Transcript Document

**KH9**
REGIONAL ECONOMIC INTEGRATION [Head, Chap.5, pp. 75-93]
- removal of significant barriers to trade and investment
- driven by the theory of comparative advantage
---> a free trade zone will produce substantial gains from trade for all member
countries
The level of economic integration ranges from free trade area to
political integration (There are 5 levels.)
(1)
Free trade area
In a free trade area there are no barriers to the trade of goods and services among member
countries (i.e. no tariffs, quotas, subsidies,..);
Each member country can have its own trade policies with regard to nonmembers
NAFTA (North American Free Trade Agreement) is a free trade area.
(2) Customs union
(Free trade area + common external trade policy for member countries)
Example.
EC (European Community) started as a customs union.
Aladi (Latin American Integration Association (Argentina, Bolivia, Brazil, Chile, Colombia,
Ecuador, Mexico, ...).
(3) Common market (Customs union + mobility for production factors)
Example. EC was characterized by the 1987 Single European Act
Its original members are: WG, F, N, B, I, L.
Its key elements are:
A. Reduction of border-crossing hassles by eliminating
(a) frontier controls (with the exception of Britain, Ireland, and Denmark,
the EU members have eliminated border controls); and
(b) cabotage restrictions (e.g. a trucking company based in France was
previously not allowed to deliver freight from one German city to another).
B. Harmonization of technical standards.
C. Reduce national-bias in government procurement by using transparent
and open bidding processes to allocate government service contracts.
(4)
Economic union (which countries are in?)
(Common market + common currency, harmonization of tax
rates, common monetary and fiscal policy)
Example. Current EU close to this, but not quite....
Does EU have a common currency for all its member
countries?)
(5)
Political union
The ultimate goal of EU. What is the current status?
Can the EU Parliament tell the French government what to
do?
Why higher integration ? why not ?
(+) accelerated free trade and investment (FDI and portfolio) flows
(+) gaining political power for the region in world politics
(-) loss of a nation's sovereignty, political and cultural
(-) loss of economic policy freedom for fine-tuning business cycle fluctuations,..
Examples.
Flexible exchange rate helps weak economies to recover by exporting;
fiscal and monetary policy in response to country- specific economic problems
(unemployment, etc.).
Canada’s unemployment always higher than the U.S.’s;
what would happen if Canada adopted the U.S. dollar?
---> without each country's fine-tuning ability, some member countries may get
stuck with permanent unemployment problems. (Read “EU problem and euros ”.)
(e.g. Maritime region in Canada, West Viirginia region in the U.S.)
When should an integration happen?
When should integration happen?
(+) trade creation: high-cost domestic producers replaced by low-cost
producers in the free trade area
(-)trade diversion: lower-cost external suppliers replaced by higher-cost
suppliers within the free trade area
Integrate if
trade creation > trade diversion
---> a free trade area justified
(-) a potential for an economic union (like EC/EU) to become a fortress of
protectionism
The WTO Rules allow exceptions to free trade areas
Members Should
except for
Treat imports from all WTO
members equally (MFN
principle)
Free Trade Areas,
Customs Unions
Treat imported goods no worse
than like domestic goods
(National treatment)
Health Protection,
Conservation
Use tariffs, not quotas or bans
(no QRs)
Health etc.,
“Safeguards”
Set tariffs at or below
“bindings”
Antidumping duties,
Countervailing duties
Notes: Accession in trade status examples
Any state or customs territory having full autonomy in the conduct of its trade policies
may become a member (“accede to”) the WTO, but all WTO members must agree on the
terms.
The European Union (formerly the European Economic Community) was founded
in 1958. Membership has grown steadily, adding Greece, Portugal, and Spain in
the 1980s and Sweden, Austria, and Finland in 1995. The 2004 accession of 10
mainly Eastern European nations saw the EU taking on more members than
in any prior expansion. Considered as a single entity, the EU has the world’s
highest GDP (over US$13 trillion) and is Canada’s second largest trade partner.
These changes in trade statuses are counted in the following figure under accessions.
Proliferation of regional agreements
Canada’s Free Trade
Agreements
1988/89: United States
1993/94: Mexico (NAFTA)
1996: Israel
1996/97: Chile
2001: Costa Rica
In negotiation: Central America 4,
EFTA, FTAA, Singapore, Korea.
Note: Unlike Mexico which has chosen to be a member of
NAFTA which promotes comparative advantage based free
trade among Canada, the U.S. and Mexico, most countries
in East Asia (e.g. China, South Korea, …) chose to adopt
various forms of strategic trade theory based development
(and trade) policies at the beginning of their economic
development processes. (E.g. infant industries, export
orientation.) Their adoption of free trade policies (e.g.
GATT, WTO) are relatively new.