Module 5- Regional Integrations

8/2/2019 Module 5- Regional Integrations

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MODULE 5: REGIONAL INTEGRATIONS

Ref: Charles Hill

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M5- Regional Integrations


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SYLLABUS

Trading Blocks nature and levels of integration Arguments for and against regional integration

Trading blocks

European Union ASEAN

APEC

NAFTA

SAARC

ANDEAN PACT

MERCOSUR.

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REGIONAL INTEGRATION

Means agreements between groups of countries ina geographic region to reduce and ultimatelyremove tariff and non-tariff barriers to the free flowof goods, services and factors of production

between each other GATT and WTO are the biggest associations of

more than 150 member countries, which strive toreduce the barriers. But WTO has a globalperspective.

By entering into regional agreements, groups ofcountries aim to reduce trade barriers more rapidly

than can be achieved under WTO


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Agreements designed to promote freer trade withinregions will produce gains from trade for all membercountries

EU is a very successful movement towards theregional economic integration

The best example of the benefits of economicintegration and political union is the USA

Before the current constitution was written, thethirteen colonies had erected significant barriers totrade between each other and had separatecurrencies

Seeing that this was not working well, and wanting abetter system for their citizens, the founding fathersagreed to combine their separate states into a United

States


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LEVELS OF ECONOMIC INTEGRATION

Free trade area

Customs union

Common market

Economic union Full political union


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PoliticalUnion

EconomicUnion

Common

Market

CustomsUnion

FreeTradeArea


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FREE TRADE AREA

All barriers to the trade of goods & services among member

countries are removed No discriminatory tariffs, quotas, subsidies or administrative

policies are allowed to distort trade between members

Each country is allowed to determine its own trade policies

with regard to non-members


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CUSTOMS UNION

Eliminated trade barriers [or charges low tariff rates]

between member countries Adopts a common external trade policy

Facilitates significant administrative machinery to overseetrade relations with non-members


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COMMON MARKET

Eliminates trade barriers or charges low tariffrates among member countries

Adopts a common external trade policy

Also allows factors of production to movefreely between member countries

Labour and capital can move freely betweenmember countries as immigration restrictionswill not be there


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ECONOMIC UNION

Eliminates trade barriers or charges low tariff rates betweenmember countries

Adopts a common external trade policy

Allows free flow of factors of production especially labour &

capital Also follows uniformity in [common] monetary policy & fiscal

policy among member countries. Also follow a commoncurrency

Demands a coordinating bureaucracy & sacrifice ofsignificant amounts of national sovereignty to thatbureaucracy

EU is an economic union but imperfect one as somemember countries have not adopted Euro as commoncurrency & have differences in tax rates


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POLITICAL UNION

Through political union, a coordinatingbureaucracy accountable to the citizens ofmember countries can be created

Ex: EU is moving towards political union.European Parliament has been directlyelected by citizens of EU countries since late

1970s Ex: Council of ministers is composed of

government ministers from each EU

member.


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ARGUMENTS FOR REGIONAL INTEGRATION

Economic case for integration Free trade results in greater world production It also stimulates economic growth in countries Free trade and investment is a positive sum game

where all the participating countries gain GAT and WTO monitoring & facilitating free trade and

investment between countries But it is very difficult to get all countries to agree to a

common set of rules So it is easy to establish a free trade and

investment regime among a limited no. of countriesthan among the world economy. So the result isRegional Integration


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Political case for integration

By linking neighboring economies & makingthem increasingly dependent on each other,incentives are created for politicalcooperation between the neighboringcountries

It reduces violent conflict between thecountries

Enhances their political weight in the world


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ARGUMENTS AGAINST REGIONAL INTEGRATION

Benefits of regional integration are determined by theextent of trade creation as opposed to trade diversion

Trade creation occurs when Higher cost domestic producers are replaced by low

cost producers within the trade block Or higher cost external producers are replaced by

lower cost external producers within the trade block Trade diversion occurs when lower cost external

suppliers are replaced by higher cost suppliers within

the trade block A regional integration will benefit the world only if the

amount of trade it creates exceeds the amount oftrade it diverts.

So trade creation should be more than tradediversion


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EUROPEAN UNION-EU

Europe has 2 trading blocs European Union and European FreeTrade Association. But EU is more significant than EFTA not just in terms of

membership [EU-25, EFTA-4], but also in terms of economic andpolitical influence in the world economy

Evolution of EU- EU is the result of 2 factors- Devastation of western Europe during 2 world wars & the desire

for a lasting peace European nations desire to hold their own on the worlds political

and economic stage Apart from this many Europeans were aware of the benefits of the

closer economic integration of the countries The EU is large economically and politically, and many of the

independent countries that were under the influence of the formerUSSR have sought to join the EU


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The forerunner of the EU , European Coaland Steel Community, was formed in 1951 byBelgium, France, West Germany, Italy,Luxembourg, and the Netherlands.

Goal was to remove barriers to trade in coal,iron, steel, and scrap metal

The Treaty of Rome was formed in 1957.While the original goal was for a commonmarket, progress was generally very slow


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Treaty Of Rome provided for creation of common market

Key objectives were: elimination of internal trade barriers Creation of a common external tariff Abolishing obstacles to free movement of factors of

production

Provision for necessary harmonization of the memberstates laws. Treaty committed EC European Commission to establish

common policies in agriculture and transportation. The community grew after 1973 and now has 25 member

countries With a population of 450 million and a GDP of $ 11

trillion, similar to that of US, EU has become asuperpower


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MEMBER COUNTRIES OF EU

Austria Belgium Czech

Republic Cyprus Denmark Estonia Finland France Germany Greece Hungary Ireland


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ItalyLatviaLithuaniaLuxembourgMalta

NetherlandsPolandPortugalSlovakia

SloveniaSpainSwedenUnited Kingdom


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POLITICAL STRUCTURE OF EU

The economic policies of the EU areformulated and implemented by a complexand still evolving political structure

The four main institutions are the EuropeanCommission, the Council of Ministers,European Council, the European Parliament,and the Court of Justice


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European Commission: is responsible for proposing EU

legislation, implementing it, and monitoring compliance withEU laws by member states

Head quarter- Brussels, Belgium, more than 24000employees, run by a group of 25 commissioners by eachmember country for 5 year renewable terms

Member states will chose president, he then chooses othermembers in consultation with states.

European Commission will approve the entire commissionbefore it can begin work

EC has a monopoly in proposing European Unionlegislation.

EC is also responsible for implementing aspects of EU lawand for monitoring member states to make sure that they

complying EU laws.


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Council of the European Union: represents

interests of member countries. It is the ultimate controlling authority within the EU ,

because draft legislation from EC can become EU

law only if the council agrees. Composed of 1 representative from the government

of each member state

If agricultural issues are being discussed,

agricultural ministers from each state attend councilmeetings and so on

The votes that a country gets in the council are

related to the size of the country


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European Parliament: has 732 members Directly elected by the citizens by the member

states

A consultative body than legislative, meets in

Strasbourg, France

It debates on legislation proposed by Commission[commission proposes to Council, and the council

puts in front of European Parliament]


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Court of Justice: comprised of one judge fromeach country, is the supreme appeals court for EUlaw.

Like commissioners the judges are required to act

as independent officials rather than asrepresentatives of national interests

Commission or a member country can bring othermembers to the court for failing to meet treatyobligations

Even member countries, companies or institutionscan bring commission or council to court for failure

to act according to an EU treaty


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SINGLE EUROPEAN ACT

The problems with lack of progress on theobjectives of the EU resulted in a number ofproblems for firms and governments, and led toadoption of the Single European Act in 1987.

The Single European Act called for the removalof border controls, mutual recognition ofstandards, open public procurement, a barrier

free financial services industry, no currencyexchange controls, free and open freighttransport, and freer and more open competition


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ESTABLISHMENT OF EURO

The Treaty of Maastricht took the EU one step further, by

specially spelling out the steps to economic union andpartial political union.

In addition to simply spelling out the steps needed, theTreaty also laid out the future outlines of a common foreign

policy, economic policy, defense policy, citizenship, andcurrency, as well as strengthened the role of the EuropeanParliament.

The single currency will eliminate exchange costs and

reduce risk, making EC firms more efficient This treaty made them to adopt a common currency system

The Euro was officially launched on January 1, 1999. Itbecame into full use On January 1, 2002

Benefits of Euro: handling only one currency, easier to


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M5 Regional Integrations


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ASEAN- ASSOCIATION OF SOUTHEAST ASIAN NATIONS

Formed in 1967, includes Brunei, Cambodia, Indonesia, Laos,

Malaysia, Myanmar, Philippines, Singapore, Thailand, andVietnam.

Laos, Myanmar, Vietnam and Cambodia have joined recently

These countries are characterized by an abundance of natural

resources, large international trade sectors and most successfuleconomic policies

This trading bloc has created a regional grouping of 600 millionpeople with a combined GDP of US$1.8 trillion

Basic objective of ASEAN is to foster freer trade betweenmember countries and to achieve cooperation in their industrialpolicies

Its aims also include accelerating economic growth, socialprogress, cultural development among its members, protection

of regional peace and stability, and opportunities for membercountries to discuss differences eacefull


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In 2003 an ASEAN Free Trade Area [AFTA] between 6

original members of ASEAN came into full effect AFTA has cut the tariffs on manufacturing and agricultural

products to less than 5% But there are some exceptions to this tariff reduction. Ex:

Malaysia refused to bring down tariffs on imported carsuntil 2005, and later reduced 20% [as per AFTA 5%].Initially Malaysia wanted to protect its inefficient local carmakers from foreign competitors

Ex: Philippines refused to lower tariff rates onpetrochemicals and rice [the largest agricultural product inthe region] will remain subject to higher tariff rates until2020

ASEAN is also pushing for free trade agreements withChina, Japan and South Korea


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APEC- ASIA-PACIFIC ECONOMIC COOPERATION

Founded in 1990 at the suggestion of Australia.

Currently has 21 member states including US, Japan and China

Collectively member states account for about 60% of the worldsGNP 47% of the world trade

Aim is to increase multilateral cooperation in view of the

economic rise of the pacific nations and the growinginterdependence within the region

APEC formally committed itself to remove trade and investmentbarriers among its members by 2010 and by 2020 aimed at

developing it economies At 1997 meeting members endorsed proposals designed to

remove trade barriers in 15 sectors ranging from fish to toys

But some critics criticize on APECs vague pronunciations.

It is yet to be successful and prove in front of world economy


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NAFTA - NORTH AMERICAN FREE TRADE AGREEMENT

In 1988, the USA and Canada agreed toform a free trade area,

The goal was to gradually eliminating all

barriers to the trade of goods and servicesbetween the countries.

In 1991 the US, Canada, and Mexico signed

an agreement aimed at forming a free tradearea between all three countries known asNAFTA


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The agreement became law in January 1, 1994. It contents: Abolishes within 10 years tariffs on 99 percent goods

traded between Mexico, Canada and United States Removes barriers on cross border flow of services, e.g.,

allowing financial institutions unrestricted access toMexican markets by 2000

Protects intellectual property rights Removes restrictions on FDI between three member

countries Allow each country to apply its own environmental

standards, provided such standards have a scientificbasis. Lowering of standards to lure investments isdescribed as inappropriate

Establishment of two commissions with the power toimpose fines to protect these standards.


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ARGUMENTS FOR NAFTA

Mexico will benefit from increased jobs as low costproduction moves south, and will attain more rapideconomic growth as a result.

The US and Canada will benefit from the access toa large and increasingly prosperous market andfrom the lower prices for consumers from goodsproduced in Mexico.

In addition, US and Canadian firms that haveproduction sites in Mexico will be more competitiveon world markets.


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ARGUMENTS AGAINST NAFTA

Jobs will be lost and wage levels will declinein the US and Canada

Mexican workers will emigrate north

Pollution will increase due to Mexicos moretax standards, toxic wastes etc

And Mexico will lose its sovereignty.


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SAARC- SOUTH ASIAN ASSOCIATION FOR REGIONAL

COOPERATION

India, Bangladesh, Bhutan, Pakistan, the Maldives, Nepal,Sri Lanka established SAARC on December 18, 1985.Afghanistan joined in April 2007

Objectives

To improve quality of life & welfare of the people of the

member countries To develop the region economically, socially and culturally

To provide conducive climate for creating & enhancingmutual trust, understanding & application of one anothers

issues To enhance cooperation with other developing countries and

other trade blocks

To have unity among member countries regarding issues ofcommon interest in the international forums


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ORGANIZATION STRUCTURE OF SAARC


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The Council : highest policy making body,represented by heads of member country

governments, meets once in 2 years

Council of Ministers: represented by foreign ministersof member countries, formulates policies, reviews thefunctioning of SAARC, consists of secretariat,Secretary General, Directors and General Staff

Standing Committee: represented by ForeignSecretaries of member governments, monitors andcoordinates the programs

Programming Committee: represented by Senior

Officials of Member Governments, scrutinizes budgetand annual schedule

Technical Committees: comprises representatives ofAll Countries, Formulates, implements and monitorsprojects



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Technical committees of the SAARC include:

All the secretarial work is done by the SAARCsecretariat, which is located in Nepal. Activities of theSecretariat include

Coordinating, monitoring and implementing SAARC

activities Servicing the meetings of the SAARC

Serving as communication link between SAARC andother international forums


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Agriculture and Environment Communications

Rural Development Health and population activities

Tourism and Transport Science and Technology



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SAARC PREFERENTIAL TRADING ARRANGEMENT- SAPTA

The Council of Ministers have signed the SAARC Preferential

Trading Arrangement agreement on April 11, 1993

Objectives:

To gradually liberalize trade among SAARC member countries

To eliminate trade barriers among SAARC countries and

reduce or eliminate tariffs To promote and sustain mutual trade and economic

cooperation among member countries

Product Areas: all raw materials, semi-finished and finishedproducts are included for mutual concessions

Tariffs: concessions would be given in tariffs , Para-tariffs& non

tariffs & trade measures.

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Special treatment for the least developed countries would

be provided in the following ways:

Providing technical assistance, establishment of industrialand agricultural projects in order to boost up their exports

Enhancing their exports by eliminating non tariff and Para-

tariff barriers

Establishing training facilities in the area of export trade

Providing external credit insurance and market information

Entering into long term contracts

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If the concessions enhance the imports resulting in seriousbalance of payments problem, the importing country cansuspend the concessions



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CONCLUSION

It is criticized that the functioning of SAPTA has not beenencouraging, not been benefitting the member countries.

One of the major reasons for this is the political conflict

between India and Pakistan

In addition the member countries dont have significantpotentialities for trade

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ANDEAN PACT

The Andean Community is a customs union comprisingthe South American countries of Bolivia, Colombia,Ecuador and Peru.

The trade bloc was called the Andean Pact until 1996 andcame into existence with the signing of the CartagenaAgreement in 1969.

Its headquarters are located in Lima, Peru.

The Andean Community has 98 million population, whose

GDP amounted to US$745.3 billion in 2005, includingVenezuela, (who was a member at that time).

It's estimated GDP PPP for 2011 amounts to US$902.86billion, excluding Venezuela

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Membership:

The original Andean Pact was founded in 1969 by Bolivia,Chile, Colombia, Ecuador and Peru.

In 1973, the pact gained its sixth member, Venezuela.

In 1976, however, its membership was again reduced to fivewhen Chile withdrew.

Venezuela announced its withdrawal in 2006, reducing theAndean Community to four member states.

Recently, with the new cooperation agreement withMercosur, the Andean Community gained four newassociate members: Argentina, Brazil, Paraguay andUruguay

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By mid of 1980s, the Andean Pact collapsed and had failed

to achieve any of its stated objectives There was no tariff free trade between member countries,

no common external tariff, no harmonization of economicpolicies

Political and economic problems seem to have hinderedcooperation between member countries

Member countries have had to deal with low economicgrowth, hyperinflation, high unemployment, political unrestand crushing debt burdens

In addition the dominant political ideology in many of theAndean Countries during that time tended toward socialism,which is not feasible for free trade or free market economy,so closure integration could not be expected

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In 1990, the heads of 5 current members met in Galapagos

Islands and signed a declaration

The declarations objectives included establishment of a freetrade area by 1992, a customs union by 1994 and a

common market by 1995. [this last milestone has not beenreached]

A customs union was implemented in 1995, and nowAndean Community operates as a customs union

In December 2003, it signed an agreement with MECOSURto restart stalled negotiations on the creation of a free tradearea between the 2 trading blocs.

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MERCOSUR

Mercado Comun del Cono Sur (Southern Cone Common Market)

Spanish Its a South American Trade Bloc

Originated in 1988, as a free trade pact between Brazil andArgentina

The modest reduction in tariffs and quotas helped to bring about80% increase in the trade between these two countries madeexpansion of the pact further

In March 1990 Paraguay and Uruguay joined as members.

Initial aim was to establish a free trade area between membercountries, a common external tariff [customs union] andsometime thereafter free movement of capital, labour andservices.

Now Mercosur operates as a full customs union

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Criticisms:

Trade diversion effects exceeded its trade creation effects

The fastest growing items in intra-Mercosur trade are cars, buses,agricultural equipment and other capital intensive goods that areproduced relatively inefficiently in the member countries

Member countries insulated/ separated from outside competitionby tariffs that is run as high as 70% of value on motor vehicles.

Members are investing in factories that build products that are tooexpensive to sell anyone but themselves

So, these member countries may not be able to compete globallyonce the groups external trade barriers are broken

And countries with more efficient manufacturing enterprises losebecause Mercosur external trade barriers keep them out of themarket

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IMPLICATIONS FOR MANAGERS

Regional integrations create significant opportunities forfirms

Lower cost of doing business in a single market. Ratherthan producing a product in each of the 25 EU countries

or the 3 NAFTA countries, a firm may be able to serve thewhole EU or NAFTA market from a single location. [onemust be careful while selecting the location]

To realize all these benefits firms must understand

differences between culture and competitive practices orcustomer tastes and preferences

Threats also include increased competition within thetrade bloc and price differences between trade blocs

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Module 5- Regional Integrations

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