International Business

UNIT-4
INTERNATIONAL
ECONOMIC INTEGRATIONS
 Learning Objectives
 To provide an overview of international
economic integration
 To make clear the theoretical framework
of special Trading Agreements
 To explicate various forms
of international economic integration
 To discuss major international economic
trade groups
 To briefly outline India’s participation in
PTAs
 To evaluate regional trading agreements
under the WTO framework
PTA(Preferential Trade Agreement)

•A trade pact between countries that reduces tariffs

for certain products to the countries who sign the
agreement. While the tariffs are not necessarily
eliminated, they are lower than countries not party to
the agreement.
•It is a form of economic integration.
 Significance of PTAs
Economic integrations among countries significantly
influence international business. The preferential
treatment granted to member countries affects the
competitiveness of goods in international markets.
Elimination of import tariffs by the member countries
of a trade group encourages sourcing of goods from
cost-efficient production locations. However,
discriminatory tariff against non-members do result
in trade diversion to member countries, even at the
cost of production efficiency.
 Trade-Creation Impact
Formation of an FTA results in the
expansion of consumption opportunities
by making available low-cost goods.
 Trade-Diversion Impact

Formation of an FTA results in trade diversion to

its members from non-members since the

elimination of import tariffs among member

countries makes sourcing of goods from member

countries more attractive compared to non-

members, even at the cost of production

efficiency.
Forms of International Economic
Integration
 Preferential Trade Agreement (PTA)

Member countries in a PTA lower tariff

barriers to imports of identified

products
from one
e. g. ECOWAS, GSTP,
another COMESA,

etc.
 Free Trade Agreement (FTA)

Form of economic integration in which

member countries seek to remove all

tariffs and non-tariff barriers for cross-

border trade of goods and services among

themselves e.g. NAFTA, LFTA., etc.

 Customs Union
(CU)
Countries not only eliminate tariff barriers

among themselves but also apply common

external import tariffs for non-members e. g.

CACM(Central American Common Market), etc.

 Common Market (CM)

In addition to free trade among members

and uniform tariff policy for non-members
in a common market, it involves
elimination of all restrictions on cross-
border investments, movement of labour,
technology transfer, management,
sharing of capital resources.
 Economic Union (EU)
It enjoys much greater level of economic

integration where free exchange of goods and

services takes place. The member countries in

an economic union also maintain a fiscal

discipline, stability in exchange, and interest

rates by way of unified monetary and fiscal

policies.
 Political Union (PU)

As a culmination of economic integration, the

member countries strive to harmonize their
security and foreign policies. A common
parliament is created with representatives of
member countries who work in
synchronization with an individual country’s
legislature.
Major Regional Trade

Agreements
 European Union (EU)

Aimed at promoting regional co-operation among

countries in Europe, in addition to trade and

economy, the EU deals with many other

subjects, such as citizens’ rights; ensuring

freedom, security, and justice; job creation;

regional development; environmental protection;

and promoting globalization

North American Free Trade Area (NAFTA)
Formed on 1 January, 1994, the economic
integration between the US, Canada and
Mexico aims at elimination of trade
barriers related to industrial goods and
services, besides separate agreement on
agriculture, intellectual property rights,
labour adjustment, and environmental
protection.
 MERCOSUR (Mercado Comun del Sur)

MERCOSUR, created in March 1991 by

Brazil, Argentina, Paraguay and Uruguay
aims at allowing free movement of
goods, capital,labour, and services with
a common uniform external tariff among
member countries in Latin America.
 Gulf Cooperation Council (GCC)

Aimed at promoting stability

and economic cooperation among the

Persian
Gulf nations, the GCC was established on

25 May 1981. Its members include

Bahrain, Kuwait, Oman, Qatar, Saudi

Arabia, and the United Arab Emirates.

Asia-Pacific Economic Cooperation (APEC)
Established in 1989, APEC aims to
enhance economic growth and prosperity
for the region and to strengthen the Asia-
Pacific Community. APEC has no treaty
obligations required of its participants.
Decisions are reached by consensus and
commitments and undertaken on a
voluntary basis.
Association of South East Asian Nations
(ASEAN)
The ASEAN was established on 8 August 1967 with
major objectives:

• To accelerate economic growth, social

progress, and cultural development in the
region through joint endeavors
• To promote regional peace and stability
through abiding respect for justice and the
rule of law in the relationship among
countries
India’s Participation in PTAs
SAARC Preferential Trading Agreement
(SAPTA)
The SAPTA was signed on 11 April 1993
at the Seventh SAARC Summit held in
Dhaka to provide a framework for the
exchange of tariff concessions with a view
to promoting trade and economic
cooperation among the SAARC member
countries.
South Asian Free Trade Agreement (SAFTA)

SAFTA has come into force from 1 January

2006 aimed at economic cooperation

and integration among member

countries. It anticipates completion of the

whole process of instituting free

trade among the member countries in ten

years.
Comprehensive Economic Cooperation
Agreement (CECA) between India and
Singapore

Signed on 29 June 2005, the CECA came

into force on 1 August 2005. Besides

trade in goods, it also covers investment,

services, mutual recognition agreements,

and customs co-operations.

Framework Agreement on Comprehensive
Economic Cooperation between the
Association of South East Asian Nations
(ASEAN) and India
The framework agreement between ASEAN and
India was signed on 8 October 2003. It covers
several aspects such as:
• gradual tariff reductions leading to formation
of FTA
• trade facilitation measures,
• Trade and investment promotion measures
• early harvest programmes

• tariff concessions.
 Bay of Bengal Initiative for Multi-sectoral
Technical and Economic Co-operation
(BIMSTEC)
BIMSTEC provides a unique link between
South Asia and Southeast Asia aimed to
develop into an FTA and focus on activities
that facilitate trade, increase investment, and
promote technical cooperation among
member countries.
Six areas were identified for cooperation
include trade and investment, technology,
transportation and communication, energy,
tourism, and fisheries.
Indo-Sri Lanka Free Trade Agreement
(ISLFTA)

An FTA between India and Sri Lanka was

signed on 28 December 1998. The
agreement envisages phasing out of
tariffs on all products except for a limited
number of items in the Negative List and
tariff rate quota items over a period of
time.
Asia-Pacific Trade Agreement (APTA)
(Bangkok Agreement)

The Bangkok agreement was approved by the

GATT council in March 1978 aimed to liberalize

and expand trade progressively in the ESCAP

region through mutually agreed concessions by

member countries. From 2 November 2005, this

agreement is renamed the Asia Pacific Trade

Agreement (APTA).
Global System of Trade Preferences (GSTP)
The GSTP establishes a framework for exchange of

trade concessions among the member developing

countries. It also lays down the rules, principles,

and procedures for conduct of negotiations and

implementation of the decisions made.

Generalized System of Trade Preferences
(GSP)

The GSP is a non-contractual instrument

by which developed countries extend

tariff concessions to developing countries

unilaterally and on the basis of non-

reciprocity.
Framework Agreement for Establishing FTA
between India and Thailand

Signed on 9 October 2003, the framework

agreement covers FTA in goods, services
and investment, and areas of economic
cooperation. It also provides an Early Harvest
Scheme (EHS) under which common items
have been agreed for elimination of
tariffs on a fast-track basis.
Bilateral Preferential Trading Agreement
with Afghanistan

The Preferential Trade Agreement

between India and Afghanistan, signed on
6 March 2003, aims to provide for grant
or concessions on a range of products of
export interest to Afghanistan, as a part
of India’s endeavour to strengthen
bilateral trade and economic relations.
 India–MERCOSUR PTA

Signed on 19 March, 2005, the PTA aims

to expand and strengthen existing trade

relations between India and

MERCOSUR

by granting reciprocal fixed trade

preferences with the ultimate objective

 India-Chile Framework Agreement on
Economic Cooperation

Signed 20 January 2005, the

on envisages a PTA between the
two
agreement
countries.
 Indo–Gulf Cooperation Council (GCC)
FTA

Signed on 25 August 2004, it also aims to

include services as well as investment and

general economic cooperation alongwith

goods.
 Limitations of Regional Economic
Integrations
 It can create an incentive for even
further discrimination, which eventually
will hurt all trading partners.
 PTAs cannot solve systemic issues, such
as rules of origin, anti-
dumping, agricultural, and
fisheries subsidies.
These issues simply cannot be handled
at the bilateral or regional level.
 The proliferation of Regional Trade

Agreements can greatly complicate the trading

environment, creating a web of incoherent

rules.

 To many small and weak developing countries

entering into a PTA with a powerful big country

means less leverage and a weaker negotiating

position as compared to that in the multilateral

talks.
Regional Trade Agreements Vis-à-vis
Multilateral Trading System Under the
WTO
RTAs are an important exception under
Article

XXIV of the GATT Agreement to the MFN rule of

the WTO agreements, under which tariff and

other technical barriers to trade can be reduced

on preferential basis by countries under the

regional agreement.