ECONOMIC INTEGRATION

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1 ECONOMIC INTEGRATION

2 Introduction 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.

3 Kinds of restrictions Tariffs taxes on imported goods for the purpose of raising their price to reduce competition for local producers or stimulate their local production. Ad valorem duty an import duty levied as a percentage of the invoice value of imported goods. Specific duty a fixed sum levied on a physical unit of an imported good. Compound duty a combination of specific and ad valorem duties Variable levy an import duty set at the difference between world market prices and local-government supported prices. Nontariff barriers all forms of discrimination against imports other than import duties Quotas numerical limits placed on specific classes of imports

4 Levels of Economic Integration Trading bloc: preferential economic arrangement among a group of countries. Trading blocs may take various forms: Free trade area Customs union Common market Economic union

5 The Free Trade Area The free trade area is the least restrictive and loosest form of economic integration among countries. Tariffs are abolished among members of the FTA, but each member country maintains its own external tariffs on imports from non-member countries e.g. North American Free Trade Agreement (NAFTA), European Economic Area (EEA)

6 The Customs Union Members of a customs union dismantle barriers to trade in goods and services among themselves. The difference between a custom union and a free trade agreement is that a custom union sets a common external tariff with respect to the rest of the world.

7 The Common Market A common market has no barriers to trade among members and has a common external trade policy. Factors of production (e.g. labor and capital) are mobile among members. Members of a common market must be prepared to cooperate closely in monetary, fiscal, and employment policies.

8 The Economic Union The creation of a true economic union requires integration of economic policies in addition to the free movement of goods, services, and factors of production. Under this union, members would harmonize monetary policies, taxation, and government spending and a common currency would be used by all members.

9 Arguments Surrounding Economic Integration Trade creation and diversion. The effects of integration on import prices, competition, economies of scale, and factor productivity. The benefits of regionalism versus nationalism.

10 Trade Creation and Trade Diversion Trade creation is having tariffs in place on high cost imports from the rest of the world but no tariffs on low cost imports from member countries. Trade diversion refers to having in place tariffs on low cost imports form the rest of the world but no tariffs on high costs imports from member countries. Whereas trade creation is positive in moving toward freer trade, and therefore lower prices for consumers, the impact of trade diversion is negative.

11 Reduced Import Prices When a small country imposes a tariff on imports, the price of the goods will typically rise, which will in turn result in lower demand for the imported goods. When a bloc of countries imposes the tariff, the fall in demand for the imported goods will be substantial.

12 Increased Competition and Economies of Scale Integration increases market size and may result in a lower degree of monopoly in the production of certain goods and services. Certain industries may not be economically viable in smaller, trade protected countries Internal economies of scale External economies of scale

13 Higher Factor Productivity When factors of production are freely mobile, the wealth of the common market countries, in aggregate, will likely increase. Factor mobility will not benefit each country in the common market.

14 Regionalism Versus Nationalism The biggest impediment to economic integration remains the reluctance of nations to surrender a measure of their autonomy.

15 European Integration Economic integration in Europe from 1948 to the mid 1980s: Organization for European Economic Cooperation (OEEC) Treaty of Rome European Free Trade Association (EFTA) Common agricultural policy (CAP) The European Union since the mid 1980s: 1992 White Paper European Union (EU)

16 Organization of the EU The executive body of the EU is the European Commission, headquartered in Brussels. The Council of Ministers has the final power to decided EU actions. The future expansion of the EU will cause changes in the decision making processes.

17 Implications of the Integrated European Market Perhaps the most important implication for Europe is the economic growth that is expected to result Several specific sources of increased growth have been identified: Gains from eliminating transaction costs Achievement of economies of scale More intense competition Cheaper transaction costs and reduced currency risks Many U.S. firms fear a unified Europe

18 North American Economic Integration Although the EU is undoubtedly the most successful and well-known integrative effort, integration efforts in North America has gained momentum and attention. North American integration has an interest in purely economic issues and there are no constituencies for political integration U.S.-Canada Free Trade Agreement North American Free Trade Agreement (NAFTA)

19 Integration in Latin America Before the signing of the U.S.-Canada Free Trade Agreement, all of the major trading bloc activity in the Americas had taken place in Latin America. One of the longest lived integration efforts among developing countries was the Latin America Free Trade Association (LAFTA), formed in 1961.

20 Integration in Asia The development in Asia has been different from that in Europe and the Americas. Asian interest in regional integration is increasing for pragmatic reasons:- European and American markets are significant for the Asian producers and some type of organization or bloc may be needed to maintain leverage and balance against the two other blocs. Given that much of the trade for the nation in the region is from intra-asian trade, having a common understanding and policies will become necessary.

21 Integration in Africa Africa s economic groupings range from currency unions among European nations and their former colonies to customs unions among neighboring states. Entities include:- ECOWAS (Economic Community of West African States) COMESA (Common Market for Eastern Southern Africa) CEEAC (Economic Community of Central African States) SACU (Southern African Customs Union) SADC (Southern African Development Community) EAC (East African Community) The main focus for COMESA is on the formation of a large economic and trading unit that is capable of overcoming some of the barriers that are faced by individual states.

22 Economic Integration and the International Manager Regional economic integration creates opportunities and challenges for the international manager. Economic integration may have an impact on a company s entry mode. Decisions regarding integrating markets must be assessed from four different perspectives Effects of change Strategic planning Reorganization Lobbying

23 Cartels and Commodity Price Agreements An important characteristic that distinguishes developing countries from industrialized countries is the nature of their export earnings This distinction is important for several reasons:- Level of price competition is higher among sellers of primary goods. Supply variability will be greater in the market for primary goods because production often depends on uncontrollable factors such as weather. A cartel is an association of producers of a particular good e.g. OPEC Commodity price agreements involve both buyers and sellers in an agreement to manage the price of a certain commodity

Economic integration: an agreement between

Chapter 8 Economic integration: an agreement between or amongst nations within an economic bloc to reduce and ultimately remove tariff and nontariff barriers to the free flow of products, capital, and