Regional Integration

Globalism and Regionalism

• Globalization based on inter-regional flows
• Global system based on three regions _
Europe, North America and East Asia
• Globalism is between regions
• These inter-regional flows dwarfed by intra-
regional flows
• Most international flows are intra-regional
Regional economic integration
• Formalise intra-regional flows via inter-state
agreement
• discrimination between members and non-
members
• Reform to enable flows via:
-Preferential trading agreements (most common)
-Common FDI rules
-Common product specifications
- Factor mobility
6
Regionalism reflects Gravity Model
• Trade determined by relative economic size
attracts countries to trade with each other while
greater distances weaken the attractiveness.
• Thus closer you are to markets more you trade
with them especially if Rich markets
8
Types of Regional Integration
• Preferential trading agreements (PTA)
• Free trade area (FTA)
• Customs Union (CU)
• Common market (CM)
• Economic union (EMU)
• Political Union (PU)

10
• FTA: no tariffs between members, retains own
tariffs (trade deflection possible)
• CU: FTA + common external tariff
• CM: CU + free movement of goods, services,
capital and labour
• EMU: CM + common economic policies and
possibly single currency
• PU: EMU + common political institutions

11
Why do States Regionalise?
• Globalism not possible
• Geo-strategic objectives
• Internal competitiveness
• Rationalisation of economic structures
• Exploit local division of labour
• Platform for global competition
• Political reasons
 Regional Mechanisms

Removal of trade barriers

Lower costs Increased competition Increased trade

Lower prices
Lower x-inefficiency

Investment stimulus
Scale economies & industrial restructuring

Greater competitiveness  increased trade

More growth and jobs

13
Costs of regionalisation?
• Discrimination vis-à-vis third countries
• Increase costs
• Loss of sovereignty
• Intra-group differences
Importance to Business
• reduces trade and transactions cost
• exploit economies of scale
• greater certainty in policy development
• exploit international development
• simpler regulatory environment
• greater efficiency - single products, etc
• All blocs retain significant obstacles to trade
and investment – even EU

15
Business responses
• Response to globalisation - fosters multiple
market thinking & global strategy
• New regionalism reflects functional needs of
MNEs
– focus on internal rules as well as trade.
– e.g. US firms seek competitive advantage by
sourcing more labour intensive needs in
Mexico
16