Regional Economic

Integration
Regional Economic Integration
Refers to agreements among countries in a
geographic region tor educe, and ultimately
remove, tariff and non tariff barriers to the free flow
of goods, services and factors of production
between each other.
Levels of Economic Integration
1.Political Union
2.Economic Union
3.Common Market
4.Customs Union
5.Free Trade Area

Free Trade Area: all barriers to the trade of goods
and services among member countries are removed.

Levels of Integration
Customs Union: eliminates trade barriers between
member countries and adopts a common external trade
policy.
Common Market: Has no barriers to trade between
member countries, includes a common external trade
policy, and allows factors of production to move freely
between members.
Economic Union: involves free flow of products and
factors of production between member countries and
adoption of a common external trade policy. It also
requires common currency, harmonization of members
tax rates, and a common monetary and fiscal policy.

Levels of Integration
Political Union: Moving toward economic union,
raises questions of how to coordinate bureaucracy
accountable to the citizens of member nations.
Political union in which a central political apparatus
coordinates the economic, social, and foreign policy
of the member states is the answer.
Case for regional integration
Economic case:
Unrestricted free trade will allow countries to
specialize in production of goods and services that
they can produce most efficiently.
Allowing free trade stimulates econmic growth
FDI can transfer technological, marketing and
managerial know-how to host nations
It is easier to establish a free trade regional
agreement among a free countries than with say
WTO.
Case for regional integration
Political case:
Linking economies together and creating
dependencies forces them to resolve conflicts in an
amiable manner
By grouping their economies, the regional countries
can enhance their political clout in the world


Impediments to integration
Loss of sovereignty: giving up controls in fiscal and
monetary policy as well as tax rates
Loss of jobs in some sectors
o NAFTA USA and Canada workers lost jobs in the textile and
other low-cost jobs

Case against regional integration
Trade creation: occurs when high-cost domestic
producers are replaced by low-cost producers within
the free trade area.
Trade diversion: occurs when low-cost external
suppliers are replaced by higher-cost suppliers
within the free trade area.
European Union
Product of two political factors:
1.Devastation of western Europe during two world
wars and desire for lasting peace
2.European nations desire to hold their own on the
worlds political and economic stage
History of EU
Forerunner of EU, the European Coal and Steel
Community was formed in 1951 by Belgium, France,
West Germany, Italy, Luxembourg and the Netherlands.
Treaty of Rome (1957): The European Community was
established. - Provided for COMMON MARKET
Grew in 1973 with additions of UK, Ireland and
Denmark.
Greece joined in 1981.
1986- Spain and Portugal
450 million people today with GDO of 11 Trillion dollars
Europe
European commission: proposes EU legislation,
implementing and monitoring compliance with EU
laws by member states.
European parliament: has 732 members directly
elected by the population of the member states.;
mostly consultative rather than legislative body
Court of justice: supreme appeals court for EU law
consists of one judge from each country.
Benefits of EURO Currency
Savings between trade upto $45 billion a year
Easier to compare prices across Europe which will
increase competition as prices will be lowered to an
equilibrium and more suppliers will be competing
European producers will be forced to look for ways
to reduce their costs.
Increase range of investment options across EU
nations
Should give boost to development of a highly liquid
pan-European capital market.
Costs of Euro
National countries lose authority over monetary
policy
Optimal Currency Area: similarities in the
underlying structure of economic activity make it
feasible to adopt a single currency and use a single
exchange rate as an instrument of macroeconomic
policy.
Regional Trade Unions
NAFTA: USA, Canada, Mexico
Andean Pact: Bolivia, Chile, Ecuador, Colombia and
Peru (now operates as a customs union including
Venezuela but minus Chile)
MERCOSUR originated with Brazil and Argentina
0 includes Paraguay and Uruguay.
ASEAN: Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore,
Thailand, Vietnam
Airbus vs. Boeing
Airbus: Great Britain, Germany, France and Spain
Gave subsidies to Airbus; also got state owned
airlines to purchase planes from Airbus.
Received subsidies to tune of 13.5 billion dollars in
form of below-market interest and tax breaks.
Boeing accused by European commission of
receiving indirect subsidies (via military contracts
and NASA)
1996 Boeing and McDonnell Douglas merged
Military Industrial Complex
Wars caused formation of MIC
o Germany, suffering from naval blockade that prevented nitrate
for bombs, turned to chemical warfare
o German chemicals industry, which had earlier emerged from
competition with British natural dyes, could make poison gas