INTERNATIONAL ECONOMICS

“Economic Integration”

Lecturer:

Febri Dirgantara Hasibuan, M.M.

Group 7

Muhammad Fariz Aslami 11201130000068

Raisya Bintang Sulaiman Putri 11201130000056

Rizky Annisa Sabrina 11201130000053

Salman Abdul Rasyid Anas 11201130000052

INTERNATIONAL RELATIONS

FACULTY OF SOCIAL AND POLITICAL SCIENCE

ISLAMIC STATE UNIVERSITY OF JAKARTA

2021
 PREFACE

Praise and gratitude to Allah SWT for all graces and gifts that have been bestowed
upon mankind. It is by His grace and permission so that we can complete the writing of this
paper.

We would like to thank all the parties who have helped us throughout the making of
this paper, and also to Mr. Febri Dirgantara Hasibuan, M.M. as our lecturer of International
Ecomonics who has given us knowledge on economics in international scope.

The purpose of this paper is to fulfill the assignment of International Economics

course. As the authors, we hope that this paper can be useful for all the readers. We also
realize that this paper is still far from perfect in term of writing and content. Therefore, we
expect constructive criticism and suggestions from the readers so that we can improve our
writing in the future.

Tangerang, October 25, 2021

 TABLE OF CONTENTS

PREFACE............................................................................................................................................2
CHAPTER I PRELIMINARY..........................................................................................................4
A. Background..............................................................................................................................4
B. Problem Statement..................................................................................................................4
C. Purpose of Writing..................................................................................................................4
CHAPTER II DISCUSSION.............................................................................................................5
A. Level of Economic Integration................................................................................................5
1. Preferential Trade Arrangement.............................................................................................5
2. Free Trade Area.....................................................................................................................7
3. Customs Union......................................................................................................................8
4. Common Market....................................................................................................................9
5. Economic Union..................................................................................................................10
6. Monetary Union...................................................................................................................12
7. Fiscal Union.........................................................................................................................14
8. Political Union or Complete Integration..............................................................................14
B. European Union.....................................................................................................................16
1. What is European Union?....................................................................................................16
2. Economic and Monetary Union...........................................................................................16
3. Negative and Positive Integration – Limits to “Social Europe”...........................................19
C. Asean Economic Community................................................................................................20
1. What is Asean Economic Community?...............................................................................20
2. The Goals of AEC...............................................................................................................21
3. Advantages and Disadvantages of AEC...............................................................................23
4. AEC Categorization.............................................................................................................24
CHAPTER III CLOSURE...............................................................................................................26
A. Conclusion..............................................................................................................................26
B. Suggestion...............................................................................................................................26
REFERENCES..................................................................................................................................27
 CHAPTER I
PRELIMINARY

A. Background
Trade relations that are getting closer between one country and another can
create the interdependence to be even higher. When trade relations continue to soar
and there is a desire to further strengthen those relations, then an arrangement that
will further integrate the economy between countries is made. Economic integration
occurs when several countries decide to eliminate obstacles both in the trade sector
and the overall economic sector.

The purpose of economic integration is to achieve prosperity through trade

liberalization among member countries. Removing tariff barriers from economic
integration is able to increase the volume of international trade and welfare. It will
result to the transformation of country’s economic structure which also increases
production capacity and optimizes resources. The process of economic integration
cannot be separated from international trade, such as export and import, as well as
investment.

B. Problem Statement
1. How are the levels of economic integration classified?

2. What is European Union?

3. What is Asean Economic Community?

C. Purpose of Writing
1. Knowing the classification of economic integration

2. Understanding the European Union

3. Understanding the Asean Economic Community

 CHAPTER II
DISCUSSION

A. Level of Economic Integration

In today’s world, many of countries rely on each other to help fulfill their
domestic needs. In order to meeting these needs, countries establish and maintain their
relations in multiple fields, including economics. Economic relations that occured
between countries were able to form a larger economic system, namely the
international economic system. Because of this phenomenon, a new term has
emerged. This term known as economic integration. Dominick Salvatore, an
American economist, defines economic integration as a discriminatory commercial
policy that reduces or removes trade barriers exclusively to the joining member
countries.1

Economic integration is a process of eliminating restrictions on international

trade, payments, and factor mobility. Economic integration results in the uniting of
two or more national economies in a regional trading arrangement. 2 It can be seen that
economic integration has certain levels according to the depth of integration. Bela
Balassa, a professor of political economy at The Johns hopkins University, identifies
and defines the stages or levels of economic integration. Balassa’s levels of economic
integration are a free trade area, a customs union, a common market, an economic
union, and complete/total economic integration. While Balassa identifies a free trade
area as the first level of economic Integration, Salvatore identifies a preferential trade
arrangement as the first level. Furthermore, Patrick M. Crowley presents the extended
version of Bela Balassa’s levels of integration.3 In this version, there are monetary
union, fiscal union, and political union. The various levels of economic integration
will be discussed below:
1
Dominick Salvatore, International Economics, Eleventh Edition, (New Jersey: John Wiley & Sons, 2013). pp.
301
2
Robert J. Carbaugh, International Economics, Fifteenth Edition, (Boston: Cengage Learning, 2014). pp. 268-
269
3
Patrick M. Crowley, Is there a Logical Integration Sequence After EMU?, Journal of Economic Integration,
Vol. 21, No. 1, 2006. pp. 3
 1. Preferential Trade Arrangement
Preferential Trade Arrangement exists when countries agree to reduce
or eliminate trade barriers on certain goods. The agreement in PTA can be
made between two countries (bilateral) and several countries (multilateral).
An example of PTA is the Melanesian Spearhead Group that consists of four
Melanesian countries: Papua New Guinea, Fiji, Vanuatu, and Solomon
Islands

1.1. Advantages of Preferential Trade Arrangement

While preferential trade promotes deeper economic integration,

it also contributes to the regional and global networks formation.
Because of tariff cuts and other provisions included in PTAs,
inputs can be shipped or exported multiple times in order to lower
the production costs and maintain the availability of local
resources. Furthermore, it helps to create and facilitate cross
borders affiliates. Parent companies and their affiliates will have
lower costs of integrating production.

1.2. Disadvantages of Preferential Trade Arrangement

Preferential trade may result to the distortion in trade patterns

between members and non-members that will undermine the
increase of welfare arising from open trade. There is also a need to
identified the nationality of a product or goods because only goods
produced by member countries can enjoy the benefit. It needs a
procedure that can differentiate whether the goods are within
member countries or not. So, it will be more complicated and
problematic especially for countries that have limited resources.4

4
Heribert Dieter, “The Multilateral Trading System and Preferential Trade Agreements: Can their Negative
Effects be Minimised?”, German Institute for International and Security Affairs, Berlin, GARNET Working
Paper No: 54/08, 2008
2. Free Trade Area

In a Free Trade Area, each member agrees to reduce or eliminate trade

tariffs and other quantitative barriers for all goods. In this integration level,
member countries are still entitled to set its own rules on tariffs against non-
member countries. North American Free Trade Agreement (NAFTA) is the
example of this integration level.

2.1. Advantages of Free Trade Area

The good thing about free trade areas is that they promote
competition and increase the efficiency of the country to be on par
with its competitors. In that way, products and services will have
lower cost and better quality. When competition is fierce, countries
tend to produce the most efficient products and commodities.
Efficient use of resources means maximizing profits. With free
trade and the elimination of tariffs and quotas, more parties can
enter the market and monopolies are eliminated. Prices will
definitely fall, allowing consumers to have greater purchasing
power. When imported goods become available at low cost,
consumers will have access to a wide variety of cheap products.

2.2. Disadvantages of Free Trade Area

For freely traded imports, domestic manufacturers can often

copy the product and sell it as a counterfeit without fear of legal
 consequences. Therefore, there is no protection for exporting
companies unless the free trade agreement includes the Intellectual
Property Law and its enforcement provisions. Furthermure,
member countries must consider ways to compensate for lower tax
revenues.5

3. Customs Union

In a customs union, the elimination of trade barriers between member

countries is coupled with the uniformity of trade rules, such as tariffs, with
non-member countries. This is commonly referred to as a common external
tariff. Southern African Customs Union (SACU) is the example of this
integration level. It is the world’s oldest customs union that consists of five
member countries: Botswana, Lesotho, Namibia, South Africa, and
Eswatini/Swaziland

3.1. Advantages of Customs Union

The main effect of free trade agreements is to increase trade

between member states. It helps improve the allocation of scarce
resources to meet consumer and needs and encourages foreign
direct investment (FDI). Customs union leads to better economic
integration and political cooperation between nations, leading to
the creation of common markets, monetary unions and fiscal
5
CFI, “Free Trade Area”, Accessed via
https://corporatefinanceinstitute.com/resources/knowledge/economics/free-trade-area/
 unions. The effectiveness of the customs union is measured in
terms of trade creation and trade diversion. If the profits from trade
creation outweigh the losses from trade diversions, this leads to
increased economic prosperity among member states. One of the
main reasons for preferring a customs union over a free trade
agreement is that customs union solves the problem of trade
conversion. The existence of common external tariffs in customs
unions helps avoid problems arising from tariff differences.

3.2. Disadvantages of Customs Union

The problem with Customs Union is that negotiations to set

common tariffs can be very complex and costly, both in terms of
time and resources. There are inevitably exceptions and "sensitive"
products that members find difficult to relinquish control of key
resources. This leads to long negotiations and compromises, the
more countries in a customs union, the longer the negotiations will
take. This issue has become related to the possibility of Brexit
negotiations, but is generally related to customs unions between
developing countries. Exceptions to certain commodities or
countries may reintroduce the trade diversion problem that the
Customs Union is trying to eliminate.6

4. Common Market
In a common market, what is removed or suppressed is not only the
trade barriers but also barriers to the movement of production factors such as
people/labor and capital. European Single Market or European Economic
Area (EEA) is the example of this integration level. It consists of 26 EU
member countries and 3 EFTA member countries.

4.1. Advantages of Common Market

In addition to the elimination of tariffs between member states,

the most important benefits of the common market include the free
movement of people, goods, services and capital. Therefore, the

6
Economics Online, “Customs Union”, Accessed via
https://www.economicsonline.co.uk/Global_economics/Customs_unions.html
 common market is often considered a "single market" because it
allows the free movement of factors of production without being
disturbed by borders. For the economy, the common market
promotes efficiency among its members, factors of production are
distributed more efficiently, which leads to stronger economic
growth. As the market becomes more efficient, inefficient
companies will eventually be closed due to fierce competition. The
remaining companies are usually benefiting from economies of
scale and increased profitability, and are more innovative to stay
competitive in a more competitive environment.

4.2. Disadvantages of Common Market

There are some drawbacks to moving to the common market.

For one thing, previously government-protected and subsidized
businesses can struggle to stay in a more competitive environment.
The migration of factor of production to other countries can
impede economic growth in that country and lead to increased
unemployment. Trade diversions occur when efficient non-
members are expelled from the single market. In addition,
countries can experience lower wages when exposed to an influx of
production factors whose supply exceeds demand.7

5. Economic Union
In an economic union, besides removing trade and factors of
production barriers, the member countries also agree to carry out uniformity
in national economic policies. In this way, conflicting and controversial
policies among countries can be avoided. European Union is the example of
this integration level.

5.1. Advantages of Economic Union

Some benefits of economic integration in the flow of more

investment in member countries due to the free flow of capital
between member countries. Some companies may want to expand
7
CFI, “Common Market”, Accessed via
https://corporatefinanceinstitute.com/resources/knowledge/economics/common-market/
 their bases closer to raw materials and labor centers. This will
improve the flow of products and services between members.
Economic integration gives employees in member countries more
flexibility in their choice of work. The integration of market
economy, finance and common economic policies allows economic
unions to become the world's new economic powers. Some
members of economic integration also have the opportunity to be
in the fast-growing economic and currency arena. You can use the
more developed financial markets to develop your economy. After
that, the unemployment rate goes down because it makes it easier
for workers to find jobs in other member countries. In other words,
company unions increase the geographical mobility of workers.

5.2. Disadvantages of Economic Union

From a critical point of view, economic integration can lead to

higher land and real estate prices. Investors are looking for cheap
land and real estate in member countries. This is easy to do because
of the free flow of capital. Regulatory standardization issues are
often more complex. Each member should be standardized
according to common standards. In that case, the motive for
internal economic interests often leads to unequal treatment of
members. Members with a wider economy may be more dominant
in decision making and politics. Economic integration can also lead
to independence and loss of economic independence. The
economic policies of the member countries must be mutually
agreed. And that may not fit their financial background. Economic
integration can also lead to regional brain drain. College graduates
leave their home countries to take advantage of better opportunities
in other member countries. International companies are rapidly
expanding the markets of their member countries. This makes it
less likely that small businesses in the country will develop. After
all, the crisis of one member can quickly spread to another. It can
 lead to even greater crises, shaking not only the region but also the
international economy.8

6. Monetary Union
In a monetary union, member countries agree to the abolition of
individual currencies and use a single, shared currency. In this integration
level, there is a common monetary policy which includes interest rates and
financial regulation, a common exchange rate, and a single central bank.
Eurozone/euro area is a monetary union that consists 19 member countries
of European Union. Member countries of the eurozone adopted the euro as
their primary currency. They also have a single central bank called the
European Central Bank.

6.1. Advantages of Monetary Union

The single currency area has several important advantages.

These are primarily due to the benefits of fixed exchange rates and
include: Producers and tourists can more easily compare prices for
international goods, services and resources. Companies can
anticipate the cost of imported raw materials and set export prices,
reducing transaction costs by not paying commissions to financial
intermediaries. This means you can plan and invest more. The
benefits of sharing a common currency can increase transactions
between members of a single currency area. Increased trade can
create jobs in industries where exports are increasing. Members
cannot choose simple options (devaluation) to get out of financial
difficulties.

6.2. Disadvantages of Monetary Union

For example, when a country joins the euro area, central banks,
including the Bank of England, lose the ability to use interest rate
policies to achieve independent macroeconomic goals. After the
financial crisis and the global recession, recessionary countries like
Greece were unable to unilaterally reduce interest rates. Many

8
Penpoin, “Economic Union: Meaning, Features, Goals, Examples, Pros, and Cons”, Accessed via
https://penpoin.com/economic-union/
 European countries, including the United Kingdom, may never
completely converge in the euro area. Convergence is difficult,
especially in the United Kingdom, due to the uniqueness of the
housing and financial services sector and the close economic cycle
of the United Kingdom to the United States. In addition, the UK
labor market is much more flexible than France, Germany and
Spain, making it difficult to converge. Under the conditions of
different economies and economic frameworks, one interest rate
alone does not make sense. Even within a single currency range,
there can be significant differences that suggest that common
economic policies can be unproductive. The asymmetric shock is
an external shock that has an unequal impact on the economy, in
this case the EU region. The next recent shake has not had the
same impact across Europe. As a result of the UK surrendering
Hong Kong to China in 1997, it moved from Hong Kong to the UK
rather than other European countries, spurring some mini-housing
booms. London; The September 11, 2001 attack on New York did
not hit all eurozone countries equally. And the collapse of the
Argentine peso in 2002 mainly affected Spain. Increasing
imbalances between the wealthier North Euro member countries,
including Germany and the increasingly debt-bearing southern
countries, including Greece, Italy and Portugal, have also caused a
single monetary policy insufficiency. It is claimed that a single
interest rate is not appropriate in these situations. Members
experiencing negative (possibly domestic) shocks require lower
interest rates and looser monetary policy compared to less-affected
members. The asymmetric inflation target means that the ECB can
only intervene if the target rate is exceeded and is not allowed if
the target rate is not reached. Critics claim that deflationary bias is
incorporated as a result. The euro area has certainly been under
deflationary pressure in recent years.9

9
Economics Online, “Monetary union”, Accessed via
https://www.economicsonline.co.uk/Global_economics/Monetary_Union.html
 7. Fiscal Union
In a fiscal union, member countries agree to unify their tax rates as
well as set the same level of public sector spending and borrowing. They
also jointly agree on national budget deficit or surplus. At the moment, there
is no substantial fiscal union among independent countries and control over
fiscal policy is still considered to national sovereignty. However, European
Union has limited powers on fiscal sector by deciding the level of value-
added tax (VAT). There is also European Fiscal Compact that can restrict
member countries’ spending and borrowing.

7.1. Advantages of Fiscal Union

It helps to promote regional equality by transferring funds to

poorer regions. It will prevent some countries from suffering from
the sovereign debt crisis. Weaker euro countries will benefit from
sharing the same euro bonds as more creditworthy countries.
Without a financial union to secure similar borrowing costs, it
would be difficult to create a common currency and interest rates.

7.2. Disadvantages of Fiscal Union

The main disadvantage of fiscal unions is that individual

countries lose sovereignty in setting spending and tax levels.
Spending cuts can be even more difficult to implement if set by an
"external" agency. There is a great risk of democratic deficit
related to financial unions.10

8. Political Union or Complete Integration

In political union, member countries commit to the standardization of
monetary, fiscal, social, and countercyclical policies as well as establishing a
supranational authority whose decisions are binding on the member
countries. Nevertheless, political union commonly occurs within countries,
not within supranational institutions. The United States of America is the
example of this integration level. It can be seen that the USA is a series of
highly integrated quasi-autonomous nation-states.

10
Tejvan Pettinger, “Fiscal Union”, Accessed via
https://www.economicshelp.org/blog/3115/economics/fiscalunion-2/
 8.1. Advantages of Political Union

Political union has all the advantages of other levels as it is the

highest stage of integration. Political Union will create stability as
well as increasing trade and prosperity. It also has the least
possibility of conflict and war.

8.2. Disadvantages of Political Union

Political union, in this case, European integration or

unification, is expected to lead to increased world trade and
prosperity, and thus to reduce the likelihood of war. However,
expecting the opposite is just as realistic. It has the possibility of
being often mentioned as encouraging the European community to
become a protected trader, develop the spirit of "Fortress Europe"
and this will be followed by other parts of the world.11

There are some factors that cause the changing of integration. Some of the
reason is spirit of regionalism. The nation who sees a common threat more likely to
integrate. As an example, NAFTA to made its member survive the global economic
system. Peace and security are another factor to create an integration. For example,
the creation of European Coal and Steel Community (ECSC) is to prevent war with
each nation of euopean while promoting prosperity with each member. The more
factor combined is more likely to create a higher and complex form of integration.
From the view of Neo-Functionalist, a low politic integration will create a spill-over
and create a higher political integration. For example, ECSC that become the main
fondation of EU in the present.12

B. European Union
1. What is European Union?
In the opening of the Treaty on European Union (TEU), the history of the
division of the European continent (West Germany and East Germany) is a
motivation that goes beyond economic agreements and tries to convey and show
the difference between the European Union and regional integration. With a clear
11
Frederika G. Oosterhoff, “The Future of Europe - Advantages and Disadvantages of Political Union”,
Accessed via https://www.christianstudylibrary.org/article/future-europe-advantages-and-disadvantages-
political-union
12
Britannica, “Economic Integration”, Accessed via https://www.britannica.com/topic/economic-integration
 goal for its members, namely the strengthening and convergence of the economy
to form a monetary economic union. The Treaty on the Function of the European
Union (TFEU) and the Treaty on the European Union (TEU) are committed to the
promotion of economic and social progress that takes into account the principle of
sustainable development by establishing a stable currency. The decision, to
continue to create close unity, between the European peoples was taken on the
principle of subsidiarity.

The European Union can be described as a legal community with a mandate

derived from a treaty with statutory limitations, not enforced if the policy area is
not stated in the agreement. The European Union has governing bodies that go
beyond regional trade institutions. There is the capacity to legislate, such as there
must be a council representing member countries and a directly elected European
parliament (representative of the people's vote). The European Union has a
distinctive feature, namely that there is an executive, the European Commission
with one commissioner from each member country, whose role is not only to
implement policies but also to act as treaty keeper and has the right of initiative in
proposing legislation. The European Central Bank (ECB) has responsibility for
monetary policy, including oversight and resolution. The ECB has a foreign
policy apparatus by establishing the principles of the European External Action
Service (EEAS).

2. Economic and Monetary Union

The euro is an extension of the European monetary integration project.
Disagreements about how to construct a monetary union were legion and
compromise hard to find (Dyson and Featherstone, 1999). Broadly speaking, the
country's attributes are security and currency, such as Germany with a strong and
stable deutcschemark. Limited ‘snake-in-the tunnel’ monetary cooperation, aimed
at limiting exchange rate fluctuations among EU members, provided flexibility for
movements "vis-à-vis third countries" which quickly collapsed when oil prices
spiked after the Yom Kippur War.13 A more comprehensive European monetary
system was introduced in 1979 which was successful in stabilizing the exchange

Lain Begg, The European Union and Regional Economic Integration: Creating Collective Publics Goods-
13

Past, Present, and Future, March 2021 Published by European Parliament. pp. 5
 rate, but had tensions and was seen as a step towards monetary union. The
Maastricht Treaty paved the way for the creation of a single currency.

Today the euro is used by 19 of the 27 EU member countries, except for

Denmark (given an "opt-out" in the Maastricht Treaty, as is the UK). Non-
participation State is considered a "reduction" of obligations and is temporary, in
practice it can stop indefinitely. Currently, Bulgaria and Croatia are positioned
towards EU membership, there is little that can be done to force the other. The
euro's conceptual and ideological differences arise because of different approaches
to managerial economics. In the Maastricht Agreement, which was divided into
economists and monetarists, the two groups had different views on engineering
the transition to a single currency.

The European Central Bank (ECB) is a stronger and more independent

institution than national central banks stemming from a hierarchical mandate,
which contains: "charged with ensuring price stability and pursuing other
economic goals, if not compromising price stability". In practice, the operational
interpretation aims for an inflation rate (measured by consumer prices) below
2%.14 The effect of the independence of the ECB is the task of designing the fiscal
policy of the European Monetary Union (EMU) at the national level because there
is no supranational fiscal body comparable to the federal or central government.
The ECB stands above the national level, determines macroeconomic policies, and
acts in the interests of the entire European region.

The incomplete nature of monetary unions proved problematic, as they needed

to reconcile the interests of members and non-members. An early example was
when new funds had to be established at short notice over a weekend in May 2010
for a bailout of Greece. The answer was one fund (the European Financial
Stabilization Mechanism) backed by the EU budget and thus, if reluctantly by
some, all (then) 27 members, and a second and larger fund (the European
Financial Stability Facility - EFSF) implicating only eurozone countries. As
explained by Olli Rehn (2020: chapter 4), the negotiations were not only tough but
also frantic, because, to forestall financial chaos, they had to be completed before
the Asian markets opened at 02:00 Brussels time.15
14
Ibid
15
Ibid
 The Fiscal Compact is an example of continued eurozone-EU tensions,
proposals that adopt more disruptive fiscal governance. The Council of Europe by
the UK turned away (the Czech Republic is also demeaning), leading to public
condemnation of British Prime Minister David Cameron by Nicolas Sarkozy,
President of France. Finally, a separate agreement on the stability of coordination
and governance was quickly concluded by the 25 member countries that agreed,
the Czech Republic later agreed.

Agreements between governments were made separately because to overcome

the obstacles of creating new public goods was emulated when the (temporary)
European Financial Stability Facility (EFSF) evolved to become the European
Stability Mechanism (ESM), a permanent fund – in its own words – 'set up as an
international bank by the euro area Member Countries to help euro area countries
in severe financial distress'.16 The ESM website observes that the only official
institution of the euro area, even the Euro group, consisting of the finance
ministers of the participating countries, is considered informal, although it uses
considerable power.

The EU's capacity to get things done is sometimes when there is a need to
create new public goods, despite the need to use more intergovernmental
arrangements, rather than community methods of advancing integration through
EU treaties. Christopher Bickerton, Demot Hodson, and Uwe Putter (2015),
calling it "new intergovernmentalism", pointing to the paradox of integration of
not delegating competence to supranational bodies. The exercise of powers, such
as: limiting the autonomy of national fiscal policies (fiscal compact) or imposition
of conditions (ESM support) can cause tensions around the legitimacy of
integration (Schmidt, 2020).

3. Negative and Positive Integration – Limits to “Social Europe”

The EU carried out the removal of trade barriers to promote the single market
as a form of market liberalization. Jan Tinbergen (1954) as the beginning and John
Pinder (1968) elaborated it into the European context, with the economy,
according to Fritz Scharph (1999), broader policy refers to negative integration.

16
Élysée, “President Macron Gives Speech on New Initiative for Europe”, Accessed via
https://www.elysee.fr/en/emmanuel-macron/2017/09/26/president-macron-gives-speech-on-new-initiative-for-
europe
 European integration is about correcting and regulating the market (positive
integration). Regulatory harmonization breaks down the barriers that, not always,
negative integration.

Integration in Europe is dominated by negative integration, because positive

integration often occurs, but is limited by the need for consensus. Although the
European Parliament, in favor of positive integration, its achievement depends on
high-level agreement among members of the government (Scharpf, 1999: 82).
Policy preferences differ, meaning that certain types of policy problems, the
solution of which will be politically feasible in each member state, is unlikely to
be effectively tackled at the European level. Scharpf argued that the EU was
striving to achieve a common welfare policy.

To remain competitive in a common market that does not have protective

barriers, can reduce the ability of countries to design their solutions, although the
risks are different in each area. Fritz Scharph (1999:83) identifies the risk of
losing problem-solving capacity in European multi-level governance, due to the
loss of results-oriented democratic legitimacy. Majone (2005: 161) is not
surprised that in many areas of policy, market integration is sacrificed for social or
political interests. As a result, laws on minimum wages, collective bargaining,
hiring and firing, duration of the working week, flexible labor contracts,
qualifications, and a host of other factors continue to differ among the member
state.17 Differences in values at the national level limit social integration in the
EU.

The much-discussed dimension of European integration, for the single market,

includes workplace health and safety, as it can be maintained consistently by
equalizing. Employment and social exclusion strategies have been outlined. The
European Pillar of Human Rights sets out aspirations for a common policy
approach. The social dimension of European integration relies on the coordination
of national policies, rather than being limited (the third method of government).

Although the EU is cautious about engaging in distributive policies, actions in

both fields, agriculture and cohesion are considered distributive. Regional
economic development policies were introduced during the expansion of the EU,
Lain Begg, The European Union and Regional Economic Integration: Creating Collective Publics Goods-
17

Past, Present, and Future, March 2021 Published by European Parliament. pp. 6
 involving Denmark, Ireland, and the United Kingdom. Three-quarters of the EU's
public spending undergoing extensive reforms is used to support agriculture and
regional economic development.

The Cohesion Policy was strengthened because of concerns the single market
would accentuate regional disparities (Padoa-Schioppa, 1987). The emergence of
a single currency is likely to highlight regional disparities and the consequence is
to add to the demand for policy cohesion. There is ambiguity about the types of
public goods provided by cohesion policies. EU institutions regard it as a policy
instrument aimed at increasing public investment in terms of fiscal federalism.
Efforts to link cohesion policies with EU priorities in increasing international
competitiveness raise concerns about the weakening role in reducing regional
differences in the European Union (Begg, 2010). Messages from evaluating policy
effectiveness exacerbate the difficulty (Bachtler et al., 2016).

C. Asean Economic Community

1. What is Asean Economic Community?
Southeast Asian countries agreed to form a regional economic integration
through the establishment of ASEAN (Association of Southeast Asian Nations).
ASEAN was founded by five countries, namely, Indonesia, Malaysia,
Thailand, Philippines, and Singapore on August 8, 1967 through the Bangkok
Declaration. At the ASEAN Summit in 1967, ASEAN officials produced three
important agreements including, The Agreement of Establishment of the
Permanent Secretariat of ASEAN, The Declaration of ASEAN Concord, and The
Treaty of Amity and Cooperation in South-East Asia. These three pillars are also
referred to as the main pillars of ASEAN.

In order to realize these 3 main pillars in ASEAN, at the 2nd Informal Summit
in 1977 the leaders of ASEAN countries agreed to form the ASEAN Security
Community (ASC), the ASEAN Socio-Cultural Community (ACC), and the
ASEAN Economic Community (AEC). The ASEAN Economic Community
(AEC) is the final realization of and The Treaty of Amity and Corporations in
South-East Asia. The Summit also introduced ASEAN Vision 2020 to realize
ASC, ACC and AEC. Therefore, in order to achieve the realization in the field of
 economic integration, ASEAN will hold regional economic integration in stages
through AFTA and CEPT-AFTA.

Before the formation of AFTA, ASEAN formed the Preferential Trade

Association (PTA) in 1977. In this agreement, ASEAN countries agreed to reduce
trade barriers in Southeast Asia. There are two important reasons for the formation
of AFTA, the first is to compete with NAFTA in the 1990s and the economic
crisis in Southeast Asia. These two important events are the reasons behind the
formation of AFTA. Then in 1992 ASEAN formed a Framework Agreement on
Enhancing Economic Integration. In this agreement stated that the ASEAN Free
Trade Area (AFTA) will be realized within a period of 15 years. However, the
time period was accelerated to 10 years.

2. The Goals of AEC

The goals of the establishment of AFTA are:

 To make the ASEAN region a competitive place of production so that

ASEAN products have strong competitiveness in the global market.

 Attract more Foreign Direct Investment (FDI).

 Increase trade among ASEAN member countries (intra-ASEAN

Trade).18

To further implement goals of AFTA, ASEAN countries re-agreed an

agreement, namely the Agreement on the Common Effective Preferential Tariff
Scheme (the CEPT-AFTA Agreement) in 1992. Based on the CEPT-AFTA
Agreement, member countries were asked to reduce tariffs to less than 20% on
products within 5-8 years. Member countries are also given additional time to
reduce tariffs to 5% or less for 7 years. Although being asked to reduce tariffs,
member countries are not required to unify plans to reduce import duties.

As has been explained, in the second informal summit in 1997, ASEAN

Vision 2020 was introduced to realize ASC, ACC and AEC. However, at the 38th
ASEAN Economic Ministers meeting in the Philippines in 2006, it was agreed
that the plan to realize the AEC was accelerated. What was originally planned for

18
ASEAN, “Questions and Answers on the CEPT: What are the objectives of AFTA?”, Accessed via
https://asean.org/questions-and-answers-on-the-cept/
 2020 was accelerated to 2015. Meanwhile, the implementation of the other two
pillars, namely the ACC and ASC, was accelerated in 2007.

The reason for the acceleration of the formation of the AEC was as a response
from ASEAN countries in observing the development of China and India in the
investment sector. So, it is hoped that the accelerated formation of the AEC can
attract foreign investors who have turned to China and India. In 2007 the ASEAN
economic ministers agreed on the AEC blueprint as the basis for the AEC. In the
AEC blueprint there are 4 pillars of AEC, such as:

 ASEAN as a single market and international production base with

elements of free flow of goods, services, investment, skilled labor and
freer flow of capital.

 ASEAN as a region with high economic competitiveness, with elements of

competition regulations, consumer protection, intellectual property rights,
infrastructure development, taxation and e-commerce.

 ASEAN as a region with equitable economic development with elements

of small and medium business development, and ASEAN integration
initiatives for CLMV countries contained in the Initiative for ASEAN
Integration.

 ASEAN as a region that is fully integrated with the global economy with
elements of a coherent approach to economies outside the region, and
increasing participation in global production networks.19

The blueprint also stipulates that there are 12 priority sectors to be integrated.
Seven of them are the goods sector, namely the agro industry, fisheries, rubber-
based industry, textile and textile product industry, wood and wood product
industry, electronic equipment, and automotive. While the rest are five service
sectors, namely air transportation, health services, tourism, logistics, and the
information technology industry or e-ASEAN.20

19
The ASEAN Secretariat Jakarta, “ASEAN Economic Community Scorecard”, 2012, Accesessed via
https://asean.org/wp-content/uploads/images/documents/scorecard_final.pdf
20
Perceptions of Local Workers on Foreign Labor Invasion in Indonesia: Challenges Facing Asean Economic
Community (MEA). Kompilek Journal. 2015
3. Advantages and Disadvantages of AEC
1.1. Advantages of AEC:

 Efficiency in product and raw material prices. Where ASEAN

countries can import and export without obstacles so that the price
of products or raw materials becomes much cheaper.

 Higher quality products. With the AEC, ASEAN countries are

required to be more competitive, one aspect that will be counted is
improving the quality of goods and services produced.

1.2. Disadvantages of AEC:

 Labor

The impact that is most felt when implementing the AEC is

labor competition, where the competition is much tougher. The
workforce of a country no longer competes with fellow domestic
workers but must also compete with workers abroad. This causes
the number of unemployed to soar in developing countries because
their skills that they have are still below standard.

 Investment 

Investment competition is becoming more competitive, because

all countries apply the same policies. Thus, to attract foreign
investors, more effort is needed.

 Competition of Goods and services

On the one hand, AEC provides advantages by facilitating

access between sellers and buyers to obtain good production
factors and products. However, on the other hand, it also creates
increasingly competitive competition because domestic goods may
not compete with foreign goods.

4. AEC Categorization
How do we categorize AEC in economic integration level? Jacques Pelkmans,
a prominent scholar on economic integration of the EU and ASEAN, provides a
 modern six-stage approach (1) FTA, (2) customs union, (3) FTA plus and
(customs union-plus), (4) deep and comprehensive FTA, (5) common market, and
(6) single market. FTA plus and (customs union-plus) is an economic integration
that includes WTO and WTO Plus policies. Deep and comprehensive FTA is a
level of integration that covers the scope of WTO and WTO Plus (services and
goods), and special fields that are not included in WTO Plus (services, investment
and competition policy, trade facilitation). 21 Reporting from a journal entitled The
ASEAN Economic Community and ASEAN Economic Integration written by
Koichi Ishikawa, he concluded that the AEC was at the level of FTA plus
integration. Because AEC removes barriers that exist in the market while
developing services, investment, capital, and human resources. However, AEC is
not included in the common market because there are still restrictions in terms of
services, investment, capital, and human resources. The AEC and EEC only have
equations in the name only. Because the EEC has reached the common market
level in 1992 and under the name of the EU it has reached the level of monetary
union. The journal also stated that it was impossible to reach a customs union due
to differences between Singapore and other ASEAN member countries. The
difference is where Singapore almost completely eliminates tariffs for all products
while other countries still use tariffs for certain products such as automotive. The
author also explains that achieving a monetary union in the AEC is impossible.

From the overall evaluation performance of AEC, it has reached a very

satisfactory level. However, AFTA still has several criticisms including: a low
intra-regional trade ratio and its low utilization rate. Although experiencing an
increase in intra-ASEAN trade by 8% from 17%-25% in the 1990s to the 2000s.
However, the value of intra-ASEAN exports in 2018 showed a gradual decline
where the export value only reached 24% and imports at 21.7%. Lagging behind
NAFTA which was able to achieve a value of around 40% and the EU at 56%.
There are arguments that show that AFTA is not effective because it has a low
ratio of intra-regional trade. The reason for the decrease in the intra-regional trade
ratio is the expansion of trade with China.

21
Koichi Ishikawa, The ASEAN Economic Community and ASEAN economic integration, Journal of
Contemporary East Asia Studies, 10:1, 24-41, DOI: 10.1080/24761028.2021.1891702, 2021, Accessed via
https://www.tandfonline.com/doi/full/10.1080/24761028.2021.1891702?scroll=top&needAccess=true
 Chia and Plummer pointed out that AFTA's utilization rate is surprisingly low
and gave the following reasons: low margin of preference between MFN and
CEPT; (the prevalence of non-tariff barriers; electronic products and components
had zero tariffs because of the WTO's Information Technology Agreement; duty-
drawbacks in export-processing zones; (iv) many SMEs were unaware of how to
apply for tariff preferences; and rule-of-origin related problems such as
complicated procedures and lengthy waits for forms to be issued. 22 However, there
are those who oppose this opinion, Sukagewa, argues that measuring the level of
benefit of AFTA is very difficult because depending on the value of exports and
imports of each country.

CHAPTER III
CLOSURE

A. Conclusion
economic integration as a discriminatory commercial policy that reduces or
removes trade barriers exclusively to the joining member countries. It results in the

22
Ibid
 uniting of two or more national economies in a regional trading arrangement.
Economic integration has certain levels according to the depth of integration. There
are preferential trade arrangements, free trade area, customs union, common market,
economic union, monetary union, fiscal union, and political union/complete
integration. The purpose of economic integration is to achieve prosperity through
trade liberalization among member countries. Removing tariff barriers from economic
integration is able to increase the volume of international trade and welfare. The
benefit of economic integration is not limited only to the economic sector, it also has
benefits in the political field by creating awareness of political cooperation which is
expected to reduce the potential for conflict. However, there are also disadvantages of
economic integration such as trade diversion, loss of policy-making independence as
well as sovereignty.

B. Suggestion
Before starting economic integration, it is better to make observations on the
future cooperation plans. Considering that integration is not always positive, for
example: UK chose to integrate its economy through the European Union, but it had
to end with the Brexit event, in which UK chose to leave, because the integration
carried out by UK through the European Union was not positive integration. There are
consequences and capital that must be issued by actors in the world who will work
together later. Thus, more observations and evaluations are needed to start economic
integration, so that the expected goals are achieved.

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