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C04 Economic Integration

1. The document discusses various types of regional trade agreements including free trade areas, customs unions, common markets, economic unions, and monetary unions. 2. It analyzes the static and dynamic effects of regional trade blocs, including trade creation and diversion. Regional agreements can lead to deeper integration but are also discriminatory. 3. The document examines the formation and development of the European Union, from the Treaty of Rome to the adoption of the euro. It discusses both the economic benefits and issues around meeting convergence criteria.

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Siti Syarief
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200 views25 pages

C04 Economic Integration

1. The document discusses various types of regional trade agreements including free trade areas, customs unions, common markets, economic unions, and monetary unions. 2. It analyzes the static and dynamic effects of regional trade blocs, including trade creation and diversion. Regional agreements can lead to deeper integration but are also discriminatory. 3. The document examines the formation and development of the European Union, from the Treaty of Rome to the adoption of the euro. It discusses both the economic benefits and issues around meeting convergence criteria.

Uploaded by

Siti Syarief
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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‡ Identify the stages of economic integration.
‡ Discuss the static and dynamic effects of a
regional trading arrangement.
‡ Assess the nature and operation of the EU.
‡ Discuss the advantages and disadvantages of
the NAFTA.
‡ Identify the reforms that the transition
economies have implemented to improve their
standard of living.

| 
  
  

   
› regional trade blocs could be a complement to
multilateralism by setting a precedent which
other nations will follow
› can lead to deeper integration
› however regional agreements are also
discriminatory in that some nations are
treated differently than others
› decreases incentives for nations to pursue
multilateral agreements
› trade bloc members may not gain additional
economies of scale through multilateralism
| 
!" 

  
   
› free-trade area ± agreement to remove trade
barriers among members
u u

› customs union ± agreement to remove trade
barriers among members and impose uniform
trade restrictions against non-members
u u u u
› common market ± agreement that permits (1)
free trade among members; (2) common
external trade restrictions; and (3) free
movement of factors of production
u u
| 
!" 

  
   
$ %&
› economic union ± common market agreement
with :
1) common national, taxation, fiscal, and social
policies among members
2) transfers of sovereignty to a supranational
authority
u u u   u 
› monetary union ± economic union with
additional characteristic of common monetary
policy and common currency
u u uu

| #
(  
  

!
   
·ith Tariff:
(before customs union)
red triangle = consumer
surplus
green triangle =
producer surplus
black rectangle = tariff
revenue
a + b = deadweight loss

| '
(  
  

!
   
·ith Customs Union:
agreement with Germany
will lower the price to SG
trade-creation effect:
welfare losses now part
of consumer surplus
a = production effect
b = consumption effect
trade-diversion effect:
area c
lost benefits from lower
cost suppliers
| )
+" 
  

!
   
› economies of scale ± access to a larger
market allows producers to become more
efficient through greater specialization, better
equipment, and usage of by-products
› greater competition ± increased number of
producers makes collusion less likely and
forces firms to become more efficient
› stimulus of investment ± because of
increased rate of return and ability to spread
R&D costs trade makes greater levels of
investment more likely
| *
 
- 
Treaty of Rome ± 1957 ± established European
Community ± precursor to EU
1) 1957: Belgium, France, Italy, Luxembourg,
Netherlands & ·est Germany
2) 1973: United Kingdom, Ireland & Denmark
3) 1981: Greece
4) 1987: Spain & Portugal
5) 1995: Austria, Finland & Sweden
6) 2004: Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland,
Slovakia & Slovenia
7) 2007: Bulgaria & Romania | ,
 
- 

,'
 ,*#

› EU members removed tariffs in 1968 leading


to fivefold increase in trade
› EU adopted common external tariffs in 1970
making it a customs union
› trade creation: machinery, transportation
equipment, chemicals & raw materials
› trade diversion: agricultural commodities and
raw materials
› trade creation exceeded trade diversion
› EU saw increases in economies of scale,
competition & investment
› 1985 EU eliminated nontariff barriers resulting
in creation of European common market | 
 
- 
.
  

› 1991 Maastricht Treaty established monetary


union and euro as common currency by 2002
› convergence criteria:
1) inflation ” 1.5% above average inflation of
three countries with lowest inflation
2) long term interest rates ” 2.0% above
average of same three countries
3) exchange rate within target bands of
monetary union for 2 years
4) budget deficit ” 3.0% of GDP
5) government debt ” 60.0% of GDP
| 
-
  
/ "
 0 
1  
› no restriction on agriculture traded internally
› EU policy based in part on variable levies
› adjusted to maintain
desired price levels
› more restrictive than
an import quota in
that foreign
producers cannot cut
prices and absorb
tariff cost to maintain
export sales
| 
-
  
/ "
 (  
› export subsidies also used to maintain higher
prices of EU - common policy
› EU producers
sell for low price
but receive
higher price
› EU purchases
any surplus
› surplus then
sold on world
market for lower
price | 
2  
/  
/  
› government purchases previously limited primarily
to domestic producers
› 1992 EU required bidding process from EU firms
› benefits:
‡ governments
purchase from
lower cost
producers
‡ increased
competition
‡ remaining firms
produce with
economies of
scale
| 
 
 "
- 
A common currency also implied the need for a
single European Central Bank responsible for all
monetary and exchange rate policies of the EMU.
› advantages:
‡ eliminated exchange rate risk
‡ reduced currency conversion costs
‡ insulation from monetary disturbance &
speculation
› disadvantages:
‡ loss of individual monetary authority
‡ transition to common currency could lead to
speculative attacks
| #
3 
| "
 
› definition ± region in which it is economically
preferable to have a single official currency
› success of common currency area:
‡ similar business cycles
‡ similar economic structures
‡ single monetary policy affecting all members in
same manner
‡ absence of legal or cultural barriers that would limit
labor mobility
‡ wage flexibility
‡ stabilizing transfer system
› EU concerns based on rigid wages and limited
labor mobility tied to cultural factors
| '
4 
  
5
!
  
› free trade area for U.S., Canada & Mexico but
not a customs union
› issues:
‡ U.S. & Canada represented developed
economies while Mexico was a developing
economy
‡ Mexico¶s authoritarian political system
‡ substantial difference in standard of living
between Mexico and Canada & U.S.
› decision: integrate Mexico to stimulate
development or allow problems in that nation
to continue to spill over borders
| )
6   

7 
› substantial benefits for Mexico because it
integrated with much larger economies
› increase in production of goods in which it has
comparative advantage
› gains at the expense of other low-wage
nations
› increases in agricultural goods and labor
intensive goods
› agriculture represents small portion of GDP
but supports roughly 25% of the population

| *
6   
.
| 

|
› Benefits:
‡ maintain status in international trade
‡ free trade preference in U.S. market
‡ equal access to Mexico¶s market
‡ inclusion in future free trade area with
Central & South America
‡ economies of scale associated with
increased output levels
› Possible Cost: closer integration with U.S. as
potential threat to Canada¶s social welfare
system
| ,
 

(

45!
› access to additional markets increases demand
› Canadian
producers can
sell more
autos
› increased
consumer
surplus due to
lower price
› no worse for
producers
since costs
have dropped | 
6   
.
| 


-%(%
› Benefits:
‡ expanded trade
‡ increased competition and lower prices
‡ enhanced economies of scale
‡ decrease in illegal immigration
‡ improved political stability in Mexico
› Costs:
‡ U.S. industries competing with imports
‡ impact on unskilled workers domestically
‡ potential for environmental consequences
‡ limited benefits due to relative size of these
economies
| 
1
|
| 

/  "
› ·ould NAFTA cause many U.S. companies to
relocate to Mexico due to lower wages?
› Productivity is a major factor in determining cost
per unit of output.

› Based on higher productivity, U.S. workers can


still receive higher wages. | 
45!

3 
| "
 8
› measures of economic integration: Canada &
Mexico are the U.S. largest trading partners
› Canada & U.S.: advanced industrial
economies with similar per capita incomes,
inflation rates and interest rates
› Mexico: lower average per capita income,
higher inflation rate, higher interest rates, and
volatile exchange rate
› Mexico adopting U.S. dollar:
pro: price & interest rate stability
con: loss of independent monetary policy
| 
5
!
 


  
› 1994 proposal calling for agreement among
34 nations in North and South America
› potential to become largest trading bloc in the
world with 850 million consumers and $14
trillion in combined income
› progressive Latin American trade policies:
‡ reduced governmental management
‡ conventional macroeconomic policies to promote
growth and stability
‡ failure of import substitution model
› challenges:
› other free trade agreements
› subsidies on agricultural goods | 
! 
 
› nations making the transition from centrally
planned to market economy
› countries
opting for
greater
political &
economic
freedom
have seen
improved
performance
and income
| #

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