TRADING BLOCS

UNIT 3CHAPTER-6

Economic Integration Economic integration is a new reality in the

international business market. Business and governments have created a range of

institutions, treaties, and agreements that help to• Overcome trade differences• Boost the free movement of trade, investment, and services

across national boundaries Economic integration is concerned with:

• The removal of trade barriers or impediments between at least two participating nations

• The establishment of cooperation and coordination between them

Integration creates high levels of globalization and regionalization

Economic integration is best viewed as a spectrum with the various integrative agreements in effect today lying in the middle of this spectrum.

The level of integration defines the nature and degree of economic links among countries

What are trading blocs?

Trading blocTrading bloc: preferential economic arrangement among a group of countries.

• Such blocs have liberal rules for member countries while a separate set of rules is laid for non-members. For example, European Union (EU), Association of South East Asian Nations (ASEAN).

Types of Trading BlocsTypes of Trading Blocs

Free trade areasCustoms Union

Common MarketPolitical UnionsEconomic Union

Free Trade Areas

Simplest form of economic integration which provides the internal free trade between member nations.

Each member is allowed to determined its own commercial policy with respect to non-members.• Example: Latin American Free Trade

Association (LAFTA)

Customs Union

More advanced form. Internal free trade among the

member nations and also adopts a uniform commercial policy against the non-members.• Example: EEC – European Economic

Community

Common Market

There are no barriers to trade among members and factors of production such as capital, labour and technology are mobile among them.

It has common commercial policy is respect to non-members.

Economic Union

Level of integration is more developed.

Members adopt common economic policies like; Common Agricultural Policy of the European Union.• Example: European Union has

introduced a common currency EURO 2000.

Political Union

It is the ultimate type of economic integration whereby member countries achieve not only monetary and fiscal integration but also political integration. • Example: the Europe Union (EU) is moving

towards a political union similar to one created by 52 states of America.

Advantages of Trading Blocs

1. Access to larger markets leads to internal economies of scale.

2. External economies of scale due to improved infrastructure (e.g. transport and telecoms links)

3. Greater international bargaining power. 4. Increased competition between

members.5. More rapid spread of technology.

Disadvantages of Trading Blocs

1. Country may lose resources to more efficient members, or to geographical center, and become depressed region.

2. Firms may co-operate, collude and merge, leading to greater monopoly power.

3. Diseconomies of scale if firms become very large.

4. High administrative costs of trading bloc.

Trade Blocs-Opportunitiesa. Elimination of trade barriers within the region would

encourage the efficient firms to expand their business activities in all countries within the region.

b. Healthy competition within the region would help the less efficient firms in acquiring competencies in order to challenge the efficient firms.

c. The overall business performance in 'terms of productivity, quality, price,

d. Delivery and customer service will improve.

e. Consumers get better quality goods and services at competitive price

f. Employment opportunities in the region increase.

Trading Blocs - Threat

a. The removal of trade barriers provides opportunities to the efficient firms to enter the different markets within the region. This endangers the survival of the less efficient firms.

b. The resources of the less efficient countries are exploited by the firms from the advanced countries of the region.

c. The less developed countries of the region mostly become consumption centres while the advanced countries of the region become the production centres.

d. The less developed countries become still poorer whereas the advanced countries of the region become still richer.

e. It discourages trade with non-members as trade with non-members is subject to strict rules and trade barriers.

European Economic Community (EEC)

Economic integration in Europe from 1948 to the mid 1980s:• Organization for European Economic

Cooperation (OEEC)• Treaty of Rome• Six member nations: France, Germany,

Italy, Belgium, Netherlands and Luxembourg.

• Now there are 15 members.• European Free Trade Association (EFTA)• Common agricultural policy (CAP)

Organization of EEC European Council

• Heads of State & President of European Commission• Resolves major policy issues & sets direction – 2x year

European Commission – Brussels, Belgium• Proposing, implementing & monitoring compliance - EU laws• Commissioners appointed by each country – 5 year renewable terms• Competition Commissioner regulator of competition and M&A

Council of the European Union• Ultimate controlling authority – approves proposed laws• 1 representative from each state – varies with topic• Use majority voting rules rather than unanimous agreement

European Parliament – Strasbourg, France• Directly elected by population – 732 members• Debates legislation – Consultative body

Court of Justice• Supreme appeals court for EU law • 1 judge from each state – required to act as independent officials

Functions of EEC/EU

Common Agricultural Policy (CAP).• Free movement from one nation to the

other,• Imports allowed only when DD>SS,• Rich farmers became richer,

European Monetary Union (EMU).

Common Transport Policy.

North American Free Trade Agreement-NAFTA

North American integration has an interest in purely economic issues and there are no constituencies for political integration.• Came into being in 1994• U.S.-Canada Free Trade Agreement• North American Free Trade Agreement (NAFTA)• Member Countries: US, Canada and Mexico

Other Aspects of NAFTA

Objectives• More business

opportunities in Mexico.

• Enhance competitive advantage.

• Reduce the prices• Enhance industrial

development.• Assist Mexico in

earning additional foreign exchange.

• Improve political relations.

Measures:• Residents of NAFTA can

invest easily in other member nations.

• Protection of Intellectual Property Rights.

• Similar Product Standards

• Free flow of FoP.• Pollution Control.

What are the drawbacks?

Most of the US industries shifted to Mexico because Mexico offered less stringent policies.

It was implemented without prior preparations.

Free Trade Blocs in America

Association of South-East Asian Nations (ASEAN)

The development in Asia has been different from that in Europe and the Americas

Asian interest in regional integration is increasing for pragmatic reasons

Asia accounts for 20% of world trade. It has substantial trade liberalisation. There are less formal agreements bilaterally

and multilaterally in abundance. Examples are SAARC, and the China Circle.

It has also created numerous sub-regional economic trade zones, which are named transnational export processing zones, natural economic territories, or growth triangles

Brief Background of ASEAN

A group of 6 Nations: Singapore, Brunei, Malaysia, Phillipines, Thailand and Indonesia

In 1992- established CEPT (Common Effective Preferential Tariffs) Plan• Free trade area in 15 years.• Tariff cut from 0.50% to 20% beginning with 15

products.• Strength skilled and educated human resource.• Created Asean Free Trade Area (AFTA) in 1994.

About AFTA Objectives:

• To encourage inflow of foreign investments.• To establish free trade area.• To reduce tariff on the products produced in ASEAN

countries

European Free Trade Association- EFTA

Formed in 1959. Member nations: Austria, Norway,

Portugal, Swedan and Switzerland. Associate members: Finland, Iceland,

Britain, Denmark. Objectives:

• To eliminate all tariffs.• To abolish trade restrictions.• To enhance economic development.• To enable free trade.

South Asian Association for Regional Cooperation

(SAARC) Member nations: India, Bangladesh, Bhutan,

Pakistan, Maldives and Sri Lanka. Established in 1983. Objectives:

• To improve quality of life and welfare of the people.• To develop region economically, socially and

culturally.• To enhance the self reliance,• To provide conducive environment• To enhance mutual assistance.• To extend co-operation to other trade blocs.

Other Trade Blocs..

SAPTA