Economic Integration

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Economic Integration

• Definition economic cooperation between
  countries and co-ordination of their economic
  policies, leading to increased economic links
  between them. It occurs because of numerous
  benefits that may be derived by the co-operating
  countries.
• There are different degrees of integration,
  depending on the type of agreement made between
  the co-operating countries, and the degree to
  which barriers between them are removed.

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Preferential trade agreements (PTA)

• Definition an agreement between two or more
  countries to lower trade barriers between each
  other on particular products. Trade barriers may
  remain on the rest of the products, and on
  imports from non-member countries.
• PTAs sometimes involve cooperation between
  members on labour standards, environmental issues
  or intellectual property.
• They include free trade areas (FTAs), customs
  unions or common markets and they may be
  bilateral or regional.

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Bilateral, regional and multilateral (WTO) trade
agreements

• Bilateral trade agreement between two countries.
• Multilateral trade agreement many countries.
• Regional trade agreement involves a group of
  countries that are within a geographical region.
• Their main objective is to promote trade
  liberalisation, ie, free(r) trade by reducing or
  eliminating trade barriers between members.
• WTO trade agreements are multilateral they
  include WTO member countries around the world
  and they require member countries to reduce trade
  barriers at the same time.

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• A fundamental principle of the WTO is
  non-discrimination, ie, a country cannot
  discriminate between any WTO members (it cannot
  impose higher barriers on imports from one
  country and lower ones on imports from another
  country).
• However, WTO makes an exception for bilateral and
  regional trade agreements, even though all PTAs
  involve discrimination against non-member
  countries.

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• Trading bloc a group of countries that join
  together in some form of agreement in order to
  increase trade between themselves and or to gain
  economic benefits from cooperation on some level.
• Different levels of economic integration
• Free trade area
• Customs union
• Common market
• Monetary union
• Complete economic integration

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Trading blocs

• Free trade area (FTA). A group of countries that
  agree to gradually eliminate trade barriers
  between themselves. Each country keeps the right
  to apply protectionist policies when trading with
  non-member countries. The trade of some products
  might still be protected.
• Examples NAFTACA, MX, US ASEAN
• One problem is that a product may be imported
  into the FTA by the country that has the lowest
  external trade barriers and then sold to
  countries within the FTA with higher external
  barriers. To avoid this rules of origin.

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• Customs union. Same conditions as FTA plus
  adoption of common policy towards non-member
  countries. Also, in negotiations with other
  countries the member countries act as a group.
  Higher degree of economic integration than a FTA.
• Example CEFTA (Central European Free Trade
  Agreement), SACU (South African Customs Union).
• Advantage same common external barriers, so no
  need to create rules of origin for imports.
• Disadvantage Possibility of disagreements, as
  members must coordinate their policies towards
  non-members.

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• In a common market, countries that have formed a
  customs union decide to eliminate any remaining
  barriers to trade between them. In addition, they
  agree to eliminate all restrictions on movements
  of factors of production (labour and capital)
  within the common market.
• Example European Economic Community, precursor
  of the EU.
• Advantages
• Free trade, which implies lower prices, greater
  consumer choice, etc
• Workers are free to move and capital can also
  flow without restrictions. This results in a
  better use of factors of produciton and improves
  the allocation of resources.

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• Disadvantages
• Requires even greater policy coordination among
  members.
• Requires the willingness of member governments to
  give up some of their policy making authority to
  an organisation with powers over all the member
  governments.
• A long time is needed for all countries to make
  the necessary policy changes to achieve
  coordination.

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• Economic and monetary union. Economic union
  involves the unification of the monetary and
  fiscal systems of the members, with a unified
  system of economic policy making. Countries
  maintain political identity.
• Monetary union is achieved by adopting a common
  currency. Ex eurozone countries.
• Eurozone countries still have separate fiscal
  systems and only a partially unified
  policy-making system.

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Pros and cons of trading blocs

• Benefits
• Increased competition.
• Expansion into larger markets.
• Economies of scale.
• Lower prices for consumers and greater consumer
  choice.
• Increased investment internal by firms from a
  member country or external by outsider firms,
  which escape the tariff imposed by the trading
  bloc on imports from outside.

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1. Better use of factors of production, especially
   if a trading bloc develops into a common market.
2. Improved production efficiency and greater
   economic growth.
3. Political advantages Reduced likelihood of
   hostilities between countries becoming
   increasingly interdependent and political
   cooperation resulting from economic integration.

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• Disadvantages
• Many economists think that trading blocs are
  inferior to the WTOs multilateral approach of
  reducing trade barriers towards all countries.
  Trading blocs involve an increasing amount of
  discrimination, which violates the WTOs
  non-discrimination principle.
• May create obstacles for global free trade. Some
  economists believe that conflicts between trading
  blocs might arise, difficulting the process of
  global integration. Trade barriers on non-members
  may result in limiting trade on a global scale,
  which would worsen the allocation of resources,
  lower global output and a weakened role for the
  WTO.
• Unequal distribution of gains from trading blocs,
  as not all members obtain the same benefit.

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Monetary union the EMU

• Involves a greater degree of integration than a
  common market and occurs when the member
  countries of a common market adopt a common
  currency and a common central bank responsible
  for monetary policy.
• EMU
• Created in 1999 by 11 European countries A, BE,
  FI, FR, G, IR, IT, L, NL, PT, SP.
• 2001 GR 2007 Slovenia 2008 CY, MT

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• 1 January 1999 birth of the euro. The
  currencies of the member countries are locked
  together through fixed and unchangeable exchange
  rates.
• 1 January 2002 euros and national currencies
  co-exist
• 1 January 2003 national currencies are
  abandoned.
• Convergence requirements
• Limiting inflation rate
• Limiting budget deficit (T-G) to 3 of GDP
• Limiting gov. debt to 60 of GDP
• The ECB assumed the responsibility for monetary
  policy for all members.

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Advantages

• Eliminates exch rate risk and uncertainty ?
  benefits for importers, exporters and investors ?
  encourages trade and investment across
  boundaries.
• Eliminates transaction costs, which encourages
  trade.
• Encourages price transparency ? easier for econ
  decision makers to see price differences quickly
  ? promotes competition and efficiency.

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• Low inflation rates, which gives rise to low
  interest rates ? more investment, increased
  output.
• Promotes higher level of inward investment (from
  outsiders towards the member countries), due to
  absence of currency risk.

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Disadvantages

• Loss of exch rates as a mechanism of adjustment.
  Currency depreciation/devaluation cannot be used
  to solve trade deficit problems or loss of
  competitiveness (due to higher inflation rate).
• Loss of monetary policy as an instrument of
  economic policy. Monetary policy carried out by
  ECB to achieve price stability for the region as
  a whole. Individual countries unable to carry out
  their own monetary policy.
• Fiscal policy constrained by convergence criteria
  (on public debt and government deficit). This
  limits govs ability to borrow according to
  domestic needs and priorities.

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• Monetary policy by the ECB will have different
  impacts on each member, since they will differ in
  theoir UE, inflation levels and where they are in
  the business cycle.