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Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

Chapter 6: International Economic Chapter 6: International Economic IntegrationsIntegrations

International BusinessInternational Business

Rakesh Mohan Joshi Rakesh Mohan Joshi

Professor & Chairperson, IIFT New DelhiProfessor & Chairperson, IIFT New Delhi

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INTERNATIONAL INTERNATIONAL ECONOMIC INTEGRATIONS ECONOMIC INTEGRATIONS

Chapter 6



Learning ObjectivesLearning Objectives To provide an overview of international To provide an overview of international

economic integrationeconomic integration To make clear the theoretical framework To make clear the theoretical framework

of special Trading Agreementsof special Trading Agreements To explicate various forms of international To explicate various forms of international

economic integrationeconomic integration To discuss major international economic To discuss major international economic

trade groupstrade groups To briefly outline India’s participation in To briefly outline India’s participation in

PTAsPTAs To evaluate regional trading agreements To evaluate regional trading agreements

under the WTO frameworkunder the WTO framework



Significance of PTAsSignificance of PTAsEconomic integrations among countries significantly Economic integrations among countries significantly

influence international business. The preferential influence international business. The preferential

treatment granted to member countries affects the treatment granted to member countries affects the

competitiveness of goods in international markets. competitiveness of goods in international markets.

Elimination of import tariffs by the member countries Elimination of import tariffs by the member countries

of a trade group encourages sourcing of goods from of a trade group encourages sourcing of goods from

cost-efficient production locations. However, cost-efficient production locations. However,

discriminatory tariff against non-members do result discriminatory tariff against non-members do result

in trade diversion to member countries, even at the in trade diversion to member countries, even at the

cost of production efficiency. cost of production efficiency.



Trade-Creation ImpactTrade-Creation Impact

Formation of an FTA results in the Formation of an FTA results in the expansion of consumption opportunities expansion of consumption opportunities by making available low-cost goods. by making available low-cost goods.



Trade-Diversion ImpactTrade-Diversion Impact

Formation of an FTA results in trade diversion to its Formation of an FTA results in trade diversion to its

members from non-members since the elimination members from non-members since the elimination

of import tariffs among member countries makes of import tariffs among member countries makes

sourcing of goods from member countries more sourcing of goods from member countries more

attractive compared to non-members, even at the attractive compared to non-members, even at the

cost of production efficiency. cost of production efficiency.



Forms of International Economic Forms of International Economic Integration Integration



Preferential Trade Agreement (PTA)Preferential Trade Agreement (PTA)

Member countries in a PTA lower tariff Member countries in a PTA lower tariff

barriers to imports of identified products barriers to imports of identified products

from one another e. g. ECOWAS, GSTP, from one another e. g. ECOWAS, GSTP,

COMESA, etc. COMESA, etc.



Free Trade Agreement (FTA)Free Trade Agreement (FTA)

Form of economic integration in which Form of economic integration in which

member countries seek to remove all member countries seek to remove all

tariffs and non-tariff barriers for cross-tariffs and non-tariff barriers for cross-

border trade of goods and services among border trade of goods and services among

themselves e.g. NAFTA, LFTA., etc.themselves e.g. NAFTA, LFTA., etc.



Customs Union (CU) Customs Union (CU)

Countries not only eliminate tariff barriers among Countries not only eliminate tariff barriers among

themselves but also apply common external themselves but also apply common external

import tariffs for non-members e. g. CARICOM, import tariffs for non-members e. g. CARICOM,

CACM, etc.CACM, etc.



Common Market (CM)Common Market (CM)

In addition to free trade among members In addition to free trade among members

and uniform tariff policy for non-members in and uniform tariff policy for non-members in

a common market, it involves elimination of a common market, it involves elimination of

all restrictions on cross-border investments, all restrictions on cross-border investments,

movement of labour, technology transfer, movement of labour, technology transfer,

management, sharing of capital resources, management, sharing of capital resources,

e.g. COMESA, MERCOSUR, etc. e.g. COMESA, MERCOSUR, etc.



Economic Union (EU)Economic Union (EU)

It enjoys much greater level of economic It enjoys much greater level of economic

integration where free exchange of goods and integration where free exchange of goods and

services takes place. The member countries in an services takes place. The member countries in an

economic union also maintain a fiscal discipline, economic union also maintain a fiscal discipline,

stability in exchange, and interest rates by way stability in exchange, and interest rates by way

of unified monetary and fiscal policies. of unified monetary and fiscal policies.



Political Union (PU)Political Union (PU)

As a culmination of economic integration, the As a culmination of economic integration, the

member countries strive to harmonize their member countries strive to harmonize their

security and foreign policies. A common security and foreign policies. A common

parliament is created with representatives of parliament is created with representatives of

member countries who work in member countries who work in

synchronization with an individual country’s synchronization with an individual country’s

legislature. legislature.



Major Regional Trade AgreementsMajor Regional Trade Agreements



European UnionEuropean Union (EU)(EU)

Aimed at promoting regional co-operation among Aimed at promoting regional co-operation among

countries in Europe, in addition to trade and countries in Europe, in addition to trade and

economy, the EU deals with many other subjects, economy, the EU deals with many other subjects,

such as citizens’ rights; ensuring freedom, security, such as citizens’ rights; ensuring freedom, security,

and justice; job creation; regional development; and justice; job creation; regional development;

environmental protection; and promoting environmental protection; and promoting

globalizationglobalization



North American Free Trade Area (NAFTANorth American Free Trade Area (NAFTA))

Formed on 1 January, 1994, the economic Formed on 1 January, 1994, the economic

integration between the US, Canada and integration between the US, Canada and

Mexico aims at elimination of trade Mexico aims at elimination of trade

barriers related to industrial goods and barriers related to industrial goods and

services, besides separate agreement on services, besides separate agreement on

agriculture, intellectual property rights, agriculture, intellectual property rights,

labour adjustment, and environmental labour adjustment, and environmental

protection. protection.



MERCOSUR MERCOSUR (Mercado Comun del Sur)(Mercado Comun del Sur)

MERCOSUR, created in March 1991, aims at MERCOSUR, created in March 1991, aims at

allowing free movement of goods, capital, allowing free movement of goods, capital,

labour, and services with a common uniform labour, and services with a common uniform

external tariff among member countries in external tariff among member countries in

Latin America.Latin America.



Gulf Cooperation Council Gulf Cooperation Council (GCC)(GCC)

Aimed at promoting stability and Aimed at promoting stability and

economic cooperation among the Persian economic cooperation among the Persian

Gulf nations, the GCC was established on Gulf nations, the GCC was established on

25 May 1981. Its members include 25 May 1981. Its members include

Bahrain, Kuwait, Oman, Qatar, Saudi Bahrain, Kuwait, Oman, Qatar, Saudi

Arabia, and the United Arab Emirates. Arabia, and the United Arab Emirates.



Asia-Pacific Economic Cooperation Asia-Pacific Economic Cooperation (APEC)(APEC)

Established in 1989, APEC aims to enhance Established in 1989, APEC aims to enhance

economic growth and prosperity for the economic growth and prosperity for the

region and to strengthen the Asia-Pacific region and to strengthen the Asia-Pacific

Community. APEC has no treaty obligations Community. APEC has no treaty obligations

required of its participants. Decisions are required of its participants. Decisions are

reached by consensus and commitments reached by consensus and commitments

and undertaken on a voluntary basis. and undertaken on a voluntary basis.



Association of South East Asian Nations Association of South East Asian Nations (ASEAN)(ASEAN)

The ASEAN was established on 8 August 1967 with The ASEAN was established on 8 August 1967 with

major objectives: major objectives:

• To accelerate economic growth, social To accelerate economic growth, social

progress, and cultural development in the progress, and cultural development in the

region through joint endeavors region through joint endeavors

• To promote regional peace and stability To promote regional peace and stability

through abiding respect for justice and the through abiding respect for justice and the

rule of law in the relationship among rule of law in the relationship among

countriescountries



India’s Participation in PTAsIndia’s Participation in PTAs



SAARC Preferential Trading Agreement SAARC Preferential Trading Agreement (SAPTA)(SAPTA)

The SAPTA was signed on 11 April 1993 at The SAPTA was signed on 11 April 1993 at

the Seventh SAARC Summit held in Dhaka the Seventh SAARC Summit held in Dhaka

to provide a framework for the exchange to provide a framework for the exchange

of tariff concessions with a view to of tariff concessions with a view to

promoting trade and economic promoting trade and economic

cooperation among the SAARC member cooperation among the SAARC member

countries. countries.



South Asian Free Trade Agreement South Asian Free Trade Agreement (SAFTA)(SAFTA)

SAFTA has come into force from 1 January SAFTA has come into force from 1 January

2006 aimed at economic cooperation and 2006 aimed at economic cooperation and

integration among member countries. It integration among member countries. It

anticipates completion of the whole process anticipates completion of the whole process

of instituting free trade among the member of instituting free trade among the member

countries in ten years. countries in ten years.



Comprehensive Economic Cooperation Comprehensive Economic Cooperation Agreement Agreement (CECA)(CECA) between India and between India and

SingaporeSingapore

Signed on 29 June 2005, the CECA came Signed on 29 June 2005, the CECA came

into force on 1 August 2005. Besides trade into force on 1 August 2005. Besides trade

in goods, it also covers investment, in goods, it also covers investment,

services, mutual recognition agreements, services, mutual recognition agreements,

and customs co-operations. and customs co-operations.



Framework Agreement on Comprehensive Framework Agreement on Comprehensive Economic Cooperation between the Economic Cooperation between the

Association of South East Asian Nations Association of South East Asian Nations (ASEAN)(ASEAN) and India and India

The framework agreement between ASEAN and The framework agreement between ASEAN and India was signed on 8 October 2003. It covers India was signed on 8 October 2003. It covers several aspects such as: several aspects such as:

• gradual tariff reductions leading to formation of gradual tariff reductions leading to formation of FTAFTA

• trade facilitation measures, trade facilitation measures,

• Trade and investment promotion measuresTrade and investment promotion measures

• early harvest programmes early harvest programmes

• tariff concessionstariff concessions. .



Bay of Bengal Initiative for Multi-sectoral Bay of Bengal Initiative for Multi-sectoral Technical and Economic Co-operation Technical and Economic Co-operation

(BIMSTEC)(BIMSTEC) BIMSTEC provides a unique link between BIMSTEC provides a unique link between South Asia and Southeast Asia aimed to South Asia and Southeast Asia aimed to develop into an FTA and focus on activities that develop into an FTA and focus on activities that facilitate trade, increase investment, and facilitate trade, increase investment, and promote technical cooperation among member promote technical cooperation among member countries. countries. Six areas were identified for cooperation Six areas were identified for cooperation include trade and investment, technology, include trade and investment, technology, transportation and communication, energy, transportation and communication, energy, tourism, and fisheries.tourism, and fisheries.



Indo-Sri Lanka Free Trade Agreement Indo-Sri Lanka Free Trade Agreement (ISLFTA)(ISLFTA)

An FTA between India and Sri Lanka was An FTA between India and Sri Lanka was

signed on 28 December 1998. The signed on 28 December 1998. The

agreement envisages phasing out of tariffs agreement envisages phasing out of tariffs

on all products except for a limited number on all products except for a limited number

of items in the Negative List and tariff rate of items in the Negative List and tariff rate

quota items over a period of time.quota items over a period of time.



Asia-Pacific Trade Agreement Asia-Pacific Trade Agreement (APTA)(APTA) ((Bangkok Agreement)Bangkok Agreement)

The Bangkok agreement was approved by the The Bangkok agreement was approved by the

GATT council in March 1978 aimed to liberalize GATT council in March 1978 aimed to liberalize

and expand trade progressively in the ESCAP and expand trade progressively in the ESCAP

region through mutually agreed concessions by region through mutually agreed concessions by

member countries. From 2 November 2005, this member countries. From 2 November 2005, this

agreement is renamed the Asia Pacific Trade agreement is renamed the Asia Pacific Trade

Agreement (APTA). Agreement (APTA).



Global System of Trade Preferences Global System of Trade Preferences (GSTP)(GSTP)

The GSTP establishes a framework for exchange of The GSTP establishes a framework for exchange of

trade concessions among the member developing trade concessions among the member developing

countries. It also lays down the rules, principles, countries. It also lays down the rules, principles,

and procedures for conduct of negotiations and and procedures for conduct of negotiations and

implementation of the decisions made.implementation of the decisions made.



Generalized System of Trade Preferences Generalized System of Trade Preferences (GSP)(GSP)

The GSP is a non-contractual instrument by The GSP is a non-contractual instrument by

which developed countries extend tariff which developed countries extend tariff

concessions to developing countries concessions to developing countries

unilaterally and on the basis of non-unilaterally and on the basis of non-

reciprocity.reciprocity.



Framework Agreement for Establishing FTA Framework Agreement for Establishing FTA between India and Thailandbetween India and Thailand

Signed on 9 October 2003, the framework Signed on 9 October 2003, the framework

agreement covers FTA in goods, services and agreement covers FTA in goods, services and

investment, and areas of economic cooperation. investment, and areas of economic cooperation.

It also provides an Early Harvest Scheme (EHS) It also provides an Early Harvest Scheme (EHS)

under which common items have been agreed under which common items have been agreed

for elimination of tariffs on a fast-track basis. for elimination of tariffs on a fast-track basis.



Bilateral Preferential Trading Agreement Bilateral Preferential Trading Agreement with Afghanistanwith Afghanistan

The Preferential Trade Agreement The Preferential Trade Agreement

between India and Afghanistan, signed on between India and Afghanistan, signed on

6 March 2003, aims to provide for grant or 6 March 2003, aims to provide for grant or

concessions on a range of products of concessions on a range of products of

export interest to Afghanistan, as a part export interest to Afghanistan, as a part

of India’s endeavour to strengthen of India’s endeavour to strengthen

bilateral trade and economic relations. bilateral trade and economic relations.



India–MERCOSUR PTAIndia–MERCOSUR PTA

Signed on 19 March, 2005, the PTA aims to Signed on 19 March, 2005, the PTA aims to

expand and strengthen existing trade expand and strengthen existing trade

relations between India and MERCOSUR by relations between India and MERCOSUR by

granting reciprocal fixed trade preferences granting reciprocal fixed trade preferences

with the ultimate objective of creating an FTA.with the ultimate objective of creating an FTA.



India-Chile Framework Agreement on India-Chile Framework Agreement on Economic CooperationEconomic Cooperation

Signed on 20 January 2005, the Signed on 20 January 2005, the

agreement envisages a PTA between the agreement envisages a PTA between the

two countries. two countries.



Indo–Gulf Cooperation Council Indo–Gulf Cooperation Council (GCC)(GCC) FTA FTA

Signed on 25 August 2004, it also aims to Signed on 25 August 2004, it also aims to

include services as well as investment and include services as well as investment and

general economic cooperation alongwith general economic cooperation alongwith

goods. goods.



Limitations of Regional Economic Limitations of Regional Economic IntegrationsIntegrations

It can create an incentive for even It can create an incentive for even

further discrimination, which eventually further discrimination, which eventually

will hurt all trading partners. will hurt all trading partners.

PTAs cannot solve systemic issues, such PTAs cannot solve systemic issues, such

as rules of origin, anti-dumping, as rules of origin, anti-dumping,

agricultural, and fisheries subsidies. agricultural, and fisheries subsidies.

These issues simply cannot be handled These issues simply cannot be handled

at the bilateral or regional level. at the bilateral or regional level.



The proliferation of Regional Trade The proliferation of Regional Trade

Agreements can greatly complicate the trading Agreements can greatly complicate the trading

environment, creating a web of incoherent environment, creating a web of incoherent

rules. rules.

To many small and weak developing countries To many small and weak developing countries

entering into a PTA with a powerful big country entering into a PTA with a powerful big country

means less leverage and a weaker negotiating means less leverage and a weaker negotiating

position as compared to that in the multilateral position as compared to that in the multilateral

talks. talks.



Regional Trade Agreements Vis-à-vis Regional Trade Agreements Vis-à-vis Multilateral Trading System Under the Multilateral Trading System Under the

WTOWTO

RTAs are an important exception under Article XXIV RTAs are an important exception under Article XXIV

of the GATT Agreement to the MFN rule of the WTO of the GATT Agreement to the MFN rule of the WTO

agreements, under which tariff and other technical agreements, under which tariff and other technical

barriers to trade can be reduced on preferential barriers to trade can be reduced on preferential

basis by countries under the regional agreement. basis by countries under the regional agreement.

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