Chapter 9 -Regional Economic Integration Flashcards
Levels of integration
- Free trade area
- Customs union
- Common market
- Economic union
- Political union
The EU is at economic union meaning it has 1,2,3,4 but not political union
Regional Economic Integration
WTO must be notified, EU has been most ambitious
Free trade area
All barriers to the trade of goods and services among member countries are removed:
no discriminatory tariffs within trade agreement, each country can set its own standards for other countries
most popular form of integration (90%)
Customs Union
Eliminates trade barriers between member countries and adopts a common external trade policy. Usually with intent of further integration down the road
EU started as customs union
Common market
No barriers to trade among member countries, includes a common external policy, and allows factors of production to move freely among members (no restriction emigration/immigration)
–> requires harmony on fiscal, monetary and employment policies
EU did this
Economic Union
Involves the free flow of products and factors of production among member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy
EU is an economic union except
- not all countries adopted the EURO
- differences in tax rates and regulations
- some markets like the one for energy still not fully deregulated
Political union
A central political apparatus coordinates the economic, social, and foreign policy of the member states (EU is on the way to this, US independent states are example of this)
economic case for integration
- all countries gain from free trade and investment
- assumes ideal absence of barriers to the free flow of goods, services, and factors of production among nations
- regional economic integration can achieve better results than under WTO
- easier among limited amount of countries than the world
why better when smaller agreement than worldwide
coordination and policy harmonization,
reconciliation of perspectives
motivated by desire to exploit gains from free trade
political case for integration
creates incentives for political cooperation, reduce potential violent conflicts, enhance political weight in world when dealing with other countries
–> this is what underlies the EC in 1957, before the EU
Impediments to integration
high costs (benefit overall, but could cause losses for certain groups and painful adjustments like job losses) loss of national sovereignty (give up some extent to control monetary, fiscal and trade policies)
Case against regional integration
only beneficial if it creates more than it diverts trade
Trade creation
high-cost domestic producers are replaced by low-cost producers within the free trade area. May also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area
Trade diversion
Occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area
Evolution of EU
- The devastation of western Europe during two world
wars and the desire for lasting peace - The European nation’s desire to hold their own on the
world’s political and economic stage - Treaty of Rome: provided for the creation of a common
market
Four main institutions of the EU
- European commission
- European council
- European parliament
- Court of justice
European commission
EU legislation, monitoring compliance
Run by commissioners appointed by member countries and approved by Europe parliament
European council
Represents the interests of member states
Ultimate controlling authority within the EU because draft legislation from the commission can become EU law only if the council agrees
Composed of one representative from the government of each member state
Ex: When agricultural issues are being discussed, the agricultural ministers from each state attend the council meetings
European parliament
751 members, directly voted by population of member states
consultive not legislative
debates legislation forwarded to them by the council and proposed by the commission
propose amendments
veto laws
Treaty of Lisbon: the power of the parliament was increased
Court of justice
one judge of each country
like commissioners, required to act as independent officials rather than representatives of national interest
The single European act
Born out of frustration among members that the community was not living up to its promise, short on achieve free trade –> EC responded with Delors Commission –> resulted in the act
objectives of the Act
Remove all frontier controls
applying mutual recognition to product standards
institute open public procurement to lower costs suppliers to enter the national economy
lift barriers to competition in banking and insurance industry
remove restrictions on foreign exchange transactions
abolish restrictions on cabotage
Impact of the Act
restructuring of substantial sections of the European Industry
shifted from national to pan-European production and distribution systems in attempt to realize scale economies and better compete in a single market
faster economic growth
moving towards a single marketplace, but difference in culture, language and laws have made it uneven
Establishment of the EURO
Maastricht Treaty → Committed EC members to adopt a common currency by January 1st, 1999. Must fulfill conditions:
-> price stability
-> sound fiscal situation
-> stable exchange rate
-> converged long term interest rates
requires the countries to give up national sovereignty on monetary policy
Benefits of the EURO
- savings from having to handle one currency
- easier to compare prices
- development of highly liquid pan-european market
- increase range of investments to both individuals and institutions
Costs of EURO
- loss of sovereignty
- loss control over monetary policy
- not an optimal currency area
i. e. Finland and Portugal have different wage rates, tax regimes, and business cycles, and they may react very differently to external economic shocks
- –> to deal with this, EU could pump money from more prosper regions to depressed regions (fiscal transfers)
qualifications to become EU
Applicants had to privatize state assets Deregulate markets Restructure industries Tame inflation Shrine EU laws into their own system Establish stable democratic governments Respect human rights (Turkey was denied because of human rights concerns)
British exit from EU
national referendum to leave the EU based on loss of national sovereignty and immigration issues
- > the British were often against the decisions taken by EU
- > seen as counterweight to economic power Germany
- > would allow GB to take control of immigration
Regional economic integration in America
Most significant attempt is the North American Free Trade Agreement others are the Andean community and Mercosur
Nafta’s content
- Abolition by 2004 on tariffs on 99 percent of the goods
- Removal of most barriers on the cross-border flow of services, allowing financial institutions
- Protection of intellectual property rights
- No restrictions on foreign direct investment
- National environmental standards
- Establishment of two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages or child labour are ignored.
The case for NAFTA
opportunity to create enlarged and more efficient productive base
- Low cost labour in Mexico allows for Canada and US to compete in globalization
- Mexico has comparative advantage in labour intensive low skill
- increased imports by mexico
The case against NAFTA
- profit from Mexico less strict rules (environmental)
- loss of jobs in Canada/US and wage decline
- Mexico lose its sovereignty because high paying jobs would be north of their border
NAFTA results
small but positive
increased trade among three member states
strong productivity growth
employment effect moderate but small (trump and sanders blame it for job losses)
Andean community
based on EU model, but less successful in 1969
Goals failed: internal tariff reduction program, a common external tariff, a transportation policy, a common industrial policy and special concessions for the smallest members
NOW: Low economic growth, hyperinflation, high unemployment, political unrest and crushing debt burdens
signed with Mercosur to work on those measures again
Mercosur
started with argentina and brazil but grew to include others because of its success
may be diverting trade instead of creating it
CAFTA
Central america free trade agreement (US is included)
lower trade barriers for 6 countries and US
CSME, ASEAN and AFTA, EAC
trade agreements elsewhere, and the African is told to be in need of tariffs to protect its fragile economy, so progress is slow
