free trade,
which we might expect to be beneficial.
• But now goods from R are subjected to a tax in I
and C, whereas similar goods from I and C,
respectively, are not.
 Trade Creation

• The elimination of tariffs between I and

C creates trade between these two
countries and generates gains.
• Each country concentrates more on
producing the goods in which it has a
comparative advantage relative to the
other country, and trade expands,
causing marginal rates of
transformation and subtraction in I to
equal those in C.
 Trade Diversion

• Since I levy a tariff when the same goods are

imported from C, residents of I will how buy
from C some products that were previously
purchased from R.
• Similarly, C residents will divert their trade
from R to I.
• This trade diversion is necessarily inefficient
because if I residents chose to buy from R
suppliers, when then competed on equal terms
with C suppliers, it must be that the former
could supply the product more favorably.
 Balance of Trade Creation
and Trade Diversion
• Trade creation is beneficial, and trade diversion is
harmful.
• When one dominates depends upon
circumstances, based integration may or may not
be a good thing.
• If, before integration, most of F’s trade is with C,
trade creation will likely dominate because their is
not much have with R to be diverted.
• Thus the larger the extent of the integration, the
more likely it is to be beneficial.
• Integration of the whole world can involve to
trade diversion (in the absence of interplanetary
trade).
• If on the other hand, most of the products that I
imports can be produced more cheaply in R than
in C, integration with C is likely to be harmful.
 Trade Modification
• Trade modification might mean that integration between C
and I either increase or decreases trade with R, depending
upon the relative importance of complements and
substitutes.
• There is a more fundamental difference between trade
diversion and trade modification.
• Trade Diversion result when integration involves a new
distortion: price recrimination. This, by itself, is necessarily
had Trade modification by contrast does not involve the
introduction of price discrimination but rather the substitution
of one pattern of world tariff by another. This may be good or
bad.
• Terms of Trade Effects:
– If the partners together are sizable in the world markets in
which they deal, integration could alter world prices of products.
– If I and C together are significantly more important in world
markets than either separately, integration would enable the two
jointly to exercise more monopoly power.
 Regionalism Vs
Multilateralism
• As defined by Winter, regionalism can be loosely
defined as any policy designed to reduce trade
barriers between a subset of countries regardless
of whether those countries are actually
contiguous or even close to each other.
• Regional Trading Arrangements on the other hand
are based on the principle of discrimination as it
goes for liberalization of trade within a group of
country – a discriminating policy towards the rest
of the world.
• This is against the most favoured nation
treatment of WTO, which says that a country
cannot discriminate among its trading partners.
 Regionalism Vs
Multilateralism
• Multilateralism on the other hand has been defined by
Winter as a characteristic of the world economy or
world economic system. Winters has defined
multilateralism as a function of:-
• The degree to which discrimination is absent and
• The extent to which the country’s trading regime
approximates free trade.
• Multilateralism is been pursued through multilateral
trade negotiations under the General Agreement on
Tariffs and Trade (GATT) and the World Trade
Organization (WTO).
• Multilateralism practiced under GATT/WTO, is based
on the principles of non-discrimination in trade. The
principle is enunciated in article I (“General Most
Favoured Nation Treatment, or MFN) and articles III
(“National Treatment on Internal Taxation and
Regulation”, or NT) of GATT.
 REGIONAL ECONOMIC
INTEGRATION IN EUROPE
• Two trade blocs in Europe;
– The European Union (EU)
– The European Free Trade Association (EFTA)
• EU is by far the more significant, not just
in terms of membership (the EU has 15
members, and EFTA has 3), but also in
terms of economic and political influence
in the world economy.
• Many now see the EU as an emerging
economic and political superpower of the
same order as the United States and
Japan.
Evolution of the European
Union
• The EU is the product of two political factors;
• the devastation of two world wars on Western Europe
and the desire for a lasting peace
• the European nations' desire to hold their own on the
world's political and economic stage.
• In addition many Europeans were aware of the
potential economic benefits of closer economic
integration of their countries.
• The original forerunner of the EU, the European Coal
and Steel Community, formed in 1951 by Belgium,
France, West Germany, Italy, Luxembourg, and the
Netherlands.
• Its objective was to remove barriers to intragroup
shipments of coal, iron, steel, and scrap metal.
• With the signing of the Treaty of Rome in 1957, the
European Community (EC) was established.
• The name changed again in 1994 when the European
Community became the European Union following the
ratification of the Maastricht treaty.
 Evolution of the European
Union
• The Treaty of Rome provided for the creation of the common
market.
• Article 3 of the treaty calls for the elimination of internal trade
barriers and the creation of a common external tariff and requires
member-states to abolish obstacles to the free movement of factors
of production among the member-states.
• To facilitate the free movement of goods, services, and factors of
production, the treaty provides for any necessary harmonization of
the member-states' laws.
• The treaty committed the EC to establish common policies in
agriculture and transportation.
• The first enlargement of the community occurred in 1973, when
Great Britain, Ireland, and Denmark joined.
• These three A-ere followed in 1981 by Greece, in 1986 by Spain and
Portugal, and in 1996 by Austria, Finland, and Sweden bringing the
total membership to 15 (East Germany became part of the EC after
the reunification of Germany in 1990).
• With a population of 350 million and a GDP greater than that of the
United States, these enlargements made the EU a potential global
superpower.
 Political Structure of the
European Union and Euro-
Currency
• Political Structure
– The economic policies of the EU are formulated and implemented by
a complex and the European Union still-evolving political structure.
– The five main institutions in this structure are the European Council,
the Council of Ministers, the European Commission, the European
Parliament, and the Court of justice.
• The Euro Currency
– In December 1991 leaders of the 12 EC member-states met in
Maastricht, the Netherlands, to discuss the next steps for the EC.
– Need for a common currency discussed as common currency was
required to cement a closer economic union.
– The 12 members signed a treaty to adopt a common EC currency by
January 1, 1999.
– This also paved the way for closer political cooperation and the
possible creation of a European super state.
• The treaty lays down the main elements, if only in embryo. of a
future European government: a single currency, a common
foreign and defense policy, a common citizenship, and an EU
parliament with teeth.
 EU AND INDIA
A NEW MOMENTUM FOR THE NEW
MILLENNIUM
The EU’s Objectives
1. To promote economic and social progress (the single market
was established in 1993; the single currency was launched in
1999).
2. To assert the identity of the European Union on the
international scene (through European humanitarian aid to
non-EU countries, common foreign and security policy, action
in international crises; common positions within international
organizations).
3. To introduce European citizenship (which does not replace
national citizenship but complements it and confers a number
of civil and political rights on European citizens).
4. To develop an area of freedom, security and justice (linked to
the operation of the internal market and more particularly the
freedom of movement of persons).
5. To maintain and build on established EU law (all the
legislation adopted by the European institutions, together
with the founding treaties).
THE INSTITUTIONS
There are five institutions involved in running the
European Union:
1. The European Parliament (elected by the
peoples of the Member States),
2. The Council (representing the governments
of the Member States),
3. The Commission (the executive and the
body having the right to initiate legislation),
4. The Court of Justice (ensuring compliance
with the law),
5. The Court of Auditors (responsible for
auditing the accounts).
These institutions are supported by other bodies:
• The Economic and Social Committee and the
Committee of the Regions (advisory bodies
which helps to ensure that the positions of the
EU'’ various economic and social categories and
regions, respectively, are taken into account),
• The European Ombudsman (dealing with
complaints from citizens concerning
maladministration at European level),
• The European investment Bank (EU financial
institution) and
• The European Central Bank (responsible for
monetary policy in the euro-area).
Major items of import
with India
Chemical and
allied products
9%
Metal and Metal
Products
6%
30%
Transport
4% Equipment
Others

14%
Gems & Jewellery

37%
Engineering
Goods
Major items of export
with India
Agriculture &
Allied Products
8% 9%
Engineering
11% 9% Goods
Others
12%
19%
Textile &
32%
Clothing
Gems &
Jewellery
Leather &
Leather Goods
Chemical &
Allied Products
 FIRST EU-INDIA SUMMIT AT
LISBON: AGENDA FOR ACTION
1. Enhancing bilateral dialogue by holding further regular Summits, Foreign
Ministers’ meetings every year and Senior Officials and experts’ meetings each
semester, which will address foreign policy and security issues of common
concern.
2. Coordinate efforts to promote and protect all human rights and fundamental
freedoms referred to in the Joint Declaration.
3. Initiate dialogue on preventing and combating terrorism and to strive for a
Comprehensive Convention on International Terrorism.
4. Strengthen co-operation to combat international drug trafficking and drug abuse.
5. Cooperate closely in identifying and furthering common interests in
international organizations.
6. Continue to work together to eradicate chemical and biological weapons.
7. Work together for the complete elimination of nuclear weapons, proliferation
and their means of delivery.
8. Launching of the India-EU Round Table.
9. Launching of the EU-India Think Tank Network .
10. Continue to strengthen the High Level Economic and Commercial Dialogue on
bilateral and multilateral trade, economic and financial issues.
11. Commence joint initiatives in the fields of information technology and
telecommunications.
12. Work towards on Agreement on Co-operation in Science & Technology.
13. Draw up plans on co-operation in culture and education and for exchange of
expertise in the field of management.
14. Endeavor to complete the elaboration of a new sector programme in elementary
education within the year.
15. Join efforts towards setting up on Institute of Environment Technology in India.
16. Promote bilateral initiatives in the field of environment and facilitate coordination on
multilateral environmental issues.
17. Further enhance economic cooperation for rapid development of infrastructure,
including telecommunications, energy and transport in India.
18. Work jointly to promote and increase flows of goods and services between the EU
and India.
19. Address all obstacles with a view to stimulate EU investment in India.
20. Facilitate industry and business links.
21. Consult each other within the existing fora on anticipated regulatory and other
measures affecting the flow of trade, investment and services with a view to resolve
problems at an early stage.
22. Establish a regular high-level dialogue on WTO issues.
THE NAFTA AGREEMENT
NAFTA became law in January 1, 1994. The contents of the agreement include the
following:
• NAFTA would mean abolition within 10 years of tariffs on 99 percent of the goods
traded among Mexico, Canada, and the United States.
• NAFTA would remove most of the barriers on the cross-border flow of services,
allowing financial institutions, for example, unrestricted access to the Mexican
marketplace by 2000.
• NAFTA contains provisions to protect intellectual property rights.
• NAFTA removes most restrictions on foreign direct investment between the three
member countries, although special treatment (protection) will be given to
Mexican energy and railway industries, U.S. airline and radio communications
industries, and Canadian culture.
• Under NAFTA each country is allowed to apply its own environmental standards,
provided such standards have a scientific basis. Lowering of standards to lure
investment is described as being inappropriate.
• NAFTA established two commissions with the power to impose fines and remove
trade privileges when environmental standards or legislation involving health and
safety, minimum wages, or child labor are ignored.
 NAFTA ARGUMENTS
• Arguments for NAFTA
– One likely short-term effect of
NAFTA will be that many U.S.
and Canadian firms will move
some of their production to
Mexico to take advantage of
lower labor costs.
– Proponents argue that NAFTA
should be viewed as an
opportunity to create an enlarged
and more efficient productive
base for the entire region .
– In addition the international
competitiveness of U.S. and
Canadian firms that move
production to Mexico to take
advantage of lower labor costs
will be enhanced, enabling them
to better compete with Asian and
European rivals.
• Arguments against NAFTA
– Those who opposed NAFTA claimed
ratification would be followed by a
mass exodus of jobs from the United
States and Canada into Mexico as
employers sought to profit from
México lower wages and less strict
environmental and labor laws
– The short-run outcome is bound to be
painful economic restructuring and
unemployment in Mexico. But if
economic theory is any guide, in the
long run there should be dynamic
gains in the efficiency of Mexican
firms as they adjust to the rigors of a
more competitive marketplace
 ASEAN (Association of
South East Asian Nations)
• Formed in 1967.
• The basic objectives of ASEAN are to foster freer trade
between member-countries and to achieve some
cooperation in their industrial policies.
• Presently has six members including Brunei, Indonesia,
Malaysia, Philippines, Singapore and Thailand.
• These ASEAN countries are characterized by
abundance of natural resources, large international
trade sectors, and an emphasis on free market
economic policies.
• Singapore and Thailand are two of Southeast Asia's
most successful economies.
 ASEAN IN INDIA

• ASEAN countries continue to command special attention

of India as growing markets for India's exports.
• The ASEAN countries will also find the relatively large
Indian Market of at least 300 million rich people to be an
attractive market for exports and as location for their
possible foreign investment.
• The Indian economy is opening up and wishes to be
more closely linked to the global economy. It has already
liberalized imports of products and technology.
• Recognizing the economic importance of India, the
ASEAN has already accorded India the status of a “
sectoral dialogue partner”.
OPPURTUNITIES

• The creation of a single market offers significant opportunities as

markets that were protected from foreign competition are opened.
• These markets are now much more open to foreign competition in the
form of both exports and direct investment.
• Free movement of goods across borders, harmonized product
standards and simplified tax regimes make it possible for firms based
in the EU and the NAFTA countries to realize potentials enormous
cost economies by centralizing production in those EU and NAFTA
locations where the mix of factor costs and skills is optimal.
• The removal of barriers to trade and investment, enduring differences
between nations in culture and competitive practices often limit the
ability of companies to realize cost economies by centralizing
production in key locations and producing standardized product for
the single multicountry market.
THREATS
• The Business Environment within both groups will become
more competitive.
• The lowering of barriers to trade and investment between
countries is likely to lead to increased price competition
throughout the EU and North America. To survive in the
tougher single market environment, firms must take advantage
of the opportunities offered by the creation of a single market
to rationalize their production and reduce their costs.
• The creation of a single market and the resulting increased
competition in the EU can be expected to result in serious
attempts by many EU firms to reduce their cost structure by
rationalizing production.
• A final threat to non-EU and/or non-North American firms
inherent in the creation of a single market, This is the threat of
being shut out of the single market by the creation of 'Fortress
Europe' or “Fortress North America” .
Thank you!