Regional Economic Integration

Regional Economic Integration

• Refers to agreements among countries in a geographic region tor educe, and ultimately remove, tariff and non tariff barriers to the free flow of goods, services and factors of production between each other.

Levels of Economic Integration

1.Political Union2.Economic Union3.Common Market4.Customs Union5.Free Trade Area

• Free Trade Area: all barriers to the trade of goods and services among member countries are removed.

Levels of Integration

• Customs Union: eliminates trade barriers between member countries and adopts a common external trade policy.

• Common Market: Has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

• Economic Union: involves free flow of products and factors of production between member countries and adoption of a common external trade policy. It also requires common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy.

Levels of Integration

• Political Union: Moving toward economic union, raises questions of how to coordinate bureaucracy accountable to the citizens of member nations. Political union in which a central political apparatus coordinates the economic, social, and foreign policy of the member states is the answer.

Case for regional integration

• Economic case: • Unrestricted free trade will allow countries to

specialize in production of goods and services that they can produce most efficiently.

• Allowing free trade stimulates econmic growth• FDI can transfer technological, marketing and

managerial know-how to host nations• It is easier to establish a free trade regional

agreement among a free countries than with say WTO.

Case for regional integration

• Political case:• Linking economies together and creating

dependencies forces them to resolve conflicts in an amiable manner

• By grouping their economies, the regional countries can enhance their political clout in the world

Impediments to integration

• Loss of sovereignty: giving up controls in fiscal and monetary policy as well as tax rates

• Loss of jobs – in some sectorso NAFTA – USA and Canada workers lost jobs in the textile and

other low-cost jobs

Case against regional integration

• Trade creation: occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area.

• Trade diversion: occurs when low-cost external suppliers are replaced by higher-cost suppliers within the free trade area.

European Union

• Product of two political factors:1.Devastation of western Europe during two world

wars and desire for lasting peace• European nations’ desire to hold their own on the

world’s political and economic stage

History of EU

• Forerunner of EU, the European Coal and Steel Community was formed in 1951 by Belgium, France, West Germany, Italy, Luxembourg and the Netherlands.

• Treaty of Rome (1957): The European Community was established. - Provided for COMMON MARKET

• Grew in 1973 with additions of UK, Ireland and Denmark.

• Greece joined in 1981. • 1986- Spain and Portugal• 450 million people today with GDO of 11 Trillion dollars

Europe

• European commission: proposes EU legislation, implementing and monitoring compliance with EU laws by member states.

• European parliament: has 732 members directly elected by the population of the member states.; mostly consultative rather than legislative body

• Court of justice: supreme appeals court for EU law – consists of one judge from each country.

Benefits of EURO Currency

• Savings between trade – upto $45 billion a year• Easier to compare prices across Europe – which will

increase competition as prices will be lowered to an equilibrium and more suppliers will be competing

• European producers will be forced to look for ways to reduce their costs.

• Increase range of investment options across EU nations

• Should give boost to development of a highly liquid pan-European capital market.

Costs of Euro

• National countries lose authority over monetary policy

• Optimal Currency Area: similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy.

Regional Trade Unions

• NAFTA: USA, Canada, Mexico• Andean Pact: Bolivia, Chile, Ecuador, Colombia and

Peru (now operates as a customs union including Venezuela but minus Chile)

• MERCOSUR – originated with Brazil and Argentina 0 includes Paraguay and Uruguay.

• ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

Airbus vs. Boeing

• Airbus: Great Britain, Germany, France and Spain• Gave subsidies to Airbus; also got state owned

airlines to purchase planes from Airbus.• Received subsidies to tune of 13.5 billion dollars – in

form of below-market interest and tax breaks. • Boeing accused by European commission of

receiving indirect subsidies (via military contracts and NASA)

• 1996 Boeing and McDonnell Douglas merged

Military Industrial Complex

• Wars caused formation of MICo Germany, suffering from naval blockade that prevented nitrate

for bombs, turned to chemical warfareo German chemicals industry, which had earlier emerged from

competition with British natural dyes, could make poison gas