Chapter 7: Regional Economic Integrations and Cooperative Agreements

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Chapter 7 Regional Economic Integrations and
Cooperative Agreements

• By Ignacio Vázquez

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Regional Economic Integration Logic

• Distance goods need to travel between countries
  is short
• Consumers tastes are likely to be similar
• Distribution channels can be easily established
  in adjacent countries
• Neighboring countries may have common history and
  interests

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Basic Types of Regional Economic Integration

• Free Trade Area (FTA) abolishes all tariffs
• Customs union eliminate internal tariffs, but
  place common external tariff on goods being
  imported from nonmembers
• Common market same elements as customs union
  plus allows free mobility of production factors
  such as labor and capital
• Economic integration economic harmonization
  through common economic policies
• Common currency
• Political integration

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Effects of Integration

• Static effects
• Shifting of resources from inefficient to
  efficient companies as trade barriers fall
• Dynamic effects
• Overall growth in market
• Expanded production
• Greater economies of scale

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Static Effects

• Trade creation
• Production shifts to more efficient producers for
  reasons of comparative advantage
• Consumers access more goods at lower prices
• Less efficient products will fail
• Trade diversion
• Trade shifts to countries in the group at the
  expense of trade with countries not in the group

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European Union

• Largest and most comprehensive regional economic
  group
• Began as a customs union
• Formed the Euro Parliament
• European Commission
• Initiates proposals for legislation
• Guardian of treaties
• Manager and executor of Union policies and trade
  relationships
• Manages the annual budget of the EU
• Established common currency (euro)
• Expansion challenges

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European Trade and Economic Integration
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European Union Issues

• Abolish the right of individual EU countries to
  run their own foreign policies
• Have the right to raise direct taxes
• Use common border controls
• Integrate the European police force
• Influence national governments budgets much more
  strongly
• Create a European president to run the Council of
  Ministers

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North American Free Trade Agreement (NAFTA)

• Established in 1994 by
• United States
• Canada
• Mexico
• Combined population and total GNP greater than
  15-member EU
• NAFTA covers
• Market access (tariff and nontariff barriers)
• Trade rules (subsidies and antidumping)
• Services
• Investment
• Intellectual property
• Dispute resolution
• Good example of trade diversion

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NAFTA Special Provisions

• Unique aspects of NAFTA include
• Labor lobby in US forced the inclusion of labor
  standards such as the right to unionize (to
  prevent massive job loss to Mexico)
• Improved working conditions
• Living standards
• Environmental lobby pushed for an upgrade of
  environmental standards in Mexico and
  strengthened compliance

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MERCOSUR

• Established in 1991
• Brazil
• Argentina
• Paraguay
• Uruguay
• Generates 80 of South Americas GNP
• Observer members Bolivia, Chile, Mexico and
  Venezuela.
• Negotiating with EU for free trade agreements

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Association of South East Asian Nations (ASEAN)

• Organized in 1967
• Member countries are protected in terms of tariff
  and nontariff barriers
• Holds tremendous potential market opportunities
  with 500 million consumers

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Latin American Integration
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Commodity Agreements

• Attempts to counteract price instability through
• Exercise of market power through international
  commodity agreements
• Stabilization of producer revenues through risk
  management instruments, such as commodities
  futures
• Stabilization of government revenues through
  precautionary savings funds

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Organization of Petroleum Exporting Countries
(OPEC)

• Producer cartel
• Group of commodity-producing countries that
  control supply and price
• OPEC controls price by establishing production
  quotas on member countries
• OPEC member countries produce 41 of the worlds
  crude oil and 155 of its natural gas