1. Preferential trading agreements

2. 2001 200520102011 Exports North America and Europe EFTA 2,3 2,2 European Union (27) 39,938,733,833,1 NAFTA 18,514,112,912,5 South and Central America 0,0 Andean Community 0,40,50,60,7 CACM 0,2 CARICOM 0,1 MERCOSUR 1,41,61,81,9 Africa 0,0 CEMAC 0,10,2 COMESA 0,50,60,80,5 ECCAS 0,30,50,6 ECOWAS 0,40,60,70,8 SADC 0,80,91,1 WAEMU 0,1 Middle East and Asia 0,0 ASEAN 6,3 6,96,8 GCC 2,63,84,45,1 SAPTA 1,01,31,82,0

3. W HY DO COUNTRIES CHOOSE REGIONAL INTEGRATION ? Economics Integration may be expected to generate substantial economic gains for members. Economic analysis looks at the balance of benefits and costs of integration. Politics & International Relations Integration increases the international profile and negotiating power of smaller countries. Integration can also be a strategic form of defence co- operation through mutual dependence.

4. L EVELS OF E CONOMIC I NTEGRATION Free trade area All barriers to trade of goods/services are removed Each country allowed to determine non-member policy Customs Union Eliminates trade barriers between member countries Adopts common external trade policy Common Market No barriers to trade among member countries Common external trade policy Allows factors of production to mover freely among members Economic Union Free flow of products & factors of production Adoption of common external trade policy Requires common currency, harmonization of tax rates, common monetary & fiscal policy Political Union Central political apparatus coordinates economic, social & foreign policy of members (US)

5. T HE I NTEGRATION P ROCESS

6. R EGIONAL E CONOMIC I NTEGRATION : E UROPE Examples of Integration European Economic Community (EEC) Enlargement of EEC (6 – 9 – 12 – 15 – 25 - 27) Single European Act—1992 European Union – single currency European Free Trade Agreement (EFTA)

7. R EGIONAL E CONOMIC I NTEGRATION A MERICAS NAFTA 1989 US & Canada – 1994 & Mexico Remove tariffs on 99% of goods in 10 years Removal of barriers to cross-border flow of services Protection of intellectual property rights Removal of most restrictions on FDI Application of national environmental standards (scientific basis) Establishment of 2 commissions Monitor environmental standards & health/safety, minimum wage or child labor laws Impose fines & remove trade privileges for violations

8. R EGIONAL E CONOMIC I NTEGRATION A MERICAS For NAFTA Opportunity to create an enlarged & efficient production base for region Mexico would benefit from inwards FDI US & Canada benefit increased Mexican incomes – importing consumers benefit – lower prices Competitiveness of firms that move production to Mexico Against NAFTA Mass exodus of jobs from US & Canada to Mexico Mexico’s lower wage & less strict environmental laws Impact Expose Mexico to more competitive US & Canadian firms – ST - Economic restructuring & unemployment in Mexico Trade grew by 109% Increase in productivity growth Increase in political stability in Mexico

9. R EGIONAL E CONOMIC I NTEGRATION A MERICAS Andean Community 1969 & 1997 – Customs Union of Bolivia, Chile, Ecuador, Colombia, Peru Internal tariff reduction, common external tariff, transportation policy, common industrial policy Political (radical/socialist) & economic (hyperinflation, unemployment & debt) problems MERCOSUR 1988 – Brazil & Argentina; 1990 Paraguay & Uruguay Aim for free trade area then common market 200 million people Critics – trade diversion effects greater than trade creation – fastest growing sectors most inefficient

10. R EGIONAL E CONOMIC I NTEGRATION A MERICAS Central American Common Market 1960’s – Costa Rica, El Salvador, Guatemala, Honduras & Nicaragua Collapse 1969 – war after soccer game CARICOM 1973 Caribbean Community Failure to meet 3 rd deadline 1991 FTAA – Free Trade Area of the Americas Proposed at 1994 Summit of the Americas 2003 – 34 countries sign blueprint agreement Brazil & US disagreements prevent progress

11. R EGIONAL E CONOMIC I NTEGRATION ASEAN 1967 – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Phillipines, Singapore, Thailand & Vietnam 500 million people & GDP $740 B Foster freer trade & cooperate in industrial policies APEC Asia-Pacific Economic Cooperation 1990 -21 Members (US, Japan, China, Australia) > 50% GDP & 41% of world trade Increase multilateral cooperation in light of interdependence of Pacific nations Regional Trade Blocs in Africa 9 trade blocs on continent Hard to establish free trade areas because “are less developed & diversified – need to be protected by tariff barriers from unfair competition” Potential of EAC (Kenya, Uganda & Tanzania) – no free trade yet

12. T HE E CONOMIC E FFECTS OF R EGIONAL I NTEGRATION : T ARIFF R EDUCTIONS Regional integration involves the removal of trade barriers. There is an immediate price reduction effect on output, consumption and efficiency: Domestic output falls as inefficient firms are affected by the price fall. Efficiency rises as inefficient firms close. Consumer surplus rises because of the price fall. Government tariff revenue falls. Lost production efficiency because inefficient local firms are protected.

13. T HE S TATIC E FFECTS OF R EGIONAL E CONOMIC I NTEGRATION Increased Specialisation: Resources are allocated according to comparative advantage (specialisation). Increased Internal Market Size: Increased efficiency because of scale economies and capacity use. Increased Internal Competition: Reduced x- inefficiency benefits consumers. Greater International Bargaining Power: Greater size leads to terms of trade improvements.

14. T RADE C REATION AND T RADE D IVERSION

16. a) la struttura della produzione. Due Paesi possono essere complementari (avere cioè strutture economiche differenti, come nel caso di un Paese industriale e di uno agricolo) o competitivi, se hanno strutture economiche simili. b) la dimensione dell'UD. Più l’UD è ampia, e maggiore il numero di Paesi che la compongono, maggiore sarà la possibilità che gli effetti di creazione superino quelli di diversione, grazie alla più efficiente distribuzione delle specializzazioni inter settoriali. c) il livello delle tariffe. Quanto più alto era il livello delle tariffe prima dell'UD (e quindi quanto più elevate erano le inefficienze-prezzo da proteggere) e quanto più basso é il livello ex post della TEC, tanto minori sono le possibilità di diversione commerciale. Condizioni che possono influenzare il risultato finale di una analisi di statica comparata

17. d) i costi di trasporto e di transazione. I costi di trasporto possono avere un effetto di ostacolo al commercio simile a quello delle tariffe: é questa una delle ragioni principali per la quale le UD si formano normalmente fra Paesi geograficamente contigui. e) la flessibilità. La possibilità di sfruttare i vantaggi collegati alla riallocazione delle produzioni é ovviamente legata alla flessibilità dei mercati del fattori ed alla presenza di "rigidità" nella struttura di produzione. Condizioni che possono influenzare il risultato finale di una analisi di statica comparata (segue)

18. S TATIC WELFARE EFFECTS Other static effects of economic integration i. Terms-of-trade effects: Individually, the members of a customs union may be small relative to world markets However, together they may become large, i.e. be able to influence their terms of trade It may be optimal for the customs union to restrict trade with non-members by imposing a CET equal to the optimum tariff

19. S TATIC WELFARE EFFECTS ii. Increased Internal Market Size: Increased efficiency because of scale economies and capacity use. iii).Increased Internal Competition: Reduced x- inefficiency benefits consumers. Iv.Pro-competitive effects: If markets are imperfectly competitive, economic integration leads to a reduction in market power of each firm, leading to a reduction in average mark-ups V. Product variety effects: If there are economies of scale (e.g. auto production), economic integration allows consumers to buy different varieties (e.g. Renaults and BMWs)

20. G ROWTH EFFECTS Economic integration may raise the incentives to innovate, and therefore may improve the economic growth performance of members Why? Integration leads to: Technological spillovers : regional integration might promote the volume of spillovers between countries, either as a consequence of increased trade volumes or because of policies designed to encourage scientific interchange Pro-competitive effect  more incentives to innovate Reduction of duplication in research  more efficient allocation of resources in R&D activities

21. E FFECTS OF R EGIONAL I NTEGRATION Foreign Direct Investment (FDI) The aggregate volume of FDI increases because:  Increased FDI by firms in other member states.  Non-member firms invest to take advantage of a larger, richer and more dynamic market.  Non-member firms fear increased protectionism and increase 'tariff jumping' FDI.

22. R EGIONAL I NTEGRATION & FDI C REATION The critical issue is the efficiency effects of the impact of regional economic integration on FDI flows - whether it promotes or replaces trade - FDI ‘Creation’ and FDI ‘Diversion’. FDI Creation, like Trade Creation, promotes economic efficiency by stimulating increased trade via greater specialisation, factor allocation and the international division of labour. Trade and FDI are complementary. Applies to internal or external inflows of FDI. Includes initial rationalisation of existing operations.

23. R EGIONAL I NTEGRATION & FDI D IVERSION FDI Diversion, like Trade Diversion, reduces economic efficiency because FDI is a substitute for trade flows – i.e. ‘tariff-jumping’ FDI. FDI Diversion relates only to FDI inflows from outside an integration area. Need for consideration of the counterfactual: some FDI inflows would not occur without actual protection or the fear of protection.