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Regional Economic
Integration
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Point of discussion
Introduction
Levels of regional economic integration
Regional integration pros & cons
Major trade blocks of the world
Implications for business
Question & Answer
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Regional economic integration refersto agreements among countries in a
geographic region to reduce, andultimately remove, tariff and nontariffbarriers to the free flow of goods,services, and factors of production
between each other.
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Free Trade Area
1. Free Trade Area:
1) No barriers to trade
among members
2) With different trade policies
to nonmembers
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E.g.EFTA
(The European Free Trade Association)
(1) established in1960
(2) Initially there were 7 countries now only 4countries remaining.
(3) free trade in industrial goods
(4) with different policy inagriculture and to outsiders
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Customs Union
A customs union eliminates tradebarriers between member countries and
adopts a common external trade policy.
Desiring greater integration
e.g. earlier EU , Andean Pact
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Common Market
A common market has no barriers totrade between member countries,includes a common external trade policy,
and allows factors of production to movefreely between members.
Harmony and cooperation on fiscal, monetary
and employment policies
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Economic Union
1) Free flow of products and factorsof production
2) Common external trade policy
3) A common currency, tax rates, monetary andfiscal policy
e.g. EU
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Political Union
The move toward economic union raises
the issue of how to make a coordinating
bureaucracy accountable to the citizens of
member nations. The answer is through
political union.
1) More integrated than an economic union
2) A coordinating bureaucracy
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Pros & Cons of R.E.I.Pros & Cons of R.E.I.
Potential
benefits
Potential
drawbacks
Trade creation
Greater consensus
Political cooperation
Creates jobs
Trade diversion
Shifts in employment
Loss of sovereignty
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European Union
The European Union (EU) is an economic andpolitical union of 27 member states which arelocated primarily in Europe.
Committed to regional integration, the EU wasestablished by the Treaty of Maastricht in 1993upon the foundations of the EuropeanCommunities.
With over 500 million citizens, the EU generatedan estimated 28% share (US$ 16.5 trillion) ofthe nominal and about 21% (US$14.8 trillion) of
the PPP gross world product in 2009
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Regional Economic Integration
AmericasNAFTA 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 FDIApplication of national environmental standards
(scientific basis) Establishment of 2 commissionsy Monitor environmental standards & health/safety,
minimum wage or child labor laws
y Impose fines & remove trade privileges for
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Regional Economic Integration
Amer
ica
sForNAFTA
Opportunity to createan enlarged & efficient
production base forregion Mexico would benefit
from inwards FDI US & Canada benefit
y increased Mexicanincomes importingy consumers benefit
lower pricesy Competitiveness of
firms that moveproduction to Mexico
Against NAFTA
Mass exodus of jobsfrom US & Canada toMexico
Mexicos lower wage& less strictenvironmental laws
Impact Expose Mexico to more
competitive US &Canadian firms
Trade grew by 109% Increase in productivity
growth
Increase in politicalstability in Mexico
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Regional Economic Integration
Amer
ica
sAndean 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
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Regional Economic IntegrationASEAN
1967 Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,Philippines, Singapore, Thailand & Vietnam
500 million people & GDP $740 B Foster free 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 unfaircompetition
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Implications for Business
Creation of single market through regionaleconomic integration offers opportunities byopening markets to exports & FDI
Lower cost of doing business in a single market -
y Free movement of goods across bordersy Harmonized product standards
y Simplified tax regimesy Centralizing production where mix of factor costs & skills
are optimal
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Regional Shares of World Merchandise
Exports (%)
WTO,International Trade Statistics 2000; alsoAnnual Report 2000.
0
10
2030
40
50
N.Ame
rica
L.Am
erica
W.Europe
C.&E.
Europe Africa
Mid-East Asia
1980
1999
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Economic Case forIntegration
Unrestricted free trade will allow countries tospecialize in the production of goods/services thatthey can produce most efficiently
Greater world production than is possible withrestrictions
Stimulates economic growth creating dynamicgains from trade
FDI can transfer technological, marketing &managerial know-how to host nations
Positive-sum game
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Case Against
Regional Integration
Benefits of regional integration have beenoversold & the costs have often been ignored
Trade creation (high-cost domestic producers arereplaced by low-cost producers within a region) vs.trade diversion (low-cost external suppliers arereplaced by higher-cost suppliers within theregion)
Regional trading blocs could emerge whosemarkets are protected by high non-tariff barriers
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Political case for integration
Linking economies & making themincreasingly dependent on each othercreates incentives for political cooperation
& reduces potential for violent conflict
By grouping economies, countries canenhance their political weight in the world