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Regional Integrations IBM

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    Regional Integrations:

    Regional Economic IntegrationsNature and levels of integration

    Arguments for and against regional integration

    Trading blocks

    European Union,

    ASEAN,

    APEC,

    NAFTA,SAARC,

    ANDEAN PACT and

    MERCOSUR.

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    Introduction One notable trend in the global economy in recentyears has been the accelerated movement towardregional economic integration. Regional economicintegration refers to agreements among countries in ageographic region to reduce, and ultimately remove,tariff and nontariff barriers to the free flow of goods,services, and factors of production between eachother.

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    Regional Economic Integration: Definition: It refers to the agreements between group of countries

    in a geographic region to reduce, and ultimatelyremove tariff & non-tariff barriers to the free flow ofgoods, service and factors of production between eachother.

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    Some countries create business opportunities forthemselves by integrating their economies in order toavoid unnecessary competition among themselves andalso from other countries. Economic integrationamong countries takes several forms. It covers differentkinds of arrangements between or among countries by

    which two or more countries link their economiescloser either in part of totals. They maintain thecohesiveness among or between the countries throughtariffs. They discriminate against the other countries,

    which are not parties to the agreement, through tariffs.They also discriminate against the goods produced byother countries. Economic integration varies indegrees.

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    GATT and WTO are the biggest association of morethan 150 member countries, which strive to reduce thebarriers. However, more than regional, WTO has aglobal perspective.

    By entering into regional agreements, groups ofcountries aim to reduce trade barriers more rapidly thancan be achieved under WTO. While there have been

    decreases in the global barriers to trade and investment,the greatest progress had been made on a regional basis.

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    Levels of Economic Integration: Countries create business opportunities for themselves

    by integrating their economies to avoid competitionamong themselves. Economic integration can be of the

    following kinds:

    Free Trade Area

    Customs Union

    Common Market

    Economic Union

    Political Union

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    Free Trade Area If a group of countries agree to abolish (eliminate or stop)

    all trade restrictions and barriers among or charge lowrates of tariffs in carrying out international trade, such agroup is called free trade area. These countries imposetrade barriers and restrictions with regard to trade with

    the countries other than the members of the group.

    Example:

    The North American Free Trade Agreement (NAFTA) isthe best example for Free Trade Area.

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    Common Market It has 3 basic characteristics;

    All member countries abolish all the restrictions and

    barriers on trade among themselves or charge lowrates of tariffs.

    They adopt a uniform commercial policy of barriersand restrictions jointly with regard to the trade with

    the non-member countries, & They allow free movement of factors of production

    (labour, capital and technology) across borders.

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    When factors of production are freely mobile, thencapital, labour and technology may be employed intheir most productive uses.

    Example:

    For years, the European Union functioned as acommon market, although it has now moved beyond

    this stage. MERCOSUR, the South American grouping of

    Argentina, Brazil, Paraguay, and Uruguay, hopes toeventually establish itself as a common market.

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    Economic Union:

    It has 4 basic characteristics;

    All member countries abolish all the restrictions on

    trade among themselves or charge low rates of tariffs They adopt a uniform commercial policy of barriers

    with regard to trade with the non-member countries

    They allow free moment of human resources and

    capital among themselves & They achieve uniformity in monetary policy and

    fiscal policyamong the member countries.

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    Political UnionApart from all the above characteristics, one central

    government rule the member countries in a union. It is the highest level of integration. It implies more

    formal political links between countries. In the purepolitical union, the member countries lose their national

    identities and come under a single state. While a limitedform of political union exists when two or morecountries share common decision making bodies andhave common policies.

    Example: The unification of East and West Germany is an example

    of total political union. The two nations now have onegovernment and one set of overall economic policies.

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    Arguments For and Against

    Integration

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    Trade CreationWhen trade barriers between countries are removed,

    industries in respective countries will concentrate on themost efficient use of resources and produce those goodsthat they are most efficient in producing. The result isthat all participants will gain from trade. In addition,

    when tariffs and other barriers are removed between themembers of a trading area, new opportunities for tradeare created. This is because exports can now be sold orimports bought at more reasonable rates inside the

    trading block. The efficient exporter can sell surplusgoods abroad, and the importer, instead of producing thegoods inefficiently at home, can reallocate resources tomore efficient production.

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    Trade DiversionWhen trade is diverted from countries outside the

    trading area to countries inside. External countries willfind it especially difficult to retain their export marketsif the common external tariff is higher than theprevious importing countrys tariff. In such a case,trade diversion may not be beneficial as trade may bediverted from a more efficient producer outside the

    trading area to a less efficient one inside.

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    Prices The consumption effects are noticed on prices and

    consumer choice. When trade barriers come down,consumers can buy goods more cheaply. This appliesnot just to tariffs, where price is directly affected, butalso to non-tariff barriers like customs choice. Tradecreation increases the availability of goods enablingthe consumers to pick and choose.

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    Competition By removing barriers between national markets,

    trading blocks create competition. Generally speaking,the longer the trading area and the higher the level ofintegration, the more competition will be created.Competition benefits consumers immensely in theform of lower prices, wider choice, and better value formoney. In addition, competition stimulates

    innovation, not only in the products themselves butalso in the channels of distribution, methods ofpayment, customer area, and so on.

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    Economies of Scale In a common market, external economies of scale may

    also be present. Because a common market allowsfactors of production to flow freely across borders,the firm may now have access to cheaper capital, moreskilled labour, or superior technology. These factors

    will improve the quality of the firms product orservice, or will lower costs, or both.

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    Dynamic Effects of Integration It describes the continuous pressure for change that is a

    feature of an integrated competitive environment. Marketforces act as a spur (encourage) to improvements inefficiency, increase in investment, and continualinnovation. A new product or process may create a

    competitive advantage for a time, but before long, acompetitor will introduce something better. The searchfor success is ongoing. The need to innovate promotesinvestment in new technology, new methods of

    production and distribution and product design.

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    Trading Blocks (trade bloc)A trade bloc is the proliferation (creation, increase) of

    economic integration schemes. It also referred astrading blocs, regional integration agreements (RIAs),

    regional trading agreements (RTAs).

    The purpose of the trading blocs is to create a singlelargest market. The single largest markets provideopportunities and pose threats.

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    Advantages of Regional Trade Blocks It has in reducing tariff and non-tariff barriers to trade.

    It accelerated economic growth, social progress, culturaldevelopment in the region.

    The liberalization of investments has been fostering(development) economic growth of a number of countries.

    It provides a forum for multilateral discussion for economicgrowth and building economic relation.

    It provides adequate and effective protection andenforcement of intellectual property rights in each partysterritory.

    It promotes the conditions of fair competition in the freetrade area.

    It increases the size of market, aggregate demand forproduct and services, quantity of production, employmentand ultimately entire economic activities of the region.

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    European Union (EU) Origin The origin of European Union goes back to the

    European Coal and Steel Community (ECSC) whichwas formed by West Germany, France, Italy, Belgium,

    Netherlands and Luxembourg in 1952. The aim was toeliminate import duties and quotas on coal, iron oreand steel regarding the international trade among themember countries.

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    Organization structure of

    European Union European Council is the main administrative body ofthe EU. Each member country is represented by aminister in this council. Each member country holds

    the presidency of the council for six-monthly period ofrotation. A committee of permanent representativesacts as the Secretariat of the council.

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    European CouncilEuropean Council acts as the executive agent of the EUin:

    Formulating rules of conduct

    Preparing new legislations

    Making decisions

    Enabling members to carry out the provisions of the

    Treaty.

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    European Commission

    The European Commission assists the Council. This isthe executive body of the EU. The members of thiscommission are appointed for a period of four yearswhich can be renewed. One or more EU policies are

    entrusted to each commissioner. Each commissioner isassisted by a chief of cabinet of his country. Theseassistants take decisions on behalf of theircommissioners.

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    Court of Justice There is a court of justice to adjudicate disputes relating

    to agriculture, social security for migrants among themember countries and competition policy. The court alsoadjudicates disputes between the member countries

    brought by the commission against the council orcommission reported by a person or a company.

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    Court of Auditors Court of auditors was appointed as a part of the EU by

    amending the Treaty of Rome. The activities of the courtof auditors include:

    Auditing the EEC budget (European EconomicCommunity)

    Monitoring the EECs expenditure

    Laying down improved procedures for collection of dutiesand levies.`

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    European Parliament The European Commission should consult the Parliament

    before a final decision is taken. The Parliament actsthrough the Parliamentary Committee. The activities ofthe European Parliament include:

    Provides consultation and information to the

    Commission.Approve or reject the draft budget prepared by the

    Commission.

    Dismiss the Commission, if necessary.

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    Advisory Committees

    There are several advisory committees to advise theEuropean Commission. These committees include:

    Economic and Social Committee

    Monetary Committee

    Consultative Committee on Coal and Steel Industry.

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    Economic and Social Committee This committee represents the activities like

    employers, employee unions, farmers, retail traders,liberal professions and public. European Commission

    appoints the members on this committee.

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    Monetary Committee: This committee examines themonetary problems, problems of the balance ofpayments and suggests measures to overcome them.

    Consultative Committee on Coal and Steel

    Industry: This committee studies the problems of coaland steel industries and offers suggestions.

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    ESTABLISHMENT OF THE EURO The euro is the currency of 13 European Union

    countries: Belgium, Germany, Greece, Spain, France,

    Ireland, Italy, Luxembourg, the Netherlands, Austria,Portugal, Slovenia and Finland.

    Leaders of EC member states met in Maastricht,Netherlands. 13 members signed a treaty that committedthem to adopting a common currency by Jan 1999.

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    According to the Treaty, to join the euro zone membercountries had to

    Achieve low inflation rates,

    Low long-term interest rates,

    A stable exchange rate,

    Public debt limited to 60% of the countrys gross

    domestic product & Current budget deficits of no more 3% of GDP

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    Benefits of EURO Europeans believe that business and individuals will

    realize significant savings from having to handle onecurrency rather than many

    The adoption of a common currency will make it easier tocompare prices across Europe.

    It boosts the development of a highly liquid Europeancapital market.

    It will increase the range of investment options open toboth individuals and institutions.

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    Cost of EURO Drawbacks The national authorities have lost control overmonetary policy.

    Currency value decreased

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    NORTH AMERICAN FREE TRADE

    AGREEMENT (NAFTA) In January 1994, Canada, the United States and Mexico

    launched the North American Free Trade Agreement(NAFTA) and formed the world's largest free trade

    area. The Agreement has brought economic growth and

    rising standards of living for people in all threecountries. In addition, NAFTA has established a strongfoundation for future growth and has set a valuableexample of the benefits of trade liberalization.

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    Obj i

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    Objectives To create new business opportunities particularly in Mexico

    To enhance the competitive advantage of the companiesoperating USA, Canada and Mexico in wider internationalmarkets.

    To reduce the prices of the products and services byenhancing the competition

    To enhance industrial development and thereby employmentthroughout the region.

    To provide stable and predictable political environment forthe investors

    To develop industries in Mexico in order to createemployment and to reduce migration from Mexico to USA

    To improve and consolidate political relationship amongmember countries.

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    Arguments for NAFTAAn opportunity to create an enlarged and more efficient

    productive base for the entire region

    Many U.S & Canadian firms will move production toMexico to take advantage of lower labor costs

    Mexico benefits because it gets much-neededinvestment & employment

    Increased incomes of the Mexicans will allow themimport more U.S & Canadian goods

    U.S & Canadian consumers will benefit from the lowerprices of products produced in Mexico

    International competitiveness of U.S and Canadian firmswill be enhanced.

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    Arguments against NAFTA

    Mass exodus of jobs from U.S and Canada into Mexico

    Environmentalists warn that Mexico could degradeclean air and toxic waste standards across thecontinent. Rio Grande is the most polluted river in theUS.

    Opposition in Mexico to NAFTA from those who fear a

    loss of national sovereignty.

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    THE ANDEAN PACT It was formed in 1969 when Bolivia, Chile, Ecuador,

    Colombia, and Peru signed the Cartagena Agreement.

    Objectives:

    Internal tariff reduction program

    Common external tariff,

    A transportation policy

    A common industrial policy & Special concessions for the smallest members Bolivia

    and Ecuador.

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    By the mid 1980s the Andean Pact had collapsed and

    had failed to achieve any of its stated objectives. The Member countries had to deal with low economic

    growth, hyperinflation, high unemployment, politicalunrest, and crushing debt burdens.

    In 1990, the members met in Galapagos Islandseffectively re- launching the Andean Pact. Thedeclarations objectives included the establishment ofa free trade area by 1992, a customs union by 1994, and

    a common market by 1995.

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    MERCOSUR

    (Southern Common Market)

    It originated in 1988 as a free trade pact between Braziland Argentina. Later in 1990 Paraguay and Uruguayjoined.

    In 1995, the members agreed to a 5 year program underwhich they hoped to perfect their free trade area andmove towards full customs union.

    MERCOSUR is making a positive contribution to theeconomic growth rates of its member states.

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    Trade between member countries quadrupled between1990 & 1998.

    The combined GDP grew at an annual average rate of3.5%

    The development of Mercosur was arguably weakenedby the collapse of the Argentine economy in 2001 andit has still seen internal conflicts over trade policy,between Brazil and Argentina, Argentina and Uruguayetc.

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    They might not be able to compete globally once thegroups external trade barriers come down.

    In December 2004 it signed a co-operation agreementwith the Andean Community trade bloc and theypublished a joint letter of intention for a futurenegotiations towards integrating all of South America.

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    THE ASSOCIATION OF SOUTH-EAST ASIAN

    NATIONS (ASEAN) The Association of Southeast Asian Nations (ASEAN)

    was established on 8 August 1967 in Bangkok,Thailand.

    Member countries:

    Indonesia, Malaysia, Philippines, Singapore, Thailand,Brunei Darussalam, Vietnam, Laos and Myanmar.

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    Five original Member Countries of ASEAN areIndonesia, Malaysia, Philippines, Singapore andThailand.

    Brunei Darussalam joined the Association on 8 January

    1984.Vietnam became the seventh member of ASEAN on 28

    July 1995.

    Laos and Myanmar were admitted into ASEAN on 23

    July 1997. The ASEAN member countries have developed

    economically at a fast rate in the globe.

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    Their strength is well educated and skilled humanresources. This enabled them to achieve faster

    Industrialization. Member countries are rich in oil, mineral resources,

    agricultural goods and modern industrial products

    These countries invite and allow the free-flow offoreign capital

    ASEAN enables the member countries to have closecohesiveness, share their economic and human

    resources and achieve synergy in the development oftheir agricultural sectors, industrial sectors and servicesectors.

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    ASEAN FREE TRADE AREA (AFTA)

    The ASEAN countries formed the AFTA in 1994 inorder to develop inter ASEAN trade.

    OBJECTIVES:

    To encourage inflow of foreign investment into thisregion

    To establish free trade area in the member countries

    To reduce tariff of the products produced in ASEANcountries

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    ASIA PACIFIC ECONOMIC COOPERATION

    (APEC)It was founded in 1990. Members:United States China

    Japan Thailand

    South Korea SingaporePhilippines Brunei

    Taiwan Malaysia

    Papua New Guinea

    Indonesia

    Mexico

    Canada

    Chile

    New Zealand

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    Objectives: To increase multilateral cooperation in view of the

    economic rise of the Pacific nations and the growinginterdependence within the region.

    The edge of state of affect met for the first time in Nov1993 to commit itself to the ultimate formation of a FreeTrade Area.

    The members again met in 1994 in Jakarta, Indonesia, &

    agreed to commit APECs industrialised members toremove their trade and investment barriers by 2010 andfor developing economies to do so by 2020. They calledfor a detailed blueprint charting how this might be

    achieved.

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    Finally they met again to remove trade barriers in 15industries from fish to toys

    However, APEC is not so completely integrated orsuccessful like EU.

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    SOUTH ASIAN ASSOCIATION OF REGIONAL

    COOPERATION (SAARC): India, Bangladesh, Bhutan, Pakistan, the Maldives

    Nepal and Sri Lanka established SAARC on December8, 1985.

    Afghanistan joined in April 2007

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    Objectives: To improve the quality of life and welfare of the people

    of the SAARC member countries.

    To develop the region economically, socially andculturally

    To provide the opportunity to the people of the regionto live in dignity and to exploit their opportunities

    To enhance the self-reliance (dependence, confidence)

    of the member countries jointly.

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    To provide favorable climate for creating andenhancing mutual trust, understanding andapplication of one anothers issues.

    To enhance the mutual assistance among membercountries in the areas of economic, social, cultural,scientific and technical fields.

    To enhance the co-operation with other developingeconomies.


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