Regional Economic Integration Final Term Lecture 2 Regional Economic Integration

Introduction Regional economic integration: refers to agreements 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 other. Notable trend; WTO to be notified about Regional Trade Agreements. Regional Trade Agreements were made in number of hundreds, many come to an end, some were redesigned and a few are still in force. While the move toward regional economic integration is generally seen as a good thing, some observers worry that it will lead to a world in which regional trade blocs compete against each other. In this possible future scenario, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs. The specter of the EU and NAFTA turning into economic fortresses that shut out foreign producers with high tariff barriers is worrisome to those who believe in unrestricted free trade. If such a situation were to materialize, the resulting decline in trade between blocs could more than offset the gains from free trade within blocs.

A move toward greater regional economic integration can potentially deliver important benefits to consumers and member countries with new challenges. Regional trade agreements are designed to promote free trade, but instead the world may be moving toward a situation in which a number of regional trade blocks compete against each other. In future, what will happen between two different trade blocks.

Levels Of Economic Integration There are mainly five levels of economic integration: Free Trade Area Customs Union Common Market Economic Union Political Union

Levels Of Economic Integration 1. Free Trade Area: A free trade area eliminates all barriers to the trade of goods and services among member countries, but members determine their own trade policies for nonmembers. the European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland), and the North American Free Trade Agreement (between the U.S., Canada, and Mexico) are both free trade areas.

Levels Of Economic Integration 2. Customs Union: A customs union eliminates trade barriers between member countries and adopts a common external trade policy. (Outside CU, 5% to 20% tariff) The Andean Pact (between Bolivia, Columbia, Ecuador and Peru) is an example of a customs union.

Levels Of Economic Integration 3. Common Market: A common market has no barriers to trade between member countries, includes a common external trade policy, and the free movement of the factors of production (esp: Labor and Capital) MERCOSUR (between Brazil, Argentina, Paraguay, and Uruguay) is aiming for common market status.

Levels Of Economic Integration 4. Economic Union: An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rates, and a common monetary and fiscal policy. The European Union (EU) is an imperfect economic union. (Problems of Currency and tax rates differentiation). The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, and differences in tax rates across countries still remain

Levels Of Economic Integration 5. Political Union: A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states. The EU is headed toward at least partial political union, and the United States is an example of even closer political union. The correct answer is b.

The Case For Regional Integration The Economic Case For Regional Integration: All countries gain from free trade and investment Regional economic integration is an attempt to exploit the gains from free trade and investment

The Case For Regional Integration The Political Case For Regional Integration: Linking countries together, making them more dependent on each other: creates incentives for political cooperation and reduces the likelihood of violent conflict gives countries greater political clout when dealing with other nations

The Case Against Regional Integration Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts Trade creation occurs when low cost producers within the free trade area replace high cost domestic producers Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers