REGIONAL ECONOMIC

INTEGRATIONA BROAD DISSCUSSION

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REGIONAL ECONOMIC INTEGRATION

1. Regional Economic Integration (REI) refers to the commercial policy of discriminatively reducing or eliminating trade barriers only between the states joining together.

2. Regional economic groups eliminate or reduce trade tariffs (and other trade barriers) among the Partner States while maintaining tariffs or barriers for the rest of the world (non-member countries).

3. Geographical proximity, cultural, historical, and ideological similarities, competitive or complementary economic linkages, and a common language among the Partner States are importantly required for effective economic integration.

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REGIONAL ECONOMIC INTEGRATION:AIM

The aim of economic integration is to lessen costs for both consumers

and producers, in addition to increase trade between the countries

taking part in the agreement.

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OBJECTIVES

REGIONAL ECONOMIC

INTEGRATION

REGIONAL ECONOMIC INTEGRATION: OBJECTIVESA primary economic objective of integration is to raise: a) real output and income of the participants & b) rate of growth by increasing specialization and competition by facilitating desirable structural (linkages) changes.

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REGIONAL ECONOMIC INTEGRATION: OBJECTIVES

1. Increase of Trade.

2. Allowing Consumers to Spend More.

3. Movement of Capital.

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INCREASE OF TRADEA simple constituent of economic integration policies is elimination of the additional payments or tariffs, making trade low-priced and giving exporters a superior incentive to do business with integrated economies.

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ALLOWING CONSUMERS TO SPEND MOREEconomic integration reduces or eliminates customs duties, which in turn results in cheaper imported products for consumers. This way, the purchasing power of consumers grows, and with it, activity in the market.The public can start buying more imported products or spend former duty expenses on other products or services. In addition, goods that are not produced in sufficient quantities in one country can be imported and distributed in the market at low cost.

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MOVEMENT OF CAPITALThe benefit of capital movement is the investment in new markets, leading to their eventual development. Economic integration removes barriers to foreign investors, minimizing or abolishing extra tax, while advanced integration policies, such as a monetary union, can even eliminate the cost of currency exchange

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ECONOMIC COOPERATIONWhen economies within the integrated area encounter problems, it is the duty of other members to help, not only as a moral obligation, but because a failing economy can have serious effects on the whole integration process. For this reason, European Union countries have offered to bail out the troubled economies of Greece, Ireland and Portugal

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REGIONAL ECONOMIC

INTEGRATION FORMS

SIMPLE FORMS OF REGIONAL INTEGRATION

Bilateral Investment Treaty (BIT)

Trade and Investment Framework Agreement (TIFA)

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BILATERAL INVESTMENT TREATY (BIT)A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment (FDI) by nationals and companies of one state in another state.

BITs are established through trade pacts.

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TRADE & INVESTMENT FRAMEWORK AGREEMENT (TIFA)A trade pact between countries that seeks to develop the necessary structures or frameworks, such as committees and trade councils, that will move the trading countries closer to a free trade agreement.

It is a form of economic integration.

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USA & BANGLADESH TIFA

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REGIONAL ECONOMIC INTEGRATION : FORMS

Regional economic groupings can take several forms raging from the 1.Preferential Trade Agreement (PTA)2.Free Trade Area (FTA) 3.Customs Union 4.Common Market5.Economic Union 6.Political Union. These forms are diverse, involving different levels of economic integration.

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PREFERENTIAL TRADE AGREEMENT (PTA)

A preferential trade area (also preferential trade agreement, PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. EXAMPLELome’s Convention, 1975 is a trade and aid agreement between: 71 African, Caribbean, and Pacific (ACP) countries and The European Community (then known as European Economic Community).

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FREE TRADE AGREEMENT (FTA) A free-trade area is the region encompassing a trade bloc whose member countries have signed a free-trade agreement (FTA). Such agreements involve cooperation between at least two countries to abolish or reduce trade barriers – import quotas and tariffs – and to increase trade of goods and services with each other. EXAMPLE Columbia/ USA FTA

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CUSTOMS UNIONA customs union is a type of trade bloc which is composed of a free trade area with a common external tariff.

The tariffs are then shared among members according to a prescribed formula.

Example - The EU (1960-1990).

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COMMON MARKETMembers of a common market remove barriers to trade in goods and services among themselves, establish a common trade policy with respect to non-members (common external tariff) and remove restrictions on the movement of factors of production (labor, capital, Land & entrepreneur) across borders. Restrictions on immigration, emigration, and cross-border investments are abolished. Members cooperate closely on monetary, fiscal, and employment policies.

Example – EU since 1990s.

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ECONOMIC UNIONMembers of an Economic Union: 1.remove barriers to trade in goods and services among themselves; 2.establish a common trade policy with respect to non-members (common external tariff); 3.remove restrictions on the movement of factors of production (labor, capital, and technology) across borders; and 4.Coordinate their economic policies (monetary, fiscal, taxation, and social welfare) so as to blend their economies into a single entity. Example – •The Belgium-Luxembourg Economic Union, 1922.

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POLITICAL UNION 1.Remove barriers to trade in goods and services among themselves; 2.Establish a common trade policy with respect to non-members (common external tariff); 3.Remove restrictions on the movement of factors of production (labor, capital, and technology) across borders; and 4.Coordinate their economic policies (monetary, fiscal, taxation, and social welfare) so as to blend their economies into a single entity. 5.It involves the unification of previously separate states.

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Most trade groups contain countries in the same area of the world (although not necessarily), for the reasons that, The distance that goods need to travel between such countries is short and consumers’ tastes and preferences are likely to be similar, Distribution channels can be easily established in adjacent countries resulting in reduced distribution cost.Another reason is that the neighboring countries may have a common history and interests, and they may be more willing to coordinate their policies.

WHY MOST OF THE REI’S IS FORMED IN SAME REGION?

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REGIONAL ECONOMIC

INTEGRATIONFORCES / MOTIVATIONS

FORCES / MOTIVATIONS OF REI1. Degree of integration depends upon

the willingness and commitment of independent sovereign states to

share their sovereignty.

2. Economic aspects and political aspects as the main motives of

economic integration.

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ECONOMIC ASPECTS/FORCES THAT MOTIVATES REGIONAL ECONOMIC INTEGRATIONReducing uncertainties

Improving credibility

Thus making it easier for the private sector to plan and invest.

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ECONOMIC EFFECTS OF REGIONAL INTEGRATION

1. Trade Creation

2. Trade Diversion

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TRADE CREATION Trade creation occurs when common external trade policy and internal free trade lead to a shift in production from high to the low cost Partner State in the community.

TRADE DIVERSION Trade diversion on the other hand arises when imports from the rest of the world are replaced by more expensive imports from the partner country.

The overall gain depends on whether trade creation is larger than trade diversion.

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POLITICAL ASPECTS/FORCES THAT MOTIVATES REGIONAL ECONOMIC INTEGRATION Many regional economic communities have been driven by political rather than economic goals.

These political objectives include, 1.National Security2.Structure of Governance : Macroeconomic Policies3.Democracy4.Human rights.

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NATIONAL SECURITY Regional economic integration can enhance security because it increases the level of trade between member countries and, in so doing, increases familiarity between the people of the member countries and lessens the degree of misconception. It can also be a means through which democracy and governance objectives can be pursued and to lock in changes in political institutions. It may also worsen security and this is likely to happen where the distribution of transfers is asymmetric between the member states.

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BENEFITS OF REGIONAL ECONOMIC INTEGRATION Regional Economic Integration offers many benefits to the participating member countries. However, these benefits are not pre-determined and they depend among other things on the internal design of the integration including the degree of political commitments by the Member States. An important feature of the higher levels of economic integration is free trade among members and this free trade is expected to lead to a rapid increase of trade which in turn is likely to lead to rapid economic growth. These gains result from the dynamic effects of integration which are cumulative in nature and lead to growth. M V S SAI HEMANT 46

The dynamic effects of integration are often described as the long-run consequences of economic growth of member states as a result of increased market size exploitation of economies of scaleincreased competitionlearning by doingincreased investment.The larger the integration (in terms of the size) the more likely it is to lead to growth since the larger the integration, the larger the market created and so on. Also, the stronger the potential economies of scale are, and the more rapid the autonomous productivity advances, the more likely the integration will lead to growth.

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economic integration can also serve as incentives for investment and attraction of Foreign Direct Investment (FDI). General reforms such as stabilization, market liberalization, and privatization adopted under regional arrangements can raise returns to all factors and are likely to be more than enough to increase private investment. Economic integration can help to ensure that production is located according to comparative advantage in each member states which in turn will lead to specialization which will further lead to increased output and services thus making the whole region better off as a result of such specialization scheme.

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NEED FOR REGIONAL ECONOMIC INTEGRATION IN DEVELOPING COUNTRIES1. To promote a balanced division of labor among a group of

countries.2. To achieve Economies of Scale.3. Isolated tiny national economies has to give way to

strategic alliances that harness knowledge and resource based comparative advantages through integration.

4. One of the major problems developing countries face is the formulation and implementation of good macro economic policies. Consequently, these countries have experienced instability in their macroeconomic environment and thus regional integration can help them to harmonize their macro policies, including fiscal and monetary policy and to achieve a stable macroeconomic environment within the integrated economies.

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REGIONAL ECONOMIC

INTEGRATION EXAMPLES

EXAMPLE OF REI United States is the perfect example of economic integration- the largest economy comprised of fifty states in the continental United States plus Alaska and Hawaii,common currency, perfect labor capital mobility

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EXAMPLE OF REI : EUROPEAN UNION The European Union is a unique economic union between 28 European countries that together cover much of the continent.

The EU is based on the rule of law: everything it does is founded on treaties, voluntarily and democratically agreed by its member countries.Mobility of Factors of Production Growth in Living standards of peopleMarket stability : Single Market Single currency : EUROHuman rights Equality EU is also known as one of the best examples of REI.M V S SAI HEMANT 52

European Union which began in 1951

established of the European Coal and Steel Community (ECSC)

by six countries, namely; The Netherlands, Britain, Italy, Luxembourg, France and the then West Germany.

This was followed by the establishment of the European Economic Community (EEC) in 1957

European Free Trade Association (EFTA) in 1960.

These schemes and more importantly the survival and apparent success of the EEC triggered a proliferation of integration schemes in Latin America, Asia and Africa.

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BBA FOREIGN TRADEBBA FOREIGN TRADEUPES, DEHRADUNUPES, DEHRADUN

UTTARAKHAND, INDIAUTTARAKHAND, INDIAM V S SAI HEMANT 55