Chapter 3

Regional Economic
Integration

1
 Regional Economic
Integration
Process whereby countries in a
geographic region cooperate with one
another to reduce or eliminate barriers to
the international flow of products, people,
or capital. A regional trading bloc is a
group of nations in a geographic region
undergoing economic integration.

2
 Goal of Regional Economic
Integration
The goal is to increase cross-border trade and
investment and raise living standards.
Specialization and trade create real gains in
terms of greater choice, lower prices, and
increased productivity.
Regional trade agreements help nations
accomplish these objectives and protect
intellectual property rights, the environment, or
even eventual political union.
3
 Levels of Integration

There are five levels. Preferential Trade Area

is the lowest extent of national integration,
political union the greatest.

Each level of integration incorporates the

properties of those levels that precede it.

4
 Levels of Economic Integration

Trading bloc: Trading blocs may take

various forms:
Group of nations in
Preferential Trade Area
a geographic
region Free trade area
undergoing Customs union
economic Common market
integration. Economic union
Political union
5
 Preferential Trade Area
Preferential Trade Areas (PTAs) exist when
countries within a geographical region agree to
reduce or eliminate tariff barriers on selected
goods imported from other members of the area.
This is often the first small step towards the
creation of a trading bloc. Agreements may be
made between two countries (bi-lateral), or
several countries (multi-lateral).

6
 Free Trade Area
a. Countries remove all barriers to trade among
members, but each country determines its own
barriers against nonmembers.
b. Policies differ greatly against nonmember countries
from one country to another. Countries in a free
trade area also establish a process to resolve trade
disputes between members. Trade
Agreement (NAFTA) is an example of such a free
trade area, and includes the USA, Canada, and
Mexico.
7
 Customs Union
a. Countries remove all barriers to trade
among members but erect a common trade
policy against nonmembers.
b. Differs from a free trade area in that
members treat all nonmembers similarly.
Countries might also negotiate as a single
entity with other supranational organizations
such as the WTO.

8
 Customs Union
Countries that export to the customs union
only need to make a single payment
(duty), once the goods have passed
through the border. Once inside the union
goods can move freely without additional
tariffs. Tariff revenue is then shared
between members, with the country that
collects the duty retaining a small share.
9
 Advantage of Customs Union
For example, Germany imposes a 10% tariff
on Japanese cars, while France imposes a 2%
tariff, Japan would export its cars to French car
dealers, and then sell them on to Germany,
thereby avoiding 80% of the tariff.

10
Disadvantage of Customs Union
Members are not free to negotiate individual
trade deals. For example, if a member wishes to
protect a declining or infant industry it cannot
do so through imposing its own tariffs. Equally,
if it wishes to open up to complete free trade, it
cannot do so if a common tariff exists. Also, it
makes little sense for a particular member to
impose a tariff on the import of a good that is
not produced at all within that country.
11
 Common Market
a. Countries remove all barriers to trade and the
movement of goods, services, labor and capital
between themselves,  expanding scale
economies and comparative advantages but
erect a common trade policy against
nonmembers.
b. Each national market has its own regulations
such as product standards.

12
 Economic Union
a. Countries remove barriers to trade and the
movement of labor and capital, erect a common
trade policy against nonmembers, and
coordinate their economic policies.
b. There must also be a significant level of
harmonisation of micro-economic policies, and
common rules regarding product standards,
monopoly power and other anti-competitive
practices. Such as the Common Agricultural
Policy (CAP) and Common Fisheries Policy (CFP).

13
 Political Union
a. Represents the potentially most advanced
form of integration with a common
government and were the sovereignty of
member country is significantly reduced.
b. Only found within nation states, such as
federations where there is a central
government and regions having a level of
autonomy.

14
 EFFECTS OF REGIONAL
ECONOMIC INTEGRATION

15
 Benefits of Regional Integration

Nations engage in specialization and trade

because of the gains in output and
consumption. Higher levels of trade between
nations should increase specialization,
efficiency, and consumption, and raise
standards of living.

16
 Trade Creation

a. Gives consumers and industrial buyers a

wider selection of goods and services not
available beforehand.
b. Lets buyers can acquire goods and services
more cheaply following the lowering of
trade barriers such as tariffs. Lower costs
lead to higher demand for goods because
people have more money after a purchase
to buy other products.
17
 Greater Consensus

Eliminating trade barriers in smaller

groups of countries may make it easier
to gain consensus as opposed to
working in the far larger WTO.

18
 Political Cooperation

A group of nations can have significantly

greater political weight than nations
have individually. The group may have
more clout in negotiating in a forum like
the WTO. Integration involving political
cooperation reduces the potential for
military conflict among members.

19
 Employment Opportunities

Regional integration can expand

employment by enabling people to move
from country to country for work, or to
earn a higher wage.

20
Drawbacks of Regional
Integration

21
 Trade Diversion
a. Trade away from nations not belonging to a
trading bloc or member nations. Trade diversion
can occur after formation of a trading bloc
because of the lower tariffs charged between
member nations.
b. Can result in reduced trade with a more efficient
nonmember nation and in favor of trade with a
less efficient member nation.
Trade is diverted from a more efficient exporter
towards a less efficient one by the formation of a
free trade agreement or a customs union.
22
 Shifts in Employment

Because trading blocs reduce or eliminate

barriers to trade, the producer of a
particular good or service will be decided by
relative productivity. Industries requiring
unskilled labor shift production to low-wage
nations within a trading bloc.

23
 Loss of National Sovereignty
a. Successive levels of integration require
nations to surrender more sovereignty.
Political union requires nations to give up a
high degree of sovereignty in foreign policy.

b. Because some members have delicate ties

with nonmember nations while others have
strong ties, the setting of a common
foreign policy is difficult.

24
 European Integration
Economic integration in Europe
from 1948 to the mid 1980s:
Organization for European Economic
Cooperation (OEEC)
Treaty of Rome
European Free Trade Association (EFTA)
Common agricultural policy (CAP)

25
 European Integration

The European Union

since the mid 1980s:
1992 White Paper
European Union (EU)

26
 Organization of the EU
The executive body of the EU is the
European Commission,
headquartered in Brussels
The Council of Ministers has the
final power to decided EU actions
The future expansion of the EU will
cause changes in the decision
making processes

27
Implications of the Integrated
European Market
Perhaps the most important implication for
Europe is the economic growth that is
expected to result
Several specific sources of increased growth
have been identified:
Gains from eliminating transaction costs
Achievement of economies of scale
More intense competition
Cheaper transaction costs and reduced currency
risks
Many U.S. firms fear a unified Europe
28
 North American Economic
Integration
Although the EU is undoubtedly the most
successful and well-known integrative
effort, integration efforts in North America
has gained momentum and attention
North American integration has an interest
in purely economic issues and there are no
constituencies for political integration
U.S.-Canada Free Trade Agreement
North American Free Trade Agreement (NAFTA)

29
Other Economic Alliances
The world’s developing
countries have perhaps
the most to gain from
successful integrative
efforts
Import substitution

30
Integration in Latin America

Before the signing of the U.S.-Canada

Free Trade Agreement, all of the major
trading bloc activity in the Americas had
taken place in Latin America
One of the longest lived integration
efforts among developing countries was
the Latin America Free Trade
Association (LAFTA), formed in 1961

31
Integration in Asia and Integration
in Africa and the Middle East
The development in Africa’s economic
Asia has been groupings range from
different from that in currency unions among
European nations and
Europe and the
their former colonies to
Americas customs unions among
Asian interest in neighboring states
regional integration Countries in the Arab
is increasing for world have made some
pragmatic reasons progress in economic
integration

32
Economic Integration and
the International Manager
Regional economic integration creates
opportunities and challenges for the
international manager
Economic integration may have an impact on a
company’s entry mode
Decisions regarding integrating markets must be
assessed from four different perspectives
Effects of change
Strategic planning
Reorganization
Lobbying
33
 Cartels and Commodity Price
Agreements
An important characteristic that
distinguishes developing countries from
industrialized countries is the nature of
their export earnings
This distinction is important for several
reasons
A cartel is an association of producers of a
particular good
Commodity price agreements involve both
buyers and sellers in an agreement to
manage the price of a certain commodity

34
Factors that promote regional
integration?

35