Regional Economic Integration

• Countries (normally) in geographic proximity

forming a regional economic block
• WTO is normally notified
• Most countries in the world are members of
trading block through an Economic
Agreement
Regional Economic Integration
• Objectives:
• Reduce trade barriers, and promote trade
between member Countries
• Greater economic and political co-operation
• Greater economic and political power as a
block of countries
Some well-known agreements
• European Union
• NAFTA (USMCA)
• APEC
• MERCOSUR
• CARICOM
• African Union
• ASEAN
• CETA (Canada-E.U. Free Trade Agreement)
Various models of trade agreements

• Unilateral (offering favored options to a

trading partner)
• Bi-lateral (between two countries), E.g.:
Canada-South Korea
• Multilateral (more than two countries signing
a trade agreement) . E.g.: NAFTA
Levels of Integration
1. Free Trade:
• Most basic and most common
• Removing discriminatory tariffs, and other
trade barriers among member countries
• Each member country determines its own
trade policies toward non-members
• Examples: NAFTA, and most recently Canada-
South Korea, Canada-E.U.
Levels of Integration
2. Customs Union:
• Higher level of integration
• Member countries adopting the same trade
policies (tariffs, etc.) toward non-members
• Co-ordinated trade policies
• Examples: The Andean Pact between Peru, Bolivia,
Columbia, Ecuador
• Customs Union of Russia, Belarus, and Kazakhstan
Levels of Integration
3. Common Market:
• Further integration yet
• Factors of production (labor, capital, etc.) to
move freely between member countries
• Complicated and difficult to manage
• Example: Mercosur in South America (Brazil,
Argentina, Paraguay, Uruguay, etc.)
Levels of Integration
4. Economic Union:
• Highest level of economic integration
• Co-ordinated economic policies
• Integrated monetary (money supply, interest
rates) and fiscal policies (taxes)
• Common economic institutions, ex: Central
Bank, treasury
• Example: European Union (E.U.)
Economic Union (Advanced Model)

• Common currency (Ex. The Euro)

• Adoption of the same currency would mean
significant change
• Extremely difficult adjustment for member
countries
• Interesting fact: countries that use the $US:
• Ecuador, Panama, El Salvador
Political Union
• One step higher than economic union
• One Central government
• Same foreign and military policies
• One central parliament
• Federalism, ex: Canada?
Case for economic integration
• Greater trade, positive-sum game
• Better access to factors of production,
greater opportunity for labor, Investors,
entrepreneurs
• Higher production, efficiency
• Beneficial to consumers
Political benefits of economic integration

• Greater political co-operation between

member countries
• Reduced risk of conflicts
• Greater political weight and power for the
block (ex: United Europe)
Case against economic integration
• Difficult adjustment process for some local
industries
• Loss of jobs for various member countries
• Wholesale movement of factors of
production
Case against economic integration
• Migrations, population controls
• Loss of control over economic management,
monetary and fiscal policies, by national
governments
• Loss of national sovereignty,
interdependence of national economies
 
European Union
• Currently 28 members
• Started in 1951 ( Germany, France, Italy,
Netherlands, Belgium, Luxemburg)
• Purpose: To avoid future conflicts, threats of
war, To give Europe a more important role in
world affairs
 
European Institutions
• The European Commission (EC), 28 members ,
headquartered in Brussels, Belgium
• The European Parliament, directly elected by
EU voters every 5 years
• The European Court of Justice (ECJ), is
the highest court in the European Union in
matters of European Union law.
Headquartered in Luxembourg
European Institutions (Cont.)
• The European Council
• The European Court of Auditors
• The European Central Bank: Managing the
monetary policy of the E.U., setting interest
rates and controlling the money supply of the
common currency (the Euro)
European Single Act (1987)
• Implemented in 1992
• Removal of all frontier controls
• Mutual recognition of product standards
(safety controls, etc.)
• Allowing non-national suppliers to compete,
forcing national suppliers to shape up
European Single Act (1987)
• Lifting barriers in finance and insurance
• Ease up foreign exchange, remove
restrictions
• Facilitate trucking and transportation among
member countries
• Results: Freer competition, economies of
scale, lower prices, greater efficiency
The European currency (The Euro)
• Introduced on January, 1st, 2002
• Adopted by most of the 28 members
• 3 countries opting out: U.K., Denmark, and
Sweden
• Weak start, gradual strengthening, currently
worth more than the $US
Benefits of the Euro
• No more currency exchange
• No commissions, no administration charges
• Ease of transaction
• Easy comparisons of prices across Europe
• Greater competition
• Easier transfer of capital across borders
• Easier investment opportunities
Costs of the Euro
• Loss of national control over monetary policy
• Single interest rates
• Difficult integration of weak and strong
economies
• Inflation in some economies, ex: Greece
• Loss of national sovereignty, emotional
attachments
Challenges facing the E.U. today
• Greece: High national debt, unemployment
(27%), austerity measures, political instability
• Spain: High unemployment (25%), collapsing
banking system
• Italy, Portugal, Ireland : Similar problems
• All above countries have had to make
fundamental changes to their economic
systems under pressure from the E.U.
Challenges facing the E.U. today
• Migration of refugees from the Middle East
and Africa into Europe
• Civil Wars and conflicts in Syria, Iraq, Libya,
and many African nations
• European nations grappling with influx of
refugees, the quota system, and difficult
management challenges
Brexit!!!
• Great Britain votes to leave the E.U.!!!
• Underlying reasons
• The aftermath: Regrexit?
• The painful process of separation
• Uncertainty, instability
• The future of the E.U.
North American Free Trade Agreement
(NAFTA)
• Between three neighboring nations of
Canada, U.S.A., and Mexico
• Ratified in 1988, implemented in 1994
• Facilitating trade among the three member
countries
North American Free Trade Agreement
(NAFTA)
• Abolition of tariffs on 99% of goods traded
between member countries
• Removal of most trade barriers on the cross-
border flow of services
• Protection of Intellectual Properties, covering
all three countries
• FDI restrictions eased
North American Free Trade Agreement
(NAFTA)
• Application of national environmental
standards
• Establishment of two commissions with
powers to impose fines, and remove trade
privileges when environmental standards or
legislation involving health, minimum wage,
and child labor violated
North American Free Trade Agreement
(NAFTA)
• Fast facts:
• Trade increased from $297B in 1993 to $1T in 2006
• Mexico, the 3rd largest exporter to the U.S.
• Canada’s exports more than doubled in the
mentioned period
• Export-related jobs, and Foreign companies pay
20-40% higher wages than domestic businesses in
Mexico
NAFTA under attack!
• U.S. presidential elections of 2016
• Donald Trump and Mexico
• The rhetoric of unfair trade
• NAFTA renegotiated? To be scrapped
altogether?
• USMCA to be ratified and implemented by all
three countris