REGIONAL ECONOMIC

INTEGRATION

Regional Economic Integration refers to agreement between groups of countries in 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 countries. Regional trade agreement are design to promote free trade, but instead the word may be moving toward a situation in which a number of regional trade blocks compete against each other.

Introduction

There are five levels of economic integration :

• Free Trade Area encourages trade among its members by eliminating trade barriers (tariffs, quotas, and other nontariff barriers [NTBs]) among them.

I. European Free Trade Association (EFTA) : Norway, Iceland, Liechtenstein and Switzerland

II. North American Free trade Agreement (NAFTA) : Canada, Mexico and United States

Level of Economic Integration

• Custom Union combines the elimination of internal trade barriers among its members with the adoption of common external trade policies toward nonmembers.

I. Andean Pact (between Bolivia, Columbia ,Ecuador and Peru) is an example of a customs union.

• Common Market eliminating barriers that inhibit the movement of factors of production (labor, capital, and technology) among its members.

I. MEROSUR (between Brazil, Argentina, Paraguay, and Uruguay )is aiming for common market status.

• Economic Union represents full integration of the economics of two or more countries. It also involves free flows of products and factors of productions between members countries and adoption of common currency, harmonization of member countries tax rates and common monetary and fiscal policy.

I. European Union (EU) is an imperfect economic union.

•Political Union involves a central political apparatus that coordinates the economic, social and foreign policy of members state.

I. EU is headed towards at least partial political union, and United States is an example of even closer political union.

Economic Reasons for IntegrationPolitical Reasons for Integration

Reason For Economic Integration

Economic Reasons for Integration

•*opening a country to free trade stimulate economic growth in the country which creates dynamic gains

from trade.

economic theories suggest free trade and foreign direct investment is a positive activity in which all participating countries gain as an attempt to achieve additional gain from the free flow of trade and investment between countries beyond those attainable under international agreement motivate desires to exploit gains from free trade and investment

Political Reasons for Integration

Attempt to establish trade areas, customs union and the like. By linking neighbouring economies and making them increasingly dependent on each other, incentive are created for political co-operation between neighbouring states

Integration will reduce potential violent conflict between the state

By grouping their economies together, the countries can enhance their political weight in the world

REGIONAL ECONOMIC

INTEGRATIONa) EUROPE

b) AMERICA

c) LATIN AMERICA

d) ASIA

e) AFRICA

EUROPE EU is the most important regional trading

bloc in the world. 27 member countries that compose one of

the world’s richest markets The creation of EU was motivated by the

desires of two world wars of western europe to promote peace and the prosperity through economic and political cooperation.

The first six European nation that signed the Treaty of Rome (established the European Economic Community) in 1957 are France, West Germany, Italy, Belgium, the Netherlands and Luxembourg.

In 1970s , followed European nation such as UK, Denmark, and Ireland joined EEC which became the European Community, (EC).

GOVERNING THE EUROPEAN NATIONThe members of EU are sovereign nation which

agreed to cede their powers to the EU.Characterized both as an “intergovernmental

government” and “supranational government”.EU is governed by four orgnizations:1. The Council of the European Union2. The European Commission3. The European parliament4. The European court of Justice

THE STRUGGLE TO CREATE COMMON MARKETThe Treaty of Rome’s goal is to create a common

market that would permit free flow of goods, services, labor, capital and technology.

Unfortunately, conflicting national regulations affects nearly every good, services purchased and the completion of the common market

Ways and process of eliminating conflicts and barriers to establish a common market:

1. Process of harmonization2. Concept of mutual recognition3. The issuing of its White Paper

FROM COMMON MARKET TO EUROPEAN UNIONMany EU economist were arguing that

European firms remained at a competitive disadvantage because of the risks and costs in so many different currencies

The result was a new treaty known formally as the Treaty on European Union and informally as the Maastricht treaty which rests on three pillars designed to further economic and political integration:-

a) A new agreement to create common foreign and defense policies among members

b) A new agreement to cooperate on police, judicial, and public safety manners.

c) The old familiar European Community, with new provisions to create an economic and monetary union among member states.

European Community became commonly known as the European Union in recognition of the increasing integration of Europe.

Five Convergence criteria that were developed because of the economic policies of its member was needed to be successful:

1) Inflation rate must be more than 1.5 percentage point2) Long term interest rates must not be more than 2

percentage points3) Must have been a member of the EU’s revised

exchange-rate mechanism for 2 years4) Government budget deficit must be no more than 3%

of its GDP5) Government debt must be trending toward no more

than 60% of its GDP.

Treaty of Europe ( Treaty of Amsterdam) furthered the process of European integration in 1997.

In 2003, The Treaty of Nice furthered the integration which became effective to reduce the risk of political gridlock as the number of members increased, the treaty reduced the number of areas.

Two years later, in 2005 they agreed to support the Treaty of Lisbon called Reform Treaty which adopted many of the government changes.

AMERICA (NAFTA)

North American Free Trade Aggreement

The goal: to eliminate all the tariffs on bilateral trade between Canada and U.S. by 1988.

The NAFTA agreements was finalized on January 1, 1994.

Contain provisions to protect intellectual property right.

Abolition within 10 years of tariff on 99% of the goods traded among Mexico, Canada and U.S

Removes most restriction on FDI between the 3 members countries.

Under NAFTA, each country is allowed to apply its own environmental standard.

NAFTA establishes 2 commissions with the power to impose fines and remove trade privileges.

LATIN AMERICA

•The Mercosur Accord members; Argentina, Brazil, Paraguay and Ururguay

•Andean Community members; Bolivia, Chile,Columbia, Ecuador,and Peru

MERCOSUR ACCORD Originated in 1988, it is a free trade pact

between Brazil & Argentina.The aim : to establish a full free trade area by

the end of 1994 and a common market sometime later.

In March 1990, Uruguay and Paraguay joined as members.

ANDEAN COMMUNITYFormed in 1969 when Bolivia, Chile, Ecuador,

Columbia and Peru signed the Cartegena Agreement.

Based on the EU model but it was less successful in its achieving goal; to make them more competitive with larger countries.

Collapsed in the mid 1980s

ASIAASEAN

(Association of South East Asia Nation)

Established in August 1967To promote regional political and economic

cooperation.To promote intra-ASEAN trade, members

established the ASEAN Free Trade Area (AFTA), to slash their tariff to 5 percent or less on manufactured goods because the progress is slow.

APEC(Asia-Pacific Economic Cooperation)

Includes the economic powers of U.S, Japan and China.

To increase multilateral co-operation in view of the economic rise of the Pacific nations and the growing interdependence within the region.

AFRICA

Southern African Development Community (SADC)

To promote the development of their regional economy.

Economic and Monetary Community of Central Africa (CEMAC)

to achieve collective autonomy, raise the standard of living of its populations and maintain economic stability through harmonious cooperation

Economic Community of West African States (ECOWAS)

To promote co-operation on regional economic development programs.

Implication of regional economic on business

1. OPPORTUNITIES2. THREATS

OPPORTUNITIESThe creation of single market offers significant

opportunities. E.g The French and Italian market in 1992

Additional opportunities arise from the inherent lower cost of doing business in a single market.

Standard and simplified tax regimes. Firms can serve whole market of the country

from a single location.

THREATSBusiness environment become more

competitive.Threat to non- EU lies in the long term

improvement in the competitive position of many European and North Americans firms.

Being shut out of ‘Fortress Europe’ and ‘Fortress North America’ whereby they might impose barriers to Non-EU and Non-American firms to trade with the countries.