Module 5 - Regional Integrations

M5- Regional Integrations
MODULE 5: REGIONAL INTEGRATIONS
Ref: Charles Hill
SYLLABUS
Trading Blocks nature and levels of integration Arguments for and against regional integration Trading blocks European Union ASEAN APEC NAFTA SAARC ANDEAN PACT MERCOSUR.
REGIONAL INTEGRATION
Means agreements between groups of countries in a geographic region to reduce and ultimately remove tariff and non-tariff barriers to the free flow of goods, services and factors of production between each other GATT and WTO are the biggest associations of more than 150 member countries, which strive to reduce the barriers. But WTO has a global perspective. By entering into regional agreements, groups of countries aim to reduce trade barriers more rapidly than can be achieved under WTO
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Agreements designed to promote freer trade within regions will produce gains from trade for all member countries EU is a very successful movement towards the regional economic integration The best example of the benefits of economic integration and political union is the USA Before the current constitution was written, the thirteen colonies had erected significant barriers to trade between each other and had separate currencies Seeing that this was not working well, and wanting a better system for their citizens, the founding fathers agreed to combine their separate states into a United States
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Integration creates both winners and losers, however. An important challenge facing many firms and governments is what should be done to minimize the costs of transition to freer markets regionally as well as internationally.
LEVELS OF ECONOMIC INTEGRATION

Free trade area Customs union Common market Economic union Full political union
Political Union Economic Union Common Market Customs Union
Free Trade Area
FREE TRADE AREA
All barriers to the trade of goods & services among member countries are removed No discriminatory tariffs, quotas, subsidies or administrative policies are allowed to distort trade between members Each country is allowed to determine its own trade policies with regard to non-members
CUSTOMS UNION
Eliminated trade barriers [or charges low tariff rates] between member countries Adopts a common external trade policy Facilitates significant administrative machinery to oversee trade relations with non-members
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COMMON MARKET
Eliminates trade barriers or charges low tariff rates among member countries Adopts a common external trade policy Also allows factors of production to move freely between member countries Labour and capital can move freely between member countries as immigration restrictions will not be there
ECONOMIC UNION
Eliminates trade barriers or charges low tariff rates between member countries Adopts a common external trade policy Allows free flow of factors of production especially labour & capital Also follows uniformity in [common] monetary policy & fiscal policy among member countries. Also follow a common currency Demands a coordinating bureaucracy & sacrifice of significant amounts of national sovereignty to that bureaucracy EU is an economic union but imperfect one as some member countries have not adopted Euro as common 9 currency & have differences in tax rates
POLITICAL UNION
Through political union, a coordinating bureaucracy accountable to the citizens of member countries can be created Ex: EU is moving towards political union. European Parliament has been directly elected by citizens of EU countries since late 1970s Ex: Council of ministers is composed of government ministers from each EU member.
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ARGUMENTS FOR REGIONAL INTEGRATION

Economic case for integration Free trade results in greater world production It also stimulates economic growth in countries Free trade and investment is a positive sum game where all the participating countries gain GAT and WTO monitoring & facilitating free trade and investment between countries But it is very difficult to get all countries to agree to a common set of rules So it is easy to establish a free trade and investment regime among a limited no. of countries than among the world economy. So the result is Regional Integration
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Political case for integration By linking neighboring economies & making them increasingly dependent on each other, incentives are created for political cooperation between the neighboring countries It reduces violent conflict between the countries Enhances their political weight in the world
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ARGUMENTS AGAINST REGIONAL INTEGRATION

Benefits of regional integration are determined by the extent of trade creation as opposed to trade diversion Trade creation occurs when Higher cost domestic producers are replaced by low cost producers within the trade block Or higher cost external producers are replaced by lower cost external producers within the trade block Trade diversion occurs when lower cost external suppliers are replaced by higher cost suppliers within the trade block A regional integration will benefit the world only if the amount of trade it creates exceeds the amount of trade it diverts. So trade creation should be more than trade diversion 13
EUROPEAN UNION-EU
Europe has 2 trading blocs European Union and European Free Trade Association. But EU is more significant than EFTA not just in terms of membership [EU-25, EFTA-4], but also in terms of economic and political influence in the world economy Evolution of EU- EU is the result of 2 factorsDevastation of western Europe during 2 world wars & the desire for a lasting peace European nations desire to hold their own on the worlds political and economic stage Apart from this many Europeans were aware of the benefits of the closer economic integration of the countries The EU is large economically and politically, and many of the independent countries that were under the influence of the former USSR have sought to join the EU
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The forerunner of the EU , European Coal and Steel Community, was formed in 1951 by Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands. Goal was to remove barriers to trade in coal, iron, steel, and scrap metal The Treaty of Rome was formed in 1957. While the original goal was for a common market, progress was generally very slow
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Treaty Of Rome provided for creation of common market Key objectives were: elimination of internal trade barriers Creation of a common external tariff Abolishing obstacles to free movement of factors of production Provision for necessary harmonization of the member states laws. Treaty committed EC European Commission to establish common policies in agriculture and transportation. The community grew after 1973 and now has 25 member countries With a population of 450 million and a GDP of $ 11 trillion, similar to that of US, EU has become a superpower
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MEMBER COUNTRIES OF EU

Austria Belgium Czech Republic Cyprus Denmark Estonia Finland France Germany Greece Hungary Ireland
Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom
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POLITICAL STRUCTURE OF EU
The economic policies of the EU are formulated and implemented by a complex and still evolving political structure The four main institutions are the European Commission, the Council of Ministers, European Council, the European Parliament, and the Court of Justice
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European Commission: is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states Head quarter- Brussels, Belgium, more than 24000 employees, run by a group of 25 commissioners by each member country for 5 year renewable terms Member states will chose president, he then chooses other members in consultation with states. European Commission will approve the entire commission before it can begin work EC has a monopoly in proposing European Union legislation. EC is also responsible for implementing aspects of EU law and for monitoring member states to make sure that they complying EU laws.
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Council of the European Union: represents interests of member countries. It is the ultimate controlling authority within the EU , because draft legislation from EC can become EU law only if the council agrees. Composed of 1 representative from the government of each member state If agricultural issues are being discussed, agricultural ministers from each state attend council meetings and so on The votes that a country gets in the council are related to the size of the country
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European Parliament: has 732 members Directly elected by the citizens by the member states A consultative body than legislative, meets in Strasbourg, France It debates on legislation proposed by Commission [commission proposes to Council, and the council puts in front of European Parliament]
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Court of Justice: comprised of one judge from each country, is the supreme appeals court for EU law. Like commissioners the judges are required to act as independent officials rather than as representatives of national interests Commission or a member country can bring other members to the court for failing to meet treaty obligations Even member countries, companies or institutions can bring commission or council to court for failure to act according to an EU treaty 22
SINGLE EUROPEAN ACT

The problems with lack of progress on the objectives of the EU resulted in a number of problems for firms and governments, and led to adoption of the Single European Act in 1987. The Single European Act called for the removal of border controls, mutual recognition of standards, open public procurement, a barrier free financial services industry, no currency exchange controls, free and open freight transport, and freer and more open competition
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ESTABLISHMENT OF EURO
The Treaty of Maastricht took the EU one step further, by specially spelling out the steps to economic union and partial political union. In addition to simply spelling out the steps needed, the Treaty also laid out the future outlines of a common foreign policy, economic policy, defense policy, citizenship, and currency, as well as strengthened the role of the European Parliament. The single currency will eliminate exchange costs and reduce risk, making EC firms more efficient This treaty made them to adopt a common currency system The Euro was officially launched on January 1, 1999. It became into full use On January 1, 2002 Benefits of Euro: handling only one currency, easier to 24
ASEAN- ASSOCIATION OF SOUTHEAST ASIAN NATIONS
Formed in 1967, includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Laos, Myanmar, Vietnam and Cambodia have joined recently These countries are characterized by an abundance of natural resources, large international trade sectors and most successful economic policies This trading bloc has created a regional grouping of 600 million people with a combined GDP of US$1.8 trillion Basic objective of ASEAN is to foster freer trade between member countries and to achieve cooperation in their industrial policies Its aims also include accelerating economic growth, social progress, cultural development among its members, protection of regional peace and stability, and opportunities for member 25 countries to discuss differences peacefully
In 2003 an ASEAN Free Trade Area [AFTA] between 6 original members of ASEAN came into full effect AFTA has cut the tariffs on manufacturing and agricultural products to less than 5% But there are some exceptions to this tariff reduction. Ex: Malaysia refused to bring down tariffs on imported cars until 2005, and later reduced 20% [as per AFTA 5%]. Initially Malaysia wanted to protect its inefficient local car makers from foreign competitors Ex: Philippines refused to lower tariff rates on petrochemicals and rice [the largest agricultural product in the region] will remain subject to higher tariff rates until 2020 ASEAN is also pushing for free trade agreements with China, Japan and South Korea
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APEC- ASIA-PACIFIC ECONOMIC COOPERATION

Founded in 1990 at the suggestion of Australia. Currently has 21 member states including US, Japan and China Collectively member states account for about 60% of the worlds GNP 47% of the world trade Aim is to increase multilateral cooperation in view of the economic rise of the pacific nations and the growing interdependence within the region APEC formally committed itself to remove trade and investment barriers among its members by 2010 and by 2020 aimed at developing it economies At 1997 meeting members endorsed proposals designed to remove trade barriers in 15 sectors ranging from fish to toys But some critics criticize on APECs vague pronunciations. It is yet to be successful and prove in front of world economy
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NAFTA - NORTH AMERICAN FREE TRADE AGREEMENT
In 1988, the USA and Canada agreed to form a free trade area, The goal was to gradually eliminating all barriers to the trade of goods and services between the countries. In 1991 the US, Canada, and Mexico signed an agreement aimed at forming a free trade area between all three countries known as NAFTA
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The agreement became law in January 1, 1994. It contents: Abolishes within 10 years tariffs on 99 percent goods traded between Mexico, Canada and United States Removes barriers on cross border flow of services, e.g., allowing financial institutions unrestricted access to Mexican markets by 2000 Protects intellectual property rights Removes restrictions on FDI between three member countries Allow each country to apply its own environmental standards, provided such standards have a scientific basis. Lowering of standards to lure investments is described as inappropriate Establishment of two commissions with the power to impose fines to protect these standards.
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ARGUMENTS FOR NAFTA
Mexico will benefit from increased jobs as low cost production moves south, and will attain more rapid economic growth as a result. The US and Canada will benefit from the access to a large and increasingly prosperous market and from the lower prices for consumers from goods produced in Mexico. In addition, US and Canadian firms that have production sites in Mexico will be more competitive on world markets.
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ARGUMENTS AGAINST NAFTA

Jobs will be lost and wage levels will decline in the US and Canada Mexican workers will emigrate north Pollution will increase due to Mexicos more tax standards, toxic wastes etc And Mexico will lose its sovereignty.
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SAARC- SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION

India, Bangladesh, Bhutan, Pakistan, the Maldives, Nepal, Sri Lanka established SAARC on December 18, 1985. Afghanistan joined in April 2007 Objectives To improve quality of life & welfare of the people of the member countries To develop the region economically, socially and culturally To provide conducive climate for creating & enhancing mutual trust, understanding & application of one anothers issues To enhance cooperation with other developing countries and other trade blocks To have unity among member countries regarding issues of common interest in the international forums
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ORGANIZATION STRUCTURE OF SAARC

The Council : highest policy making body, represented by heads of member country governments, meets once in 2 years
Council of Ministers: represented by foreign ministers of member countries, formulates policies, reviews the functioning of SAARC, consists of secretariat, Secretary General, Directors and General Staff Standing Committee: represented by Foreign Secretaries of member governments, monitors and coordinates the programs
Programming Committee: represented by Senior Officials of Member Governments, scrutinizes budget and annual schedule Technical Committees: comprises representatives of All Countries, Formulates, implements and monitors projects
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Technical committees of the SAARC include:

Agriculture and Environment Rural Development Tourism and Transport Communications Health and population activities Science and Technology
All the secretarial work is done by the SAARC secretariat, which is located in Nepal. Activities of the Secretariat include Coordinating, monitoring and implementing SAARC activities Servicing the meetings of the SAARC Serving as communication link between SAARC and other international forums
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SAARC PREFERENTIAL TRADING ARRANGEMENT- SAPTA

The Council of Ministers have signed the SAARC Preferential Trading Arrangement agreement on April 11, 1993 Objectives: To gradually liberalize trade among SAARC member countries To eliminate trade barriers among SAARC countries and reduce or eliminate tariffs To promote and sustain mutual trade and economic cooperation among member countries
Product Areas: all raw materials, semi-finished products are included for mutual concessions
and finished
Tariffs: concessions would be given in tariffs , Para-tariffs& non tariffs & trade measures. 35
Special treatment for the least developed countries would be provided in the following ways: Providing technical assistance, establishment of industrial and agricultural projects in order to boost up their exports Enhancing their exports by eliminating non tariff and Paratariff barriers Establishing training facilities in the area of export trade Providing external credit insurance and market information Entering into long term contracts
If the concessions enhance the imports resulting in serious balance of payments problem, the importing country can suspend the concessions
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CONCLUSION
It is criticized that the functioning of SAPTA has not been encouraging, not been benefitting the member countries. One of the major reasons for this is the political conflict between India and Pakistan In addition the member countries dont have significant potentialities for trade
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ANDEAN PACT
The Andean Community is a customs union comprising the South American countries of Bolivia, Colombia, Ecuador and Peru. The trade bloc was called the Andean Pact until 1996 and came into existence with the signing of the Cartagena Agreement in 1969. Its headquarters are located in Lima, Peru. The Andean Community has 98 million population, whose GDP amounted to US$745.3 billion in 2005, including Venezuela, (who was a member at that time). It's estimated GDP PPP for 2011 amounts to US$902.86 billion, excluding Venezuela
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Membership: The original Andean Pact was founded in 1969 by Bolivia, Chile, Colombia, Ecuador and Peru. In 1973, the pact gained its sixth member, Venezuela. In 1976, however, its membership was again reduced to five when Chile withdrew. Venezuela announced its withdrawal in 2006, reducing the Andean Community to four member states. Recently, with the new cooperation agreement with Mercosur, the Andean Community gained four new associate members: Argentina, Brazil, Paraguay and Uruguay
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By mid of 1980s, the Andean Pact collapsed and had failed to achieve any of its stated objectives There was no tariff free trade between member countries, no common external tariff, no harmonization of economic policies Political and economic problems seem to have hindered cooperation between member countries Member countries have had to deal with low economic growth, hyperinflation, high unemployment, political unrest and crushing debt burdens In addition the dominant political ideology in many of the Andean Countries during that time tended toward socialism, which is not feasible for free trade or free market economy, so closure integration could not be expected
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In 1990, the heads of 5 current members met in Galapagos Islands and signed a declaration The declarations objectives included establishment of a free trade area by 1992, a customs union by 1994 and a common market by 1995. [this last milestone has not been reached] A customs union was implemented in 1995, and now Andean Community operates as a customs union In December 2003, it signed an agreement with MECOSUR to restart stalled negotiations on the creation of a free trade area between the 2 trading blocs.
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MERCOSUR
Mercado Comun del Cono Sur (Southern Cone Common Market) Spanish Its a South American Trade Bloc Originated in 1988, as a free trade pact between Brazil and Argentina The modest reduction in tariffs and quotas helped to bring about 80% increase in the trade between these two countries made expansion of the pact further In March 1990 Paraguay and Uruguay joined as members. Initial aim was to establish a free trade area between member countries, a common external tariff [customs union] and sometime thereafter free movement of capital, labour and services. Now Mercosur operates as a full customs union Collectively has 200 million population 42
Criticisms: Trade diversion effects exceeded its trade creation effects The fastest growing items in intra-Mercosur trade are cars, buses, agricultural equipment and other capital intensive goods that are produced relatively inefficiently in the member countries Member countries insulated/ separated from outside competition by tariffs that is run as high as 70% of value on motor vehicles. Members are investing in factories that build products that are too expensive to sell anyone but themselves So, these member countries may not be able to compete globally once the groups external trade barriers are broken And countries with more efficient manufacturing enterprises lose because Mercosur external trade barriers keep them out of the market
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IMPLICATIONS FOR MANAGERS
Regional integrations create significant opportunities for firms Lower cost of doing business in a single market. Rather than producing a product in each of the 25 EU countries or the 3 NAFTA countries, a firm may be able to serve the whole EU or NAFTA market from a single location. [one must be careful while selecting the location] To realize all these benefits firms must understand differences between culture and competitive practices or customer tastes and preferences Threats also include increased competition within the trade bloc and price differences between trade blocs
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