Regional Economic Integration Chapter–9

 Regional Economic Integration  Agreement among 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 country.  World Trade Organization (WTO)  161 Members have all signed one or more Regional trade agreements.  Members are required to notify the WTO of any regional trade agreements.

Several smaller regional organizations with non-overlapping memberships.

South Asian Association for Regional Cooperation (SAARC) Bay of Bengal Initiative for Multi- Sectoral Technical and Economic Cooperation (BIMSTEC) Association of Southeast Asian Nations (ASEAN) Asia Cooperation Dialogue (ACD) MekongMekong–Ganga Cooperation (MGC)Ganga Cooperation Council for the Arab States of the Gulf (GCC) Economic Cooperation Organization (ECO) Cooperation Council of Turkic-Speaking States (TC) Shanghai Cooperation Organization (SOC) Relationships between various Asian Regional Organizations

Member states [ Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

Commonwealth United Nations Non-Aligned Movement Organization of Islamic Cooperation South Asian Association for Regional Cooperation Centre on Integrated Rural Development for Asia and the Pacific Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation Developing 8 Countries Asia Pacific Trade Agreement World Trade Organization Regional Organization of Bangladesh

The Americas North American Free Trade Agreement (NAFTA) USA, Mexico, Canada The Andean Pact Bolivia, Chile, Ecuador, Colombia, Peru MERCOSUR (FTA) Southern Cone Common Market. Argentina, Brazil, Paraguay, Uruguay (Mercosur 4); Bolivia, Chile from 1997 (Mercosur 6). Central American Common Market (CARICOM) Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

Elsewhere Association of Southeast Asian Nations (ASEAN) Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam Asia Pacific Economic Cooperation (APEC) USA, Japan, China + 18 Pacific nations SAARC South Asian Association for Regional Cooperation. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka, Afghanistan.

Levels of Economic Integration  Least Integration Free Trade Area (FTA) = Removal of Tariffs among members Customs Union = FTA + Common External Tariffs Common Market = Customs Union + Free Flow of Other Factors of Production (Capital, Labour) Economic Union = Common Market + Harmonisation of Economic Policies Political Union = Economic Union + Political Integration  Most Integration

Economic case for integration Stimulates economic growth in countries Increases FDI and world production Countries specialize in those goods and services efficiently produce. Additional gains from free trade beyond the international agreements such as GATT and WTO Because they may be easier to negotiate outside of the GATT and WTO

Political case for Integration Linking neighboring economies and making them increasingly depended on each other create incentives for political cooperation between the neighboring states and reduce the potential for violent conflict. Grouping their economies, the countries can enhance their political weight in the world.

Painful adjustments in certain segments of economy Threat to national sovereignty The Case Against Regional Integration A regional free trade will only benefit the world only if the amount of trade it creates exceed the amount it diverts. Impediments to integration

European Union 28 member countries; million people; GDP of trillion US dollars, constituting approximately 23% of global GDP members of coal and steel community –France, Germany (W.), Italy, Belgium, Netherlands, Luxembourg 1957 Treaty of Rome: European Community –Common market –Elimination of internal trade barriers –Common external tariff –Free movement of factors of production st enlargement: Britain, Ireland, Denmark

nd enlargement: Greece rd enlargement: Portugal, Spain 1992 single European act Remove all frontier controls Principle of mutual recognition to product standards Open public procurement to non-national suppliers Lift barriers of competition to banks and insurance Remove restrictions on foreign exchange transactions 1994 Maastricht treaty: European Union th enlargement: Austria, Finland, Sweden th enlargement: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia conclude accession agreements. European Union

The four main institutions the European Union European Commission: Responsible for proposing EU legislation, implementation and monitoring compliance with EU laws by member states. 27 commissioners, one appointed from each member state for five-year renewable terms. European Council: Represents the interest of member states. The ultimate controlling authority within the EU since draft legislation from the commission can become EU law only if the council agrees. European Parliament: 732 members, is directly elected by the populations of the member states. Debates legislation proposed by the commission and forwarded to it by the council. It has the right to vote on the appointment of commissioners as well as veto some laws. Court of Justice: comprised of one judge from each country, is the supreme appeals court for EU law.

The Euro (€) Maastricht treaty: European common currency adopted 01/01/1999 Common foreign and defense policy Common citizenship EU parliament € is now being used by 18 countries (x-Sweden, Denmark, Britain)

Economic criterion to be fulfilled A high degree of price stability A sound fiscal situation Stable exchange rates Converged long term interest rates

Recent and Future Euro Countries On January 1, 2009, Slovakia started using the euro. Estonia began using the euro on January 1, Latvia began using the euro as its currency on January 1, Lithuania is expected to join the Eurozone in the next few years and thus become a new country using the euro. Only 18 of the 27 members of the European Union (EU) are part of the Eurozone, the name for the collection of EU countries that utilize the euro. Notably, the United Kingdom, Denmark, and Sweden have thus far decided not to convert to the euro. Other new EU member countries are working toward becoming part of the Eurozone.members of the European Union On the other hand, Andorra, Kosovo, Montenegro, Monaco, San Marino, and the Vatican City are not EU members but do officially use the euro as their currencies.

Benefits of the Euro (€) Lower transaction costs for individuals/business come from lower foreign exchange and hedging cost. Prices comparable across the continent; increased competition Rationalization of production across Europe to reduce cost Pan-European capital market Increase range of investment options available to both individuals and institutions

Costs of the Euro (€) Loss of monetary policy control at national level ECB sets interest rates and determines monetary policy (Frankfurt, Germany) ECB is not under political control; issues instructions to national central banks EU is not an optimal currency area Not enough similarities in the underlying structure of economic activity (e.g., Finland vs Portugal) Interest rates may be too high in depressed regions or too low for economically booming regions May need to deal with this through fiscal transfers from prosperous to depressed regions Economic issues may come against political ones

NAFTA NAFTA created the world's largest free trade area, which now links 450 million people producing $17 trillion worth of goods and services. The NAFTA countries were the second and third largest suppliers of goods imports to the United States in (Canada $332.1 billon, and Mexico $280.5 billion). USA, Canada, Mexico (FTA-1988) Continuation of opening process through elimination of tariffs All remaining duties and quantitative restrictions were eliminated, as scheduled, on January 1, 2008.

U.S. goods and services trade with NAFTA totaled $1.2 trillion in 2012 (latest data available). Exports totaled $597 billion; Imports totaled $646 billion. The U.S. goods and services trade deficit with NAFTA was $49 billion in The United States has $1.1 trillion in total (two ways) goods trade with NAFTA countries (Canada and Mexico) during Goods exports totaled $527 billion; Goods imports totaled $613 billion. The U.S. goods trade deficit with NAFTA was $86 billion in Trade in services with NAFTA (exports and imports) totaled $134 billion in 2012 (latest data available). Services exports were $89 billion; Services imports were $45 billion. The U.S. services trade surplus with NAFTA was $44 billion in 2012.

NAFTA - Key provisions General (effective 01/01/1994) Tariffs reduced across all sectors by 99% over 10 yrs FDI unrestricted (x-oil and railways in Mexico, Culture in Canada, airlines-communications US) No free movement of labor (x-white collar easement) Protection of intellectual property rights Cross-border flow of services unrestricted Application of environmental standards Two commissions have the right to impose penalties on issues of health/safety, child labor, minimum wages

Enlarged and productive regional base Labor-intensive industries move to Mexico Mexico gets investment and employment Increased Mexican income to buy US/Canada goods Demand for goods increases jobs Consumers get lower prices Loss of jobs into Mexico Mexican firms have to compete against efficient US/Canada firms Mexican firms become more efficient Environmental degradation Loss of national sovereignty CONSNAFTAPROS

Implications for Business Opportunities Less protectionism; higher economic growth Lower cost of doing business (fewer borders) Threats Cultural differences persist Increased price competition within blocks Across-trading-block rivalry can increase barriers Improvement of competitiveness of many local firm within the blocks