1 Regional Integration Regional trade agreements (RTAs) References Hill, C W “International Business” (6th edit., 2007), Chapter 9 Ball, D et al. “International Business” (11th edit.), Chapter 4 Sloman, John, “Economics” (8 th edit) – chapter

2 THEORY OF REGIONAL INTEGRATION Agreements between countries in a region to reduce tariff and non-tariff barriers to trade and allow the free flow of factors of production There has been a large increase in the number of regional trade agreements in the last 10 years 75% of operational agreements were signed between

3 Driven by the potential gains to be made from the free flow of trade and investment The population of the EU is now 457 million and the total GDP is around $11 trillion With 149 (2006) members the WTO (World Trade Organisation) has been criticised for being too slow in reducing barriers to trade It is easier to establish free trade and investment in countries which are geographically close to one another than on a global scale

4 Regional trade agreements can help speed up the process The EU is the most prominent regional trade bloc having 27 members already with Turkey waiting to join Other trade blocs include : - NAFTA (1994) – USA, Canada and Mexico MERCOSUR (1990) – Paraguay, Argentina, Brazil, Uruguay and Venezuela

5 APEC (1989) – may create Asia-Pacific rim 21 nation free trade area, including NAFTA, Japan and possibly China ASEAN (1967) – covers around 500 million people Initially to promote peace and industrial co-operation between member states has had some successes Members include Singapore, Myanmar, Thailand, the Philippines and Vietnam Andean Community (1969) - Colombia, Peru, Ecuador, Bolivia and until recently Venezuela

6 Advantages of Regional Integration (a) Economic –Advantages based on competition and scale –Small countries often cannot achieve economies of scale fully until they open up to free trade –More competition makes firms more efficient –e.g. by opening up domestic monopolies to competition or via internal inefficiencies –Open access to larger markets

–Lower prices for consumers –Consumers have access to more goods –Free trade increases economic growth –Inflows of investment (FDI) from rest of world enabling transfers of technology and skills –Factor mobility (i.e. labour and capital) –Trade creation inside the bloc –Can gain new skills, technology and experience 7

(b) Political –Increasing dependency on regional trading partners tends to promote cooperation –Less risk of war –Greater influence in world –This was instrumental in the formation of the EU after WWII –On the one hand global domination by the USA and on the other the potential threat from the USSR 8

9 Disadvantages of Regional Integration (a)Economic TRADE DIVERSION instead of TRADE CREATION - i.e. there may be a cheaper source outside of the trade bloc but now common external trade barriers increase the price of such goods for domestic consumers Resources flow from the less efficient members of the customs union to the most efficient or to the geographical centre leaving periphery to decline

Greater industrial concentration tends to lead to collusion i.e. oligopoly Competition may be reduced as mergers and hostile takeovers occur once barriers have gone Administrative costs Diseconomies of scale (b) Political A loss of sovereignty for member states e.g. monetary and fiscal policy from single currency Slower decision-making 10

11 Levels of Integration (a) Free Trade Areas Tariffs, quotas and subsidies are set at the same level for all members – no DISCRIMINATION between member states Restrictions on movements of goods from outside are determined by each country NAFTA and EFTA (set up in 1960) – includes Norway, Iceland and Switzerland

12 (b) Customs Union Trade barriers between member states are removed A common external trade policy is adopted e.g. the Andean Pact in South America – Bolivia, Colombia, Ecuador and Peru (c) Common Market Again no internal trade barriers and a common external trade policy BUT a common market also allows free flow of labour and capital within the trade bloc

13 Only achieved by the EC prior to becoming the EU Requires close coordination of economic policy between the member states (d) Economic Union Requires even closer economic integration including a common currency – e.g. the EURO Significant cooperation on fiscal and monetary policy – i.e. tax rates set at the same level So far only the EU has achieved this close degree of cooperation

14 (e) Political Union Economic Union AND a single accountable bureaucracy elected by the citizens of the member states This would include a single foreign policy A Central Bank with a common currency European Parliament and Council of Ministers

15 Disadvantages to Economic Regionalism Main disadvantage - trade blocs may become ‘economic fortresses’ RTAs may undermine multilateral trade agreements Developing nations may be excluded fro markets Economic and political conflict between regional trade blocs would be damaging to free trade