1. Chapter 9
Economic Integration

2. Regional economic integration
Forms of economic integration
Preferential trading agreement
Free trade area (FTA)
Customs union
Common market
Economic union
Political union

3. Regional economic integration
Preferential trading agreement reduce intra-group tariffs
A free trade area eliminates all barriers (both tariff and nontariff) to trade between member countries, but allows each country to establish its own trade policies against non members.
A customs union combines the elimination of barriers to internal trade between member countries with the adoption of common external trade policies toward non members.

4. Regional economic integration
A common market combines the elements of a customs union with a policy that allows for the mobility of factors of production.
Productivity is expected to rise in a common market because factors of production are free to locate where the returns to them are highest.
The European Union is an example of a common market till the late 1990s.

5. Regional economic integration
An economic union eliminates trade barriers between member countries, establishes a common external trade policy, follows a policy of factor mobility, and coordinates economic policies of member countries.
An example of an economic union is the European Union.

6. Regional economic integration
A political union combines the elements of an economic union with the added feature of complete political integration.
The United States, transformed from 13 separate colonies into one, is an example of a political union.
A variation of a political union occurred when the former colonies joined to form the Commonwealth of Australia.

8. Tariffs under Different Stages of IntegrationB C
t = 5%
t = 20%
(a) Preferential Trade Arrangement

9. Tariffs under Different Stages of IntegrationB C
t = 0%
t = 20%
(b) Free-trade Area

10. Tariffs under Different Stages of Integration
CET = 15%
t = 0% A B C
t = 0%
CET = 15%
(c) Customs Union

11. Welfare effect of Customs Union
Static effect
Trade creation: trade-liberalization element of integration is called Trade Creation.
Trade diversion: protectionist element of integration is called Trade Diversion.
Dynamic effect
Economies of scale
Competition
Investment

12. Trade creation P P1 D S1 B a b Q P2 P3 A C S3 S2 Q3 Q1 Q2 T1 T2
Integration eliminates protection among member countries and allows them to specialize and trade according to comparative advantage and to exploit potential economies of scale.

13. Trade diversion P P1 D Q P2 P3 A C S3 S2 Q1 Q2 T1 T2
Diversion of trade from nonmembers to members caused by discrimination inherent in integration

14. Intra Group Trade as Percent of Total Merchandise Trade, 2000EU
NAFTA 20 40 50 60 70
Percent 30 10
ASEAN
MERCOSUR
Intra-Group Exports as Percent of Total Exports
Intra-Group Imports as Percent of Total Imports

15. U.S., Canadian and Mexican Exports, 20000%
Share of U.S. exports
40%
60%
80%
100%
Percent
20%
Non-NAFTA
countries
Mexico
Canada
U.S.
Share of Canadian exports
Share of Mexican exports

16. Regional trading blocs
The European Union (EU)
The Americas
NAFTA
Asian & Pacific areas
ASEAN, APEC, etc
Other regional trading blocs
Free trade agreements in Africa

17. EU EU is the most important trading bloc in the world today.
Developed from European Economic Community (EEC), a “Custom Union”.
Elimination of internal tariffs.
Common external tariffs of 15 percent (members’ average).

19. EU Institutionalize the virtuous circle of export-led growth.
The elimination of tariffs would create trade (trade creation).
The imposition of external tariffs would reduce dependence from the United States, Soviet Union, etc. (trade diversion).

20. Intra-EC trade as a % of total trade

22. Enlargement of EU
After successfully growing from 6 to 15 members, the European Union is now preparing for its biggest enlargement ever in terms of scope and diversity
13 countries have applied to become new members:
10 of these countries - Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia joined on May 1st, 2004
Bulgaria and Romania hope to do so by 2007, while Turkey is not currently negotiating its membership
Next new candidate: Croatia

23. Requirements of EU
In order to join the Union, the candidate country needs to fulfil the economic and political conditions known as the 'Copenhagen criteria', according to which a prospective member must:
be a stable democracy, respecting human rights, the rule of law, and the protection of minorities
have a functioning market economy
adopt the common rules, standards and policies that make up the body of EU law

24. Requirements of EU four freedoms: Free movement of goods
Free movement of services
Free movement of persons
Free movement of capital

25. Main institutions of EU
The Council of the European Union
The European Commission;
The European Parliament;
The European Court of Justice
The European Central Bank (ECB)

26. NAFTA
In January 1994 a FTA between Canada, Mexico and US took place (NAFTA)
Addressed the following
Trade in goods
Financial services
Transportation
Telecommunications
Foreign direct investment
Intellectual property rights
Government procurement
Dispute settlement

28. ASEAN
The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.
The ASEAN region has a population of about 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product of US$737 billion, and a total trade of US$ 720 billion.

30. APEC

31. Free trade agreements in Africa