ECONOMIC INTEGRATION IB Economics Section 4.3

Economic Integration One of the most notable trends in the global economy in recent years has been the movement towards regional economic integration. Regional Economic Integration: agreements between groups of countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. By entering into regional agreements groups of countries aim to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO The specter of the EU and NAFTA turning into ëconomic fortress”that shut out foreign producers with high tariff barriers is particularly worrisome to those who believe in the value of unrestricted free trade

I - LEVELS OF ECONOMIC INTEGRATION Free Trade Area (FTA): When a group of countries remove tariffs and quotas between themselves, while retaining the right to set tariffs/quotas towards nonmembers. Ex: EFTA (Iceland, Liechtenstein, Norway and Switzerland ) NAFTA (United States, Mexico, and Canada) Customs Union: A regional economic association where tariffs and quotas have been eliminated and common external tariffs and quotas are applied to member countries. Ex: Andean Pact (Bolivia, Columbia, Equador, and Peru)

Common Market: Is a customs union with complete freedom of movement for all goods and services. This includes the freedom of factors of production and neccessitates increased economic, social and legislative cooperation in taxes, labor laws and invidible barriers to trade. EX: The EU http://europa.eu/index_en.htm

THE CASE FOR REGIONAL INTEGRATION A - THE ECONOMIC CASE FOR Unrestricted free trade will allow countries to specialize in the production of goods and services that they can produce most efficiently Opening a country to free trade stimulates economic growth in the country, which in turn creates dynamic gains from trade. Flows of FDI can transfer technological, marketing and managerial know-how to host nations. Stimulates Economic Growth

B – POLITICAL CASE FOR INTEGRATION C – IMPEDIMENTS TO INTEGRATION Incentives are created or political cooperation between neighboring states By grouping their economies together, the countries can enhance their political weight in the world. C – IMPEDIMENTS TO INTEGRATION Costs, painful adjustments Concerns over national sovereignty

III - THE CASE FOR/AGAINST REGIONAL INTEGRATION A - TRADE CREATION Occurs when high-cost domestic producers are replaced by low-cost external suppliers within the free trade area. B - TRADE DIVERSION Occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of trade exceeds the amount it diverts. In theory, GATT and WTO rules should ensure that a free trade agreement does not result in trade diversion.

IV - REGIONAL ECONOMIC INTEGRATION IN EUROPE The EU is the product of two political factors: a) Devastation of two wars b) Desire to hold their own on the world’s political and economic stage TREATY OF ROME – 1957 In 1973, first enlargement of the EC Other additions, Greece in 1981, Spain and Portugal in 1986, and in 1996 by Finland, Austria and Sweden With a population of 350 million and a GDP greater than that of the United States, these enlargements made the EU a potential global superpower.

In 1994, following the ratification of the Maastricht treaty Single European Act: The main problem with the EC was the disharmony of the member-countries technical, legal, regulatory and tax standards. The rules of the game differed substantially from country to country, which stalled the creation of a true single internal market. The “White Paper” was published in 1985, proposing that all impediments to the formation of a single market be eliminated by 1992. Objectives of the Act: frontier controls, mutual recognition of standards, public procurement, financial markets, lifting barriers, exchange controls, freight transport. “The United States of Europe”

The Treaty of Maastricht 1992 Common currency, lower cost of doing business in Europe, reduce risks that arise from currency fluctuations. National authorities would lose control over monetary policy Enlargement of the European Union: Eastern European Countries? Fortress Europe?

V - REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS A - The Nafta Agreement Nafta became law January 1, 1994. Guidelines: - Abolition within 10 years of tarifs on 99% of the goods traded among Mexico, Canada, and the U.S. - Remove most of the barriers on the cross-border flow of services - Protect intellectual property rights - Removes most restrictions on FDI among the three members - Members are allowed to apply its own environmental standards

Arguments against NAFTA: - mass exodus of jobs from the US and Canda (H. Ross Perot’s “Sucking Sound”) - Expose Mexican firms to highly efficient Canadian and American firms. - Painful Economic Restructuring and Unemployment in Mexico - Loss of National Sovereignty

VI - ASIAN AND AFRICAN TRADING BLOCKS VII - COMMODITY AGREEMENTS ASEAN, APEC AFRICAN COOPERATION VII - COMMODITY AGREEMENTS BUFFER-STOCK SYSTEM MULTIFIBER ARRANGEMENT (MFA)

VIII - THE UNITED NATIONS UNCTAD IX - THE ENVIRONMENT THE RIO EARTH SUMMIT

Reference: University of New Mexico, Anderson School of Management. (2009). Economic Integration. Retrieved on April 12, 2009, from mgtclass.mgt.unm.edu/DeGouvea/528/Regional%20Economic%20Integration.ppt -