Chapter 8 - Regional economic integration. The main goals of this chapter are to: Explain the process and the levels of regional economic integration; review the progress towards regional integration in Europe, the Americas, Asia and elsewhere; outline the basic costs and benefits of economic integration (such as trade creation and trade diversion);...
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Chapter 8 Regional economic integration
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Lecture plan
• Why regionalism?
• Definition of regional economic integration
• Five levels of regional economic integration
– industrial free trade area; full free trade area; customs union; common market; economic union
• Trade effects of regional integration
• Regional groups: EU, NAFTA, AFTA, MERCOSUR
• Bilateral free trade agreements
• Is regionalism the path to globalism?
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Regional economic integration
• Agreements among countries in a
geographic region to reduce, and ultimately
remove, tariff and non-tariff barriers to the free flow of goods, services and factors of production among each other.
• It is estimated that currently there are about
220 regional trade arrangements!
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Regional trade arrangements
• Exception to MFN (Most Favoured Nation) rule in GATT/WTO; allows regional
agreements to provide higher preferential treatment to members than to non-
members.
• Five levels of regional economic integration
– industrial free trade area
– full free trade area
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Regional economic integration
Free Trade Area (FTA)
• No tariffs and quotas among members
• National tariffs against non-members
• Partial (industrial) FTA and full FTA
• Australia’s bilateral FTAs with New
Zealand, Singapore, USA, Thailand
• Pluri-lateral FTA: EFTA, NAFTA, AFTA
Free Trade Area
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Regional economic integration
customs union
No tariffs and quotas among members.
Common tariffs operate against non-members.
Examples: European Community EC (1968)
Customs Union Free Trade Area
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Regional economic integration common market
Abolition of restrictions on factor movements
© Copyright J Gionea
RMIT 2003
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Regional economic integration
economic union
Customs Union
Free Trade Area
Common Market
Economic Union
Characterised by
• harmonisation and unification of economic policies
• common currency
Example:
European Union
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Trade effects of integration
• Trade creation
– trade up through lower-cost goods and services (e.g European Union: industrial sector)
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Intra-regional trade under major regional trade agreements, 2002, $US billion, %
Regional
Trade Agreements
Intra-regional
trade ($US billion)
Share of World exports
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Intra-exports as % of total merchandise exports of selected regional trading
blocs
0 10 20 30 40 50 60 70
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Intra-imports as % of total merchandise imports of selected regional trading blocs
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0
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European economic integration
1957 European Communities (6): France, Western
Germany, Italy, Belgium, Luxemburg, Netherlands
1968 Customs union
1973 UK, Ireland, Denmark, Greece (1981), Spain and
Portugal (1986)
1992 European single market
1996 Austria, Finland, Sweden
2002 European Monetary Union (currently 12 members)
2004 10 new members: Cyprus, Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Slovak Republic and Slovenia (500 million people)
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North American Free Trade
Agreement (NAFTA)
US, Canada, Mexico
• Became law 1/1/1994
• Over 15 year period
– tariffs reduced (99% of goods traded)
– non-tariff barriers reduced
– investment opportunities increased
• Protects intellectual property
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MERCOSUR (Southern Common
Market)
• Originated in 1988 as a free trade pact
between Brazil and Argentina
• Expanded in March 1990 to include
Paraguay and Uruguay
• Combined population of 200 million
• 1995: 5-year plan to move to full customs union
• Objective: South American Free Trade Area (SAFTA)
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The Free Trade Area of the Americas (FTAA)
• Old plan of ex-US president George Bush, pursued now by his son.
• FTAA = 34 nations (including NAFTA and
MERCOSUR members) with population of 880
million; world’s largest free trade area.
• The Quebec 34-country Summit of March 2001
agreed on an FTAA to be launched in 2005.
• President Bush obtained fast-track authority (now renamed Trade Promotion Authority)
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ASEAN (10)
• AFTA = ASEAN Free Trade Area; launched in 1992
• Members: Singapore, Indonesia, Thailand, Malaysia,
Philippines, Brunei, Vietnam, Burma, Laos, Cambodia (550 million people).
• On the Common Effective Preferential Tariff (CEPT) of AFTA, the 6 founding members agreed (individually) to achieve a minimum of 85% of the tariff lines on their inclusion lists in the 0-5 % range by 2000, covering 90% of intra-ASEAN trade.
• They also brought forward from 2003 to 2002 the date of
implementation of the CEPT; few extensions (e.g cars).
• ASEAN + 3 (China, Japan, South Korea).
• ASEAN–China FTA: >1.7 billion people; GDP: US$1.65 trill.
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MFN simple mean tariffs 1999 vs CEP tariff rates 1999, 2003, % in selected ASEAN
countries
MFN 1999
MFN = Most Favoured Nation: non-discrimination
(All WTO signatories have MFN status.) CEPT = Common Effective Preferential Tariff: a comprehensive timetable for
gradual phase out of intra-ASEAN tariffs on nominated goods
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Automotive MFN tariffs in selected ASEAN countries, %
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Three-way balance (E Asia, EU, US)
output, trade with the ROW*, reserves
01,0002,0003,0004,0005,0006,0007,0008,0009,00010,000
Output(WBA) Output(PPP) Trade Reserves
* ROW = Rest of the World
Based on Fred Bergsten’ s Economist article
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Why the push for East-Asian
integration?
• East Asian financial crisis
• Failures of WTO and APEC to make
headway on trade liberalisation
• Positive inspiration provided by European integration (especially the euro)
• Broad disquiet with behaviour of both
the US and EU
Based on Bergsten, 2000 (See References.)
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Bilateral Free Trade Agreements (FTAs)
• Singapore’s free trade agreements with
– US, Japan, Australia, New Zealand,
Mexico
• Mexico-European Union
• Australia’s FTAs with
– New Zealand, Singapore, Thailand, USA (under Australian Senate approval)
• Australian discussions for FTAs with China and Malaysia
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The share of regional trading blocs in
Australia’s merchandise exports 1974,
Source: adapted from DFAT, Direction of Trade Time Series,
1974 to 1994 and Composition of Trade, 2003
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Is regionalism a path to globalism?
Two key questions:
1 Does regional integration increase or
decrease global economic welfare?
2 Will regional trading blocs lead to global
trade more quickly than the multilateral process?
Two views
• regional trading blocs = ‘stumbling’ blocs
• regional trading blocs = building blocs
Hopefully, the latter view will prevail.
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References
• Bergsten, F 2000, ‘Towards a tripartite
world’, The Economist,15 July.
• Gionea, J 2003, International Trade and
Investment, McGraw-Hill, Sydney
• Hill, C 2003, International Business,
Competing in the Global Marketplace,
McGraw-Hill, New York
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Australia’s trade with ASEAN in passenger motor vehicles, A$ million, 1999–2003
0 50 100 150 200
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Australia’s trade with NAFTA in passenger motor vehicles (PMV), A$ million,
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Australia’s trade with NAFTA in motor
vehicle parts (MVP), $A million, 1999–2003
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Australia’s cumulative trade (PMV + MVP) with NAFTA, A$ million, 1999–2003
0 200 400 600 800 1000 1200