Concept of Economic Integration

8/12/2019 Concept of Economic Integration

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CONCEPT OF ECONOMIC INTEGRATION

The term economic integration has been interpreted in different ways. Some

authors include social integration in this concept, others subsume different forms

of international cooperation under this heading, and the argument has also been

advanced that the mere existence of trade relations between independent national

economics is sign of economic integration.

However, the term is commonly used to refer to the type of arrangement that

removes artificial trade barriers, like tariffs, between the integrating economies.

The structure of regional agreements varies hugely, but all have one thing in

common- the objective of reducing barriers to trade between member countries. At

their simplest, they merely remove tariffs on intrabloc trade in goods, but many go

beyond that to cover non-tariff barriers and to extend liberalization to trade and

investment. At their deepest, they have the objective of economic union, and they

involve the construction of shared executive, judicial, and legislative institutions.

Bela Balassa defines economic integration as a process and as a state of

affairs. Regarded as a process, it encompasses measures designed to abolish

discrimination between economic units belonging to different national states:

viewed as a state of affairs, it can be represented by the absence of various forms

of discrimination between national economies.

In interpreting his definition, Balassa draws a distinction between integration and

cooperation. The difference is qualitative as well as quantitative. Whereas

cooperation includes actions aimed at lessening discrimination, the process of


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economic integration comprises measures that entail the suppression of some

forms of discrimination. For example, international agreements on trade policies

belong to the area of international cooperation, while rte removal of trade barriers

is an act of economic integration. The main characteristic of economic integration

is, thus, the abolition of discrimination within an area.

OBJECTIVES

Economic integration schemes have several objectives. The motivation to form

trading blocs may vary from region to region and from country to country.Nevertheless, as Shiells suggests, the following motivation seem to play a key role

in the formation of trading blocs.

1. To obtain economic benefits from achieving a more efficient productionstructure by exploiting economies of scale through spreading fixed costs

over larger regional markets, increased economic growth from foreign direct

investment, learning from experience etc.

2. To pursue non-economic objectives such as strengthening political ties andmanaging migration flows.

3. To ensure increased security of market access for smaller countries byforming regional trading blocs with larger countries.

4. To improve members collective bargaining strength in multilateral tradenegotiations or to protest against the slow pace of trade negotiations.

5. To promote regional infant industries which cannot be viable without aprotected regional market.


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6. Finally, to prevent further damage to their trading strength due to furthertrade diversion from third countries.

Levels of Economic Integration

There are five levels of economic integration .These extend from simple economic

trade arrangements to full political integration characterized by a single

government. The following examines each of these levels beginning with the

simplest.

Free Trade Area

A free trade area is an economic integration arrangements in which barriers to

trade (such as tariffs) among member countries are removed. Under this

arrangement each participant will seek to gain by specializing in the production of

those goods and services for which it has a comparative advantage and importing

those goods and services for which it has a comparative disadvantage.

One of the best known free trade arrangements is the North American Free

Trade Agreement (NAFTA), a free trade area currently consisting of Canada, the

US, and Mexico. The US and Canada created this free trade area with the United

States Canadian Free Trade Agreement of 1989 and the arrangement has now

been expanded to include Mexico. While trade diversion can occur under free trade

arrangements, NAFTA has generated a great amount of trade creation. Infact, trade

between the three members of NAFTA is now in the range of $1 trillion annually.

Customs Union

A Customs Union is a form of economic integration in which all tariffs between

member countries are eliminated and a common trade policy towards non-member

countries is established. This policy often results in a uniform external tariff


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structure. Under this arrangement, a company outside the union will face the same

tariff an exports to any member currency receiving the goods.

Under a customs union, member countries cede some of the control of their

economic policies to the group at large. None of the regional integration groups in

existence today has been formed for the purpose of creating a customs union;

instead many of them have sought greater integration in the form of a common

market or economic union. However, because of the difficulty of attaining this

high degree of integration, some countries have effectively settled for a customs

union. The Andean Pact, which will be discussed shortly, us an example.

Common Interest

A common market is a form of economic integration characterized by

(a)No barriers to trade among member nations,(b)A common external trade policy, and(c)Mobility of factors of production among member countries.

A common markets allows reallocation of production resources. Such as capitals,

labour, and technology, based on the theory of comparative advantage.While this

may be economically disadvantageous to industries or specific business in some

member countries. The best example of a successful common market is the EU

although this group has progressed beyond a common market and is now focusing

on political integration.

Economic Union

An economic union is a deep form of economic integration and is characterized by

free movement of goods, services, and factors of production between member

countries and full integration of economic policies. An economic union


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(1)Unifier monetary and fiscal policy among the member nations,(2)Has a common currency ( or a permanently fixed exchange rate among

currencies), and

(3)Employs the same fare rates and structures for all members.Additionally, most of all nationl economic policies of the individual countries are

ceded to the group at large. While there are no true economic unions in the worlds,

the creation of a single currency, the euro, certainly moves the EU in this direction.

Political Union

A political union goes beyond full economic integration, in which all economic

policies are unified, and has a single government. This represents total economic

integration, and it occurs only when countries give up their national powers to

leadership under a single government. One successful is the US, which combined

independent states into a political union. The unification of West and East

Germany in 1991 has also created a political union; the two nations now have one

government and one set of overall economic policies. And the EU is on its way

towards becoming a political union. The European Parliament , for example, is

directly elected by citizens of the EU Countries and its Council of Ministers, which

is the decisionmaking body of the EU, is made up of government ministers from

each EU currency.


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Free

Trade

Area

Free Trade

Among

Members

Custom

Union

Free Trade

Among

Members

Common

External

Commercial

Policy

Common

Market

Free Trade

Among

Members

Common

External

CommercialPolicy

Free Factor

Mobility

within theMarket

Economic

Union

Free Trade

Among

Members

Common

External

Commercial

Policy

Free Factor

Mobility

within the

Market

Harmonised

Economic

Policies

Economic

Integration

Free Trade

Among

Members

Common

External

Commercial

Policy

Free Factor

Mobility

within the

Market

Harmonised

Economic

Policies

Supernational

Organisational

Structure


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REASONS FOR ECONOMIC INTEGRATION

The recent periods has witnessed qualitative as well as quantitative changes in the

regional integration schemes. According to a report by the World Bank, the

following factors are responsible for the changes in the integration schemes:

1.Need for Effective Integration:The recognition of the fact that effective integration requires more than reducing

tariffs and quotas. Many other barriers have the effect of segmenting markets and

impending the free flow of goods, services, ideas and investments and wide-

ranging policy measures are needed to remove these barriers. This type of

integration was actively pursued by Single Market Program of the European

Union(EU) and elements of this program are now finding their way into the debate

in other regional agreements.

2.Need to Broaden Closed Regionalism:

The second factor is the move from closed regionalism to a more open model. In

the 1960s and 1970s, the blocs formed between the developing countries were

based on import-substituting development and agreements with high external trade

barriers were implemented. The new wave of regional agreements are more

outward looking and more committed to boosting rather than controlling

international commerce.

3. Advent of Trade Block:The third factor is the advent of trade blocs in which regional agreements between

developed and developing countries which is designed to boost the economy of all


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the member countries. The most important example being the North American

Free Trade Area (NAFTA) formed in 1994. EU has linked with the countries

Turkey in Eastern Europe.

Therefore, it is likely that some of the existing regional groupings will become

more integrated and new regional integration schemes will come into being.

The Advantages of Economic Integration:

Economic integration can be defined as a kind of arrangement where countries get

in agreement to coordinate and manage their fiscal, trade, and monetary policies in

order to be mutually benefited by them. There are many degrees of economic

integration, but the most preferred and popular one is free trade. In economic

integration no country pays customs duty within the integrated area, so it results in

lower prices both for the distributors and the consumers. The ultimate aim of

economic integration is to increase trade across the world. There are many other

advantages associated with this concept. Some of these are:

1. Trade creation:

Trade creation occurs when consumption shifts from a high cost producer to a low

cost producer. Economic integration increases specialization by removing trade

barriers and by encouraging specialization, it enables a shift in production from

high cost to low cost countries. If, for example, Uganda is the most efficient

producer of sugar in the East African region, after joining the EAC Rwanda

consumers start accessing cheaper Uganda sugar that they were not accessing

before the economic integration.


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2. Attracting Foreign Direct Investment (FDI):

Investors are attracted by large markets. Small and fragmental national markets

are usually not sufficient to attract huge investments. Economic integration makes

the region a huge market which foreign investors find attractive.

3. Employment Opportunities:

As economic integration encourage trade liberation and lead to market expansion,more investment into the country and greater diffusion of technology, it create

more employment opportunities for people to move from one country to another to

find jobs or to earn higher pay. For example, industries requiring mostly unskilled

labor tends to shift production to low wage countries within a regional cooperation.

4.Improved political co-operation:

Countries entering economic integration form groups and have greater political

influence as compared to influence created by a single nation. Integration is a vital

strategy for addressing the effects of political instability and human conflicts that

might affect a region.

5. Improves standard of living:

Economic integration increases the variety of products available to consumers in

member states. Removal of trade barriers enables consumers to have a variety of

commodities from which to choose. Local consumers are no longer restricted to


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consuming local products. Increased variety and consumer choice improve

peoples standard of living.

6. Member countries enjoy economies of scale:

Economic integration enables member countries to expand the scale of production

and enjoy economies of scale because of the expanded market. For example, a

factory in Rwanda gets access to markets in Uganda and Tanzania and so it enjoys

economies of scale.

7. Economic integration improves bargaining power:

A group of countries acting together improves their bargaining power in trade

agreements with other countries and trade blocs. A common policy and common

stand enables the group of countries to integrate to achieve more than they would if

the individual countries bargain individually.

8. Economic integration Reduces problems of exchange rates:

Economic integration enables member countries to use the same currency through

out the region. This eliminates the need for converting currencies for cross border

trade. For example, when the East African countries decide to use the samecurrency, a trader in Kenya can use the same currency in Uganda, Rwanda,

Tanzania, and Burundi. This speeds up trade and because there is one currency

acceptable throughout the region, exchange of goods and services is made easier.


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9. Integration encourages specialization:

The knowledge that a country will be able to freely export surplus output to its

trading partners encourages specialization which greatly improves the efficiency

and quality of output produced.

10. Lower costs of research and joint utilities:

When countries integrate, they are able to undertake very costly projects that they

would not have afforded individually. This enables them to undertake costly

research, develop better and modern infrastructures and services.

11. No duplication in resource use:

In the absence of integration, countries end up duplicating industries and

infrastructure because they want to be self-reliant. With economic integration,

there is no wasteful duplication. Countries develop and use common infrastructure

and services. For example, if the entire member countries can be adequately

served by one hydroelectric power dam, the other countries will have to use the

funds to set up something else other than having to put up their own hydro power

plants yet they can get power from the other countries.

12. Increases competition:

With many firms from the member countries competing for the market without

restrictions, firms are forced to improve on quality and sell at lower prices. Firms


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must devise the most efficient methods of production so as to favorably compete.

Integration therefore promotes efficiency.

13. Peace and security:

Economic integration promotes peace and security within the region. A country

will find it difficult to wage war against a fellow member state. There are also

many structures aimed at resolving conflicts amicably without resorting to war.

14.Beneficial for financial markets:

Economic integration is extremely beneficial for financial markets as it eases firm

to borrow finances at low rate if interest. This is because capital liquidity of larger

capital market increases and the resultant diversification effect reduces the risks

associated with high investment.

Disadvantages of Economic Integration:

There are many problems or difficulties in the formation of a customs union or free

trade area by developing countries. They are enumerated as under:

1. Trade diversion:

Trade diversion occurs when consumption shifts from a low cost producer outside

trading bloc. E.g. assume the efficient producer of beef in the world is New

Zealanda country that is not a member of the East African Community. Before

joining the EAC, Rwanda, for example, was free to import beef from any country

of the world at her own set tariffs. By joining the EAC, Rwanda is bound by


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external tariffs and policies. Consequently, Rwanda may have to import beef from

Uganda at a higher cost than it would have imported the beef from New Zealand.

By joining the EAC therefore, Rwandas trade is diverted from a cheaper source

New Zealand to a higher cost source Uganda. That is trade diversion.

2. Loss of revenue:

Economic integration involves the reduction and eventual elimination of tariffs.

Tariffs are one major source of revenue for governments especially in the

developing countries. Economic integration would therefore mean that the countrywould lose all the revenue it used to collect on imported commodities from

member countries. This has consequences for the countrys budget, expenditure

and programmes.

3. Production of similar products limits trade:

In some cases, member states of an economic group produce the same or similar

goods. Because of this, there is a limit on what can be exported. For example, it is

difficult for any country in East Africa to export tea to another country in East

Africa because almost all the countries produce tea.

4. Retaliation by other trading blocs:

It can also increase trade barriers against non-member countries. Other countries

may retaliate and also impose restrictions on the exports. This may lead to

formation of rival trade blocs.


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5. Unemployment:

Economic integration may result in unemployment. Firms will be relocated to themore cost effective locations within the bloc and as such may lead to

unemployment in those countries where the firms move.

6. Uneven distribution of benefits:

Benefits may not be equally shared: sometimes, some countries may benefit morefrom economic integration than others. Countries that are more developed and

produce more, gain at the expense of the less developed countries within the

integrated area. Unfair distribution of gains may result this is due to the free

movement of goods among member states, which may be in one direction.

7. Loss of economic sovereignty:

Economic integration makes a country lose its sovereignty since it loses powers to

make certain decisions. For example, a country will have to adopt a common tariff

policy and therefore its independence in determining what tariffs to charge

commodities from other countries.

8. Problem of administration:

Administrative costs and bureaucracy may also be a cost to economic integration.

It may be costly i.e. the cost of staffing may be high since labour force of the union


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can be transferred to far places, Running commissions and secretariats may be

costly. Bureaucracy and long time decisions lags may not be favorably in a rapidly

changing world where quick decisions are required.

9. Uneven development:

Uneven development may occur. This is due to the uneven distribution of

industries and other gains to trade thus unfavourable to some countries of the

integration.

10. Geographical Distances:

The developing countries often lack in geographical proximity to each other.

Nearness to each other is essential for forming an economic union to be successful.

Even if there is geographical proximity among them, they lack in good transport,

communications, infrastructural and other facilities for intra-regional trade.


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European Union

The European Union (EU) is an economic and political union of 27 independent

member states which are located primarily Europe. The EU traces its origins from

the European Coal and Steel Community (ECSC) and the European Economic

Community (EEC), formed by six countries in 1958. In the intervening years the

EU has grown in size by the accession of new member states, and in power by the

addition of policy areas to its remit. The Maastricht Treaty established the

European Union under its current name in 1993. The last amendment to the

constitutional basis of the EU, the Treaty of Liston, came into force in 2009.

The EU operates through a hybrid system of supranational independent

institutions and intergovernmental made decisions negotiated by the member

states. Important institutions of EU include the European Commision, the Council

of the European Union, the European Council, the Court of Justice of the European

Union, and the European Central Bank. The European Parliament is elected every

five years by citizens. EU policy aims to ensure the free movement of people,

goods, service, and capital, enacts legislation in justice and home affairs, and

maintains common policies on trade, agriculture, fisheries and regional

development. Through the Common Foreign and Security Policy the EU has

developed a limited role in external relations and defense. Permanent diplomatic

missions have been established around the world and the EU is represented at the

United Nations, the WTO, the G8 and G-20. With a combined population of over

500 million inhabitants, or 7.3% of the world population, the EU generated anominal GDP of 16,242 billion US dollars in 2010, which represents an estimated

20% of global GDP when measured in terms of purchasing power parity.


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Member States

The European Union is composed of 27 sovereign Member States : Austria,

Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland,

France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,

Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain,

Sweden, and the United Kingdom.

The Unions membership has grown from the original six founding states

Belgium, France,(thenwest) Germany, Italy, Luxembourg and the Netherlands

to the present day 27 by successive enlargements as countries acceded to the

treaties and by doing so, pooled their sovereignty in exchange for representation in

the institutions.

To join the EU a country must meet the Copenhagen criteria, defined at 1993

Copenhagen European Council. These require a stable democracy that respects

human rights and the rule of law; a functioning market economy capable of

competition within the EU; and the acceptance of the obligations of membership,

including EU law. Evaluation of a countrys fulfillment of the criteria is the

responsibility of the European Council. No member state has ever left the Union,

although Greenland (an autonomous province of Denmark) withdrew in 1985. The

Lisbon Treaty now provides a clause dealing with how a member leaves the EU.

There are five official candidate countries, Croatia, Iceland, Macedonia,

Montenegro and Turkey. Albania, Bosnia, and Herzegovina and Serbia are

officially recognized as potential candidates. Kosovo as also listed as a potential

candidate but the European Commission does not list it as an independent country

because not all member states recognize it as an independent country separate from

Serbia. Four Western European countries that are not EU members have partly


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committed to the EUs economy and regulations; Iceland ( a candidate country for

EU membership), Liechtenstein and Norway, which are a part of the single market

through the European Economic Area, and Switzerland, which has similar ties

through bilateral treaties. The relationships of the European microstates, Andorra,

Monaco, San Marino and the Vatican include the use of the euro and other areas of

cooperation.

BENEFITS OF EU

1. One great advantage is the replacement of the different policy and regulatoryenvironments of the newly joined members by the that of the uniform policy

and regulatory environment of the union and the reduction in transaction

costs.

2. It is also likely that there would be expansion of the market benefiting fromthe enlargements of the Union.

3. Further, the availability of new ports in the enlarged EU could reducetransaction costs.

4. The harmonization of the tariff structures of the new members with that ofthe EU will increase the import duty of some countries above the pre-

accession levels and reduce those of others. On the whole, the average

weighted tariff of these countries will significantly come down to the benefit

of the exporters to these markets.

5. It is expected that the removal of quota restrictions for textiles and clothingfrom January 2005 may also work to Indias advantage, since it will reduce

the protection presently available to ACs exports in the EU market.

6. The enlarged EU may also spur joint ventures with Indian companieslooking forward to setting up manufacturing bases in the low cost ACs.


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CHALLENGES

1. Many Indian products will have to face a stiffer competition in the EUfrom the new members.

2. The low labour cost in these nations could encourage EU firms toestablish manufacturing bases these or sources from there which can

affect Indian exports to EU and give rise to new competition from these

firms in other markets.

3. It is feared that the relative competitive advantage of many of Indiasexports to the EU(15) may be affected by the enlargement of EU, ascountries like Poland and Czech Republic compete with India in selling

textiles and apparel, footwear and leather, chemical compounds, iron and

steel, automotive parts etc. in the EU(15) market. According to one

estimate, India and Poland compete in EU market for 46 of the top 100

exports from India to the EU. Exports of textiles may be adversely

affected with low cost production in Central and Eastern European

countries [CEECs] eating into Indias EU(15) markets.

4. As the AC are labour abundant and low income countries, India may alsoface stiffer competition on account of temporary movement of its natural

persons to EU and business process outsourcing by EU to India.


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SAARC

The South Asian Association for Regional Cooperation (SAARC) is an

organization of South Asian nations, founded in December 1985 and dedicated to

economic, technological, social, and cultural development emphasizing collective

self-reliance. Its seven founding members are Bangaladesh, Bhutan, India, the

Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan joined the organization

in 2005. Meetings of heads of state are usually scheduled annully; meetings of

foreign secretaries annually. It is headquartered in Kathmandu, Nepal. The 16

stated areas of cooperation are agriculture and rural, biotechnology, culture,

energy, environment, economy and trade, finance, funding mechanism, human

resource development, poverty alleviation, people to people contact, security

aspects, social development, science and technology; communications, tourism.

HISTORY

The concept of SAARC was first adopted by Bangalesh during 1977, under the

administration of President Ziaur Rahman. In the late 1970s, SAARC nations

agreed upon the creation of a trade bloc consisting of South Asian countries. The

idea of regional cooperation in South Asia was again mooted in May 1980. The

foreign secretaries of the seven countries met for the first time in Colombo in

April 1985, identified five broad areas for regional cooperation. New areas of

cooperation were added in the following years


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OBJECTIVES

The objectives of the association as defined in the charter are:

To promote the welfare of the people of South Asia and to improve theirquality of life;

To accelerate economic growth, social progress and cultural development inthe region and to provide all individuals the opportunity to live in dignity

and to realize their full potential;

To promote and strengthen collective self reliance among the countries ofSouth Asia;

To contribute to natural trust, understanding and appreciation of oneanothers problem;

To promote active collaboration and mutual assistance in the economic,social, cultural, technical and scientific fields;

To strengthen cooperation with other developing countries; To strengthen cooperation among themselves in international forums on

matters of common interest ; and

To cooperate with international and regional organizations with similar aimsand purposes.


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SAARC Youth Award

The SAARC Youth Award is awarded to outstanding individuals from the SAARC

region. The award is notable due to the recognition it gives to the Award winner in

the SAARC region. The award is based on specific themes which apply to each

year. The award recognizes and promotes the commitment and talent of the youth

who give back to the world at large through various initiatves such as Inventions,

Protection of the Environment and Disaster relief. The recipients who receives this

award are ones who have dedicated their lives to their individual causes to improve

situations in their own cuntries as well as paving a path for the SAARC region to

follow. The committee for the SAARC Youth Award selects the best candidate

based on his/her merits and their decision is final.

Previous Winners

1997 : Outstanding Social Service in Community welfare Mr. Md. Sukur Salek

( Bangladesh)

1998 : New Inventions and DiscoveriesDr. Najmul Hasnain Shah ( Pakistan)

2001 : Creative Photograhpy : South Asian Diversity Mr Mushfiqul Alam

( Bangladesh)

2002 : Outstanding contribution to protect the Environment Dr. Masil Khan

( Pakistan)

2003 : Invention in the Field of Traditional Medicine Mr. Hassan Sher( Pakistan )

2004 : Outstanding contribution to raising awareness for TB and / or HIV / AIDS

Mr. Ajij Prasad Poudyal ( Nepal )


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2006 : Promotion of Tourism in South Asia Mr. Syed Zafar Abbas Naqvi

( Pakistan )

2008 : From Himalayan glaciers to verdant Plains to coral reefs Protecting the

Environment in South Asia Ms. Uswatta Liyanaye Deepani Samantha ( Sri

Lanka )

2009 : Outstanding contribution to humanitarian works in the aftermath of Natural

DisastersDr. Ravikant Singh ( India )

2010 : Outstanding contribution for the Protection of Environment and mitigation

of Climate ChangeMs. Anoka Primrose Abeyrathe ( Sri Lanka )

PROBLEMS

There are a number of problems which confront the SAARC.

1. Border disputes, ethnic issues and religions, political outlook andaffiliations, etc. cause mutual distrust among some of the members of the

Association and these prevent emotional closeness and, as a consequence,

adversely affect the pursuit of cooperation.

2. One important problem that limits the scope of economic cooperation is thatthe economies of the member countries are similar rather than dissimilar. In

other words, complementarity, an important contributor to the success of

economic integration, is limited.

3. As the member countries have been emphasizing very much of thepromotion of exports to the hard currency areas, intra-regional trade has

been relatively neglected.


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4. Some of the member countries are important exporters of same type ofproducts and are, therefore, competitors in the international market. For

example, this is true of India and Bangladesh with respect to jute, and India

and Sri Lanka with respect to tea. Similarly, textiles and clothing are very

important export items of some of the members.

5. Due to the differences in the levels of development of economic strength,there is a feeling that the relatively advanced member countries would be the

major beneficiaries of the cooperation and the least developed among them

may not benefit much. As a matter of fact, the least developed members

could enormously benefit from others, particularly from India, if proper

schemes of cooperation are pursued.

6. Due to foreign exchange problems, these countries, generally, tend to restrictimports and this comes in the way of intra-regional trade too. Further,

revenue consideration may discourage governments the abolition/reduction

of tariffs even on intra-regional trade.

7. Underdevelopment of transport, communications, payment and clearingarrangements, institutional inadequacies etc. also hinder expansion of

economic relations.


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NAFTA

The United States signed its first free trade agreement (FTA) with Israel in the

mid-1980s, followed by a FTA with Canada in 1988 and the North American

Free Trade Agreement (NAFTA) in 1994 which was later widened with the

inclusion of Mexico (1994), making North America a giant free trade area.

NAFTA is a large trading bloc with a combined population and total GNP

greater than the 15-member EU (but lower than the expanded EU). However,

NAFTA could further expand substantially by adding more countries in the

future. NAFTA is, in fact, perceived to expand by pulling together NorthCentral and South America.

FEATURES

The NAFTA seeks to eliminate all tariffs on products moving among the threecountries and end other barriers to services and investment capital within North

America. NAFTA covers the following areas:

1. Market access- tariff and non-tariff barriers, rules of origin, governmentalprocurement.

2. Trade rules- safeguards, subsidies, countervailing and antidumping duties,health and safety standards.

3. Services- provides from the same safeguards for trade in services(consulting, engineering software, etc.) that exist for trade in goods.


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4. Investment- establishes investment rules governing minority interests,portfolio investment, real property and majority-owned or controlled

investments from the NAFTA countries; in addition, NAFTA coverage

extends to investments made by any company incorporated in a NAFTA

country, regardless of country of origin.

5. Intellectual property- all three countries pledge to provide adequate andefficient protection and enforcement of intellectual property rights, while

ensuring that enforcement measures do not themselves become barriers to

legitimate trade.

6. Dispute settlement- provides a dispute settlement process that will befollowed instead of countries taking unilateral action against an offending

party.

A very significant feature of the NAFTA is that, while most free trade

agreements have provisions only for the trade liberalization, it includes

labour standards and environmental standards. The inclusion of the labour

standards resulted from the pressure of the labour lobby which feared that

the US and Canada would lose a jobs to Mexico as a result of Mexicos

cheaper wages, poor working conditions, and lax environmental

enforcement. Similarly, the inclusion of the environmental standards

resulted from the pressure of the environmental lobby which pushed for an

upgrade of environmental standards in Mexico and the strengthening of

compliance.


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IMPACT OF NAFTA

NAFTA has achieved substantial trade liberalization. The trade between the US

and Canada and the US and Mexico is substantial and has been rising fast. The

two-way trading relationship between the United States and Canada is the largest

in the world. Mexico replaced Japan as the second-largest market for US exports,

while remaining as the third most important supplier to the US market after Canada

and Japan. However, although the Canada-Mexico trade has been increasing fast

after the Agreement, they are still marginal trading partners with each other.

Doubts are, however, raised about the impact of the NAFTA on employment in the

US. The American companies would immensely benefit by shifting production to

Mexico where labour is substantially cheap as compared to the US. It was pointed

out that what NAFTA would help achieve is a free movement of American capital

to Mexico- a superior alternative from the US viewpoint, when compared to the

free movement of Mexican labour to the US. Environmentalists have also

expressed concerned about the US moving high pollution industries to Mexico

which has less stringent environment protection laws.

There have been divergent views on the potential benefits and harmful effects of

NAFTA and its members. Many feared that there would be an exodus of jobs to

the substantially low-wage Mexico from the US and Canada, while the other

school maintained that there would be substantial job creation in the US and

Canada because of the huge increase in demand for US and Canadian goods and

services in Mexico following the trade liberalization. Many Mexicans feared

competition from the US firms would seriously damage the Mexican industry and


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economy, while many others maintained that liberalization and competition will

increase the competitiveness of the Mexican industry.

The real impact of NAFTA on US employment is not clear. Although there are job

losses to the US due to NAFTA, some estimate indicate significant net job creation

in the US. This is corroborated by the relatively low unemployment rates

prevailing in the US after the formation of the free trade area.

Foreign investment in Mexico has risen substantially since the

Agreement.Companies from outside NAFTA have been making large investmentin Mexico to gain a free entry to the huge NAFTA market. NAFTA has been

resulting in a lot of trade diversion.

The NAFTA comprising Mexico also could cause difficulties for exports of the

developing countries to the US and Canada as Mexico, a developing country, by

virtue of a being member of the NAFTA would get a considerable edge over othernations in selling in the US and Canada.


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Trade effects of NAFTA: trade creation and trade diversion

Trade Flow Trade Expansion Trade Diversion Creation

U.S. import from Canada $1074186 $689997 $384189

U.S. import from Mexico 334912 50138 284774

Canadian import from US 63656 25212 38444

Canadian import from Mexico 167264 163943 3321

Mexican import from US 77687 27651 50036

Mexican import from Canada 28001 27099 902

ASEAN

The Association f South East Asian Nations (ASEAN) was formed by the

Bangkok declaration 1967 by five countries, viz, Indonesia, Malaysia, the

Philippines, Singapore and Thailand with a view to accelerate economic progress.

The region accounts the highest share of the worlds natural rubber, palm oil and

tin, it is also an important producer of sugar, coffee, timber, petroleum, nickel,

bauxite, tungsten and coal.

The ASEAN free trade area was created in 1992 by the six nations mentioned

above. Between 1995 and 1999 Vietnam, Laos, PDR, Myanmar and Cambodia

acceded to AFTA taking the membership to ten.

AFTA reduced intra-regional tariffs of Common Effective Preferential Tariffs

(CEPT) rates to a range of 0-5%. The agreement also calls for elimination of all

custom duties by 2010. AFTA includes preferential liberalization of services and

investments, harmonization to tariff nomenclature, intellectual property


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cooperation, and harmonization of products standards and mutual recognition of

conformity. Under AFTA, ASEANs established members have cut tariff on most

goods traded within the region to between 0-5%.

Despite the realization of AFTA the share of intra-regional trade has not increased

significantly. There are a number of reasons for this:

1. Within ASEAN 66% of the tariff lines have the same CEPT rates.2. Many products with strong potential for intra-regional, trade are also

politically sensitive and have had their liberalization delayed by a number

of members.

The 10 nations of ASEAN will form an economic community by 2020. This

unified market would have about 500 million people and estimated annual sales

totaling US $720 billion.


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CONCLUSION

The growth of regionalism poses a threat to multilateralism. A WTO Report

observes: Regionalism can serve as a catalyst for further liberalization as the

multilateral level. But the increasing number of regional agreements may also

represent a threat to multilateral liberalization. A multiplicity of regional

agreements will almost certainly engender a degree of trade diversion, and the

application of numerous rules of origin and differing standards will make

international trade more complex and costly. The growing number of overlapping

bilateral and plurilateral agreements risks the transparency of trading rules, thusposing a threat to some of the fundamental principles of the WTO. Regional

trading agreements may create vested interests determined to avoid any dilution of

preferential margins implied by multilateral trade liberalization. Finally, increasing

regionalism will tend to distract attention and energy from multilateral

negotiations. The report points out that two ground rules of policy behavior could

help to consolidate and build upon the benefits of regionalism and promote a more

effective multilateral system. The first rule would be to refrain from engaging in

regional commitments (on issues covered within the mandate of the WTO) which

governments would be to consolidate the first rule by agreeing to a consultative

system that would map and monitor the timing and conditions attached to the non-

discriminatory, multilateral application of commitments made in regional

arrangements. Such arrangements might provide a more effective link between

regionalism and multilateralism than exits today.

Documents

Concept of Economic Integration