Unit 4.3 Economic Integration Globalization

Economic Integration Types of preferential trading arrangement The degree of economic integration can be categorized into six stages: Preferential trading area Free trade area Customs union Common market Economic and monetary union Complete economic integration

Preferential Trading Area a trading bloc which gives preferential access to certain products from certain countries through an agreement called a trade pact This is done by reducing tariffs, but does not abolish them completely. An example of a preferential trading area is one formed by the EU and ACP The weakest form of economic integration

Free Trade Areas The second stage of economic integration The Free Trade Area is a result of a Free Trade Agreement between two or more countries have agreed to eliminate tariffs, quotas, and preferences on most (if not all) goods Countries choose this kind of economic integration form if their economic structures are complementary. If they are competitive, they will choose customs union

Customs Union A free trade zone amongst members with a common external tariff on non-member nations Results in an increase in trade among member nations Direct effects of a customs union trade creation trade diversion

Customs Union Long-term effects of a customs union longer-term advantages internal economies of scale external economies of scale better terms of trade increased competition between members longer-term disadvantages certain regions of the union may suffer possibility of oligopolistic collusion administrative costs

Common market Fourth level of economic integration Also called the single market A customs union with common policies on product regulation and freedom of movement of all factors of production

The European Common Market The single market the Single European Act completing the single market benefits of the single market trade creation reduction in the direct costs of barriers economies of scale greater competition

The European Common Market From customs union to common market Common Agricultural Policy regional policy competition policy tax harmonisation social policy

Economic and Monetary Union Fifth level of economic integration A single market with a common currency The European Union evolved from the single market European common market

European Union (E.U) Formed in 1993, following adoption of Maastricht Treaty [1991] replacing the European Community (E.C) which replaced the European Economic Community (E.E.C) [Treaty of Rome, 1957] 15 original member countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the UK.

Aim of the E.U. Economic, monetary and political union of all the member states, adopt the single European currency (see slides about Euro) allow the free movement of people and businesses throughout all E.U. countries. harmonise aspects such as taxation, interest rates

European Union advantages of EMU eliminating conversion costs increased competition elimination of exchange-rate uncertainty between members increased inward investment lower inflation and interest rates disadvantages of EMU political arguments adjustment to shocks regional problems

The European Union criticisms of the single market radical economic change is costly adverse regional multiplier effects development of monopoly/oligopoly power trade diversion evidence the future of the EU effect of new members

Globalization: Trade and Developing Countries Trade strategies primary outward looking secondary inward looking import-substituting industrialisation (ISI) secondary outward looking possibly complemented by primary inward looking

Trade and Developing Countries Approach 1: exporting primaries justification for exporting primaries exploits comparative advantage a 'vent for surplus' an 'engine for growth' problems with traditional trade theory comparative costs change over time benefits may not flow to nationals trade my lead to greater inequality externalities from mines and plantations

Trade and Developing Countries long-term problems for primary exporting countries low income elasticity of demand protection in advanced countries technological developments synthetic substitutes miniaturisation rapid growth in imports adverse movements in terms of trade

Trade and Developing Countries Approach 2: ISI justifications problems of primary exporting dynamic potential in manufacturing infant industries rapid technological advance patterns of protection selecting industries for protection tariff and quota escalation attracting multinational investment

Trade and Developing Countries Approach 2: ISI (cont.) adverse effects of ISI often counter to comparative advantage tends to cushion inefficiency encourages establishment of monopolies artificially low interest rates use of capital-intensive techniques encourages rural–urban migration adverse effects on rural sector leads to greater inequality environmental problems limit to home market

Trade and Developing Countries Approach 3: exporting manufactures transition from inward-looking to outward- looking industrialisation a neutral trade approach active promotion of manufactured exports benefits from exporting manufactures conforms with comparative advantage increased competition increased investment more employment and greater equality faster growth

Trade and Developing Countries Approach 3: exporting manufactures drawbacks of exporting manufactures possible retaliation from advanced countries but attitudes of WTO competition from other developing countries vulnerability to world fluctuations world recessions speculation trade between developing countries trade blocs of developing countries

World Trade Organization Began as the GATT agreements at Bretton Woods after WWII in 1944