Regional Economic Integration

Question 1

What is REI

Answer 1

Using a set of rules or intergovernmental organisations to create economic integration

Question 2

What are the 6 types of REI

Answer 2

1) Free Trade Area - Some chosen tariffs or quotas, NTBs exist
2) Customs Unions - FTA with external trade policies, NTBs exist
3) Common Market (Custom Union removing NTBs)
4) Economic Union (EU)
5) Monetary Union (Eurozone)
6) Political Union (UK) –> Economic/Monetary union with political control

Question 3

Why have an REI

Answer 3

Rule of Origin Problem
Reduced Tariff and NTBs
Monetary policy can be unified to reduce exchange rate risks

Question 4

What are the static effects of REI

Answer 4

Improved resource allocation

BUT

Adjustment costs
Free movement of labour and capital changes labour market conditions and ownership of firms

Question 5

What are the dynamic effects of REI

Answer 5

Increase in trade, capital and labour flows. stimulates internal and external economies of scale, leads to decrease in cost and increase in quality

BUT

Adjustment costs
Growth in some regions but decline in others
Problems adjusting to new tech

Question 6

Trade Creation and Diversion

Answer 6

REI can create trade between members, but divert trade from those outside the REI and also those who are not s competitive inside.

Question 7

Major effects of different types of REI

Answer 7

FTA basically static and dynamic.

Customs Union eliminates Rule of Origin problem, but can create trade diversion and adjustment costs

Common Market means inclusion of services, capital, labour and improved allocation of resources, but loss of national sovereignty, adjustment costs, decline in less competitive regional industries.