Lesson 5 - Economic Integration Among Countries

Download as pdf or txt
Download as pdf or txt
You are on page 1of 26

Economic Integration among

Countries
Rosalie M. Cabagay, MPA
Economic Integration
 An arrangement among nations that typically
includes the reduction or elimination of trade
barriers and the coordination of monetary and
fiscal policies.
Levels of Economic Integration
 Global: trade liberalization by GATT or WTO
 Regional: preferential treatment of member countries in the
group
 Bilateral: preferential treatment between two countries

Regional and bilateral agreements are against the MFN clause


(normal trading relations), but allowed under WTO.
Four stages (types) of economic
integration
1. FTA (free trade area):no internal tariffs among members,
but each country imposes its own external tariffs to the third
country.
 NAFTA (North America Free Trade Agreement)
 AFTA (ASEAN Free Trade Area)
 EFTA (European Free Trade Area)
Four stages (types) of economic
integration
2. Customs union: no internal tariffs and common external
tariffs
Mercosur (Southern Common Market),CACM (Central
American Common Market) CARICOM (Caribbean
Community and Common Market)
Four stages (types) of economic
integration
3. Common market: free movement of products and factors
(resources), which is customs union plus factor mobility

EU (European Union – previously EEC)


Four stages (types) of economic
integration
4. Economic union: common market plus common currency
coordination of fiscal and monetary policy

EMU (Economic and Monetary Union)


Economic effects of economic
integration
 Static effects: Short-term effects (shift of production)
 Trade creation: production shifts to more efficient member
countries from inefficient domestic or outside countries.
 Trade diversion: production shift to inefficient member
countries from more efficient outsiders.
 Dynamic effects: Long-term effects
Cost reduction due to economies of scale
Cost reduction due to increased competition.
History of EU
 Treaty of Paris (1951)
 Treaty of Rome (1957)
 Formation of ECSC (European coal and steel community) by
six countries
 Formation of EEC (European economic community), initially
free trade area, becoming a customs union in 1967.
 The Stockholm convention in 1960 created EFTA by seven
countries to counteract EEC.
History of EU Continued
 Single European Act of 1987
 Creation of single market (Common market) effective on
Jan. 1, 1993
 Rename EEC by EU (15 members)
 Treaty of Maastricht (1992)
 Creation of an economic union, EMU (11 members)
 Establishment of European Central Bank on July 1998
 Introduction of a common currency, euro on Jan. 1, 1999
 Circulation of euro on Jan 1, 2002
Organization of EU European
Commission: European Parliament
 administrative body of 20 members
 Initiate proposals
 Guardian of the treaties
 Implementing policies
 European Parliament
 626 members elected according to population distribution
 Legislative body, but final decision by Council of Ministers
 Control over budget and supervision of the Commission
Organization of EU Continued
 European Council and Council of Ministers
 European Council: summit meeting of state heads, providing
guidelines
 Council of Ministers
 25 different councils (agriculture, transport, etc.)
 Final say on legislations
 Different votes allocated to individual countries (according to
population)
 Unanimity or qualified majority voting required depending on
issues.
 Court of Justice, Court of Auditors, sub-committees
EMU (Economic & Monetary Union)
 Common currency (Euro) area for 11 members
 Euro became the official currency unit on Jan. 1, 1999.
 Euro will be in circulation from Jan. 1, 2001
 U.K, Denmark and Sweden opted out.
 Greece was not qualified.
 European Monetary System in 1979
EMU (Economic & Monetary Union)
 European Monetary Institute in 1994
 European Central Bank in July 1, 1998
 Convergence criteria
 Inflation (no more than 1.5% above the 3 lowest ave.)
 Long-term interest rate (no more than 2% above the 3 best
ave.)
 Budget deficit: no more than 3% of GDP
 Public debt: no more than 60% of GDP
Remaining Issues of EU
 Further elimination of barriers to common market
 Compatible standards and specifications
 No barriers to market access
 Coordination of VAT and other taxes
 Expansion
 European Economic Area: extension of customs union privileges
to EFTA member countries (Norway, Iceland and Liechtenstein
accepted. Switzerland voted not to join)
 Special agreements with Turkey and others
 Expansion to central and eastern European countries
 Fast-track applicants
NAFTA North America Free trade
Agreement History
 Free trade area among the U.S., Canada and Mexico
 The largest trading bloc in terms of GNP
 A good example of trade diversion (production shifted from
Asia to Mexico)History
 Automotive products Trade Agreement (1965) between the
U.S. and Canada
 Canada-U.S. Free Trade Agreement (1989)
 NAFTA (1994)
Provisions of NAFTA Elimination of
tariffs
 Most tariffs will be eliminated by 2004
 The remaining by 2008
 Elimination of nontariff barriers
 Harmonization of trade rules (subsidies, antidumping, safety
standards)
 Liberalization of capital movement (FDI)
 Protection of intellectual properties
 Dispute settlement
 Provisions on labor and environmental standards
Economic Effects of NAFTA
 Trade
 Trade among members increased faster than trade with the
rest of world
 Investment
 Mexico is the main beneficiary (FDI not only from the U.S.
and Canada, but also from other countries)
 Employment
 Difficult to measure because of too many confounding
variables
 Overall employment effect in the area including the U.S. has
been positive
Issues related to NAFTA
 Rule of origin and local content
 Rule of origin: products must originate from North America to
get preferential treatment.
 Local content: the percentage of value of a product that must be
from North America to be considered as North American origin
 Currently 50% for most products and 62.5% for autos. Political
pressure to increase this percentage
 Expansion of membership
 Potential entry by Chile, and some central and south American
countries
 FTAA (Free Trade Area of America) proposal in 2001
Other Regional Trade Blocs
 ASEAN and AFTA
 Originated in 1967
 Formation of AFTA in 1993
 Mercosur (Southern Common Market)
 Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay.
 Aim for a customs union, but not yet
Other Regional Trade Blocs
 Andean group (Andean Common Market)
 ALADI (Latin American Integration Association)
 CARICOM (Caribbean Community and Common Market)
 CACM (Central American Common Market)
APEC Asia Pacific Economic
cooperation
 Formed in 1989 to promote trade and investment
 21 member countries that border the Pacific Rim
 APEC is not a trading bloc
 For trade liberalization and against protectionism
 Prefer open regionalism over closed regionalism
 Goal: Free and open trade
by 2010 for the industrialized countries
by 2020 for the rest of the members

You might also like