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Chapter 9
Economic Integration
Chapter 9
Regional economic integration Forms of economic integration
Preferential trading agreement Free trade area (FTA) Customs union Common market Economic union Political union
Chapter 9
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.
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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.
Chapter 9
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.
Chapter 9
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.
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Chapter 9
Tariffs under Different Stages of Integration
t = 8%
t = 5%BA C
t = 20%
(a) Preferential Trade Arrangement
t = 10%
Chapter 9
Tariffs under Different Stages of Integration
t = 0%
t = 0% BA C
t = 20%
(b) Free-trade Area
t = 10%
Chapter 9
Tariffs under Different Stages of Integration
t = 0%
t = 0%BA C
CET = 15%
(c) Customs Union
CET = 15%
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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
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Trade creationIntegration eliminates protection among member countries and allows them to specialize and trade according to comparative advantage and to exploit potential economies of scale.
P
P1
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D
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Q3 Q1 Q2
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Trade diversionDiversion of trade from nonmembers to members caused by discrimination inherent in integration
P
P1
0
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P2
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Chapter 9Intra Group Trade as Percent of Total Merchandise Trade, 2000
0EU NAFTA
20
40
50
60
70Percent
30
10
ASEAN MERCOSUR
Intra-Group Exports as Percent of Total ExportsIntra-Group Imports as Percent of Total Imports
Chapter 9
U.S., Canadian and Mexican Exports, 2000
0%
Sh
are
of
U.S
. ex
po
rts
40%
60%
80%
100%Percent
20%
Non-NAFTAcountriesMexicoCanadaU.S.
Sh
are
of
Can
adia
n e
xpo
rts
Sh
are
of
Mex
ican
exp
ort
s
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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
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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 pe
rcent (members’ average).
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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).
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Intra-EC trade as a percentage of total trade
25
30
35
40
45
50
55
60
65
70
75
80
1958 1963 1968 1973 1978 1983 1988 1993
Per
cen
tag
e o
f to
tal
tra
de
Belgium, Luxembourg France Germany Italy Netherlands
Intra-EC trade as a % of total trade
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Chapter 9
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
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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
Requirements of EU
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four freedoms:
• Free movement of goods
• Free movement of services
• Free movement of persons
• Free movement of capital
Requirements of EU
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•The Council of the European Union
• The European Commission;
• The European Parliament;
• The European Court of Justice
• The European Central Bank (ECB)
Main institutions of EU
Chapter 9
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
NAFTA
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Chapter 9
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.
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APEC
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Free trade agreem
ents in A
frica
