Regional Integration

Associate Professor Dr.Nisit Panthamit

Faculty of Economics

Chiang Mai University, Thailand

nisitp@gmail.com

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Regional Integration vs. Multilateralism

• WTO

– Promote trade liberalization through worldwide agreements

– Trade liberalization by any one nation

• Extended to all WTO members, 153 nations

– Nondiscriminatory

• Regional trading arrangements

– Nations reduce trade barriers only for a small group of partner nations

– Discriminating against the rest of the world

Regional Integration vs. Multilateralism

• Regional block – stumbling blocs to multilateralism

– Members not greatly interested in worldwide liberalization

• May not realize additional economies of scale from global trade liberalization

• May want to invest their time and energy in establishing strong regional linkages – Rather than investing them in global negotiations

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Regional Integration vs. Multilateralism• Regional block – building blocks to global free

trade and investment

– When structured according to principles of openness and inclusiveness

– May achieve deeper economic interdependence among members

• Greater commonality of interests

• Simpler negotiating processes

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Regional Integration vs. Multilateralism

• Regional block – building blocks to global free trade and investment

– Self-reinforcing process

– Encourages the partial adjustment of workers

• Out of import-competing industries in which the nation’s comparative disadvantage is strong

• Into exporting industries in which its comparative advantage is strong

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Brief History of International Trade Policy

– More results of GATT:• Textiles: bilateral quotas of MFA must be removed at

end of 10 years; quotas probably will be replaced by high tariffs.

• Complete elimination of tariffs in several important sectors by industrial countries.

• Clarified distinction between acceptable and unacceptable subsidies.

• Strengthened enforcement of intellectual property rights.

• Established WTO– Member countries must now subscribe to all rules and

responsibilities.

Economic Integration

• Formation of countries into groups (EU, NAFTA)

– Five types or stages of economic integration shown in Figure 1 (increasing degree of unification):

1. Preferential trading arrangement (PTA)– Member countries agree to erect lower barriers to trade

within the group than to trade with nonmember countries (Figure 9.3).

2. Free trade area– Involves eliminating barriers to intra-group trade while

allowing each country to maintain its own nationally determined barriers to trade with nonmembers.

Economic Integration

3. Customs union– Intra-group trade faces no barriers and members maintain a

common external tariff (CET) on trade with nonmembers.

4. Common market– Extends free trade among members to factors of production

(labor migration and capital flows), as well as to goods and services.

5. Economic union– Most extensive form of economic integration.

– Means common, group-determined economic policies, as well as a common currency.

Figure 1: Levels of Economic Integration

Common market

Preferential tradingarrangement

Free-trade area

Customs union

Economic union

Reduction o

f

intr

a-g

roup

ta

riffs

Rem

oval of in

tra

-

gro

up t

ariffs

Com

mo

n e

xte

rnal

tariff

Intr

a-g

roup

capita

l and labor

mobili

ty

Com

mon

econom

ic p

olic

ies

and c

om

mon

curr

ency

• Free trade. Tariffs (a tax imposed on imported goods) between member countries are abolished or significantly reduced. Each member country keeps its own tariffs in regard to third countries

• Custom union. Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries.

• Common market. Factors of production, such a labor and capital, are free to move within

• Economic union. Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro).

• Political union. Represents the potentially most advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.

• Source: Aid for Trade Database Organization for Economic Co-operation and Development; IMF Direction of Trade Statistics 2011; Fragile states--ADB (2012) Working Differently in Fragile and Conflict Affected Situations: The ADB Experience; Landlocked, LDCs and SIDS--UN-OHRLLS.

Types of Regional Trading Arrangements

• Free-trade area

– Association of trading nations

– Members agree to remove all tariff and nontariff barriers among themselves

– Each member maintains its own set of trade restrictions against outsiders

– North American Free Trade Agreement (NAFTA)

• Canada, Mexico, and the United States

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Types of Regional Trading Arrangements

• Customs union

– Agreement among two or more trading partners

– To remove all tariff and nontariff trade barriers between themselves

– Each member nation imposes identical trade restrictions against nonparticipants

– Benelux

• Belgium, the Netherlands, and Luxembourg

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Types of Regional Trading Arrangements

• Common market

– Group of trading nations

– Free movement of goods and services among member nations

– Initiation of common external trade restrictions against nonmembers

– Free movement of factors of production across national borders within the economic bloc

– European Union (EU), 1992

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Types of Regional Trading Arrangements

• Economic union

– National, social, taxation, and fiscal policies are harmonized and administered by a supranational institution

– Requires an agreement to transfer economic sovereignty to a supranational authority

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Types of Regional Trading Arrangements

• Monetary union

– Ultimate degree of economic union

– Unification of national monetary policies

– Acceptance of a common currency administered by a supranational monetary authority

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Types of Regional Trading Arrangements• The United States - Monetary union

– Fifty states with a common currency

– Federal Reserve

• Single central bank for the nation

– Free trade among the states

– Labor and capital move freely

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Types of Regional Trading Arrangements

• The United States - Monetary union

– Federal government

• Nation’s fiscal policy

• National defense

• Retirement and health programs

• International affairs

– States can keep their identity within the union

• Police protection and education

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Impetus for Regionalism• Motivations for regional trading arrangements

– Prospect of enhanced economic growth

• Economies of large-scale production

• Foster specialization and learning-by-doing

• Attract foreign investment

– Foster a variety of noneconomic objectives

• Managing immigration flows

• Promoting regional security

– Enhance & solidify domestic economic reforms

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Effects of a Regional Trading Arrangement

• Static effects of economic integration

– On productive efficiency

– And consumer welfare

• Dynamic effects of economic integration

– Relate to long-term rates of growth

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ASEAN

Nature of ASEAN as Regional Bloc

• The ASEAN leaders emphasize friendship, understanding, consensus, and non-intervention to promote regional peace and stability.

• Consultations and consensus are the most enduring features of ASEAN

• The leaders emphasized that the successful building of an ASEAN Community that is truly people-oriented by 2015 requires the cooperation and contribution of all sectors of ASEAN society and the participation of ASEAN peoples in all aspects of community-building

Economic Cooperation

Economic Integration

is a preferential treatment that aims to reduce tariffs and commercial barriers among its member countries

Removal of some measures that discriminates against foreign suppliers of goods and services. Economies of its member nation is completely integrated. Which means establishment of a single market

2015WHAT?

• Single market and production base with the free movement of goods, services, investment, skilled labor and the freer flow of capital

WHO?Brunei, Cambodia, Indonesia,

Laos, Malaysia, Myanmar,

Philippines, Singapore, Thailand

and Vietnam

WHY?

• Increase competitiveness, narrow development gaps and improve resilience against external shocks

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ASEAN

1967

PTA

19

77

AFTA

19

93

AFAS

19

96

ASEAN VISION 2020

19

97

ASEAN

Community

201520

03

BALI CONCORD II2

00

7

Cebu Declaration on ASEAN Charter

To achieve ASEAN Community by 2015 2

00

9

AEC 2015 in full steam:

• ATIGA

• AFAS –70% Equity Participation

• ACIA

The Evolution of ASEAN

20

08

ASEAN CHARTER

AIA

19

98

Regional conflictsSpread of communism

Tom Yum Kung crisis

20

01

China’s WTO accession

NAFTA/EEC

Overview of ASEAN Economic Community

AEC

Single Market and

Production base

To create a stable, prosperous and highly

competitive ASEAN economic region

Freer flow of capital

Free flow of goods services,

investment, and skilled labor

characteristic

objective

Single Market and Production Base

AEC

goods

service

investment

capital

skilled labor

Characteristics of AEC

Objectives of AEC

AEC Blueprint

Single market and production

base

Competitive economic

region

Equitable economic

development

Integration into the global

economy

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Introduction

• ASEAN, or the Association of Southeast Asian Nations, has much room for development, and so outside influence is competing for a foothold in the ASEAN countries. The ASEAN plus 3 consists of all ten original countries, along with China, Japan and Korea.

• Back in 1997, when the Asian economic crisis occurred, most of the east asian countries came together to negotiate the issue dealing with the crisis.

• They also discussed about solutions that would better the economy.

Introduction

• According to the article, “Japan, China, and South Korea Should Sign an FTA with ASEAN for Broader Cooperation”, the author stated that “After the East Asian countries failed to obtain the expected assistance from countries outside the region, in their response to the crisis-triggered serious situation, they came to recognize the importance of cooperation within East Asia. China, South Korea, and Japan have the greatest influence over ASEAN compared to other groups and countries.

Introduction

• Southeast Asia is an area of particular interest for growing super powers. It has become a fluid area for trade and opportunity. The ASEAN+3 has widely different developed and developing countries, with a lot of potential. Countries other than the +3 have developed their own strategies for ASEAN influence such as The United states and Australia. Of all countries, China seems to have the most influence over ASEAN in recent years.

Potentials/Challenges

The potential gains from implementing the EAEC are enormous.

• Move East Asian region on to a higher and more sustainable growth path.

• Reduce vulnerability and volatility.

• Leveraging diversity through integration and reduce development gaps that exist both within and between member states

1. Together, East Asian countries should be formed an economic powerhouse.

2. EAEC is not a single market.

3. Macroeconomic stability has provided a platform for growth.

4.EAC is a growing hub of consumer demand.

5. EAC is well positioned in global trade flows.

6. Intraregional trade could significantly deepen with implementation of the East ASIAN Economic Community, but there are hurdles.

7. ASEAN is home to many globally competitive companies.

ASEAN is one of the largest economic zones in the world; growth has been rapid and relatively stable since 2000.

THE IMPORTANCE OFUPCOMING CHANGETO THE ECONOMIC,

POLITICAL ANDCONSUMER CLIMATE

+ China

• China is an extremely dominant country in Asia and ASEAN has accepted to live inevitably in their contribution, because both sides benefit from each other and have kind relations.

+ Japan

• Japan is another dominant Asian power that has a great influence on the ASEAN states. In recent years Japan has invested a large amount into ASEAN. Japan has strategic capabilities that other countries,

+S. Korea

• S. Korea also has patterns of trade, investment, aid, and tourism, its influence has continued to grow.

• The Korean way of life has been affected by Southeast Asia. South Korea and Southeast Asia have been involved for many years now and the influence is only growing as they benefit mutually.

Number of Problems in EAST ASIA

• among them grave human rights violations; corruption and poor governance; state-sanctioned land grabs; authoritarian and military regimes; police brutality, torture and enforced disappearances; modern-day slavery and lack of corporate responsibility and accountability.

Number of Problems in EAST ASIA

• companies are profiting from investment-friendly protection measures at the expense of citizens – with certain member states allowing corporations to sue governments over local laws that may hinder their business.

• conflict between governments, companies and grassroots communities all over the region.”

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Benefits to MNCs

Targeting more

sales volume in

the ASEAN market

Components

procurement on

an EAEC-wide

basis

More product

specialization to

achieve

economies of

scale

Greater emphasis

on profitability

using EAEC-wide

operations

Benefits to Local

Companies

More export

opportunities to

EAEC market

EAEC-wide

expansion

opportunity for

corporate growth

strategy

Technology and

financial support

opportunities

from MNCs

EAEC-wide pool

of talent

A Balanced Approach is Needed

A Balanced Approach

Missing Link…

• It is undeniable that EAEC offers a host of opportunities for the states involved in it.;

• EAEC member countries should, therefore, address those aforementioned issues if they wish to make substantial and justified progress towards the strengthening of East Asian regionalism.

• The EAEC may have limited resources to deal with the problem alone and it needs to cooperate in form of the ASEAN plus three to deal with the multiple risks.

Key principle for EAEC in the future1. The APT process should serve as the main vehicle for East Asian cooperation,

and ASEAN should play a leadership role.

2. The future process of regional integration will continue to emphasize participating countries’ sovereignty.

3. The future of a regional East Asian institution will demand accommodation for diversity .

4. The future success of East Asian community building will hinge on common development goals.

5. A successful regional architecture in the years ahead will need to stress openness.

6. Need to place more emphasis on economic cooperation and nontraditional security than on security cooperation and traditional security.

(Prof. Wu Xinbo is Professor Deputy Director at the Center for American Studies and Associate Dean at the School of International Relations and Public Affairs at Fudan University.

Thank you