Regional Integration: Zollverein & European Unity

• Regional integration involves the voluntary linking of formerly independent states in economic and political areas.
• It means shifting authority over key national policies to a supranational level.
• Germany, Italy, and France experienced regional integration in the 19th century.
• Prussia partnered with Hesse-Darmstadt to create a customs union called the German Zollverein.
• Count Goluchowski of Austria-Hungary advocated a unified Europe.
• Early projects to achieve unity faced unsuccessful outcomes.
• The Zollverein was a union of German states managing tariffs and economic policies.
• The Zollverein Treaties were signed in 1833.
• The Zollverein was formally launched on January 1, 1834, under Prussian leadership.
• It established a free trade area across much of Germany.
• It included most German states but it excluded the German Confederation.
• The Zollverein was history's first case of full economic union without political union.

Regional Integration in 20th Century Europe

• This occurred after WWII.
• Nation-states merged to form a prosperous economy.
• The European Coal and Steel Community (ECSC) was formed in 1952.
• The Treaty of Rome in 1957 established the European Community, with six founding members including Germany, France, Italy, Belgium, Luxembourg, and The Netherlands.
• The European Union (EU) underwent its first enlargement in 1973.
• The UK, Denmark, and Ireland joined the EU.
• The European Union (EU) deepened integration in 1993.

Regional Integration in Latin America and Asia

• The Latin American Free Trade Association and the Andean Pact formed in the 1960s.
• Mercosur and NAFTA emerged in the 1990s.
• The Association of the Southeast Asian Nations (ASEAN) formed in 1967.
• The Asia-Pacific Economic Cooperation Forum (APEC) established in 1989.

Causes of Voluntary Integration

• The process is complex with recurring regularities and is driven by different forces.
• There is a general logic.

Peace-building

• Post WWII politicians devised a new structure of European governance that would eradicate conflicts.
• Supranational control over warfare resources was established via the ECSC.
• Rival regional integration took form as EFTA.

Theories of Regional Integration

• Theories include political science and economics.

Neofunctionalism

• Functionalism is its predecessor theory.
• Supranationality is the path to state welfare.
• Nation-states become obsolete because of specific forces.
• Supranational decision-making is often more efficient.
• Membership requests timings depend on different factors.
• External events play a role in regional integration.

Intergovernmentalism

• Heads of State play a central role
• Bargains are made among lead political leaders of major states in a region.
• Power is a related variable.
• Small states are often bought off through side-payments.

Economics

• Market relationships exist.
• Institutional and political forces not relevant.
• Customs union theory covers trade creation, trade diversion, and terms of trade.
• Regional integration causes welfare gains and losses.

Bridging Political Science and Economy

• Functionalism in IR is the predecessor of neofunctionalism.
• David Mitrany (1888-1975) developed functionalism.
• Mitrany published "The Functional Theory of Politics" in 1975.
• Mitrany worked toward developing an effective peace organization which later became the UN.
• Midtrany was a member of the Foreign Office's academic intelligence unit during WWII.

Working Peace System

• Advocated a functional organization in "Agenda of peace-making."
• A "Working Peace System"(1943) was translated into various languages.
• A new peace organization would develop along functional and sociological lines.

Functionalism and Sovereignty

• Sovereignty transfers effectively through function.
• Peace spreads "by pieces."
• Functional cooperation starts from low-key economic and social planes.
• Scarce resources, labor, public health, and commodity prices are managed jointly.
• Prosperity through global economic integration guarantees a stable international system.
• Economic unification leads to political unification.

Ernst B. Haas (1958) The Uniting of Europe

• Nation-states stop being wholly sovereign.
• Nations voluntarily mingle and merge with neighbors.
• Political actors shift loyalties toward a larger center with jurisdiction over pre-existing states.
• Primary actors are both above and below the nation-state.
• Actors below the state include interest groups and political parties.
• Actors above the state include supranational regional institutions.
• Integration is promoted by fostering the development of interest groups and cultivating ties with them.
• The government role is creatively responsive in either accepting, sidestepping, or ignoring federal authority decisions.

Community Formation

• Dominated by nationally constituted groups with specific interests and aims.
• These groups adjust aspirations by profiting through supranational means.
• Supranational actors expand their own institutions to influence community affairs.

The Process

• Functional spillover impacts different sectors that are highly interdependent in a modern industrial economy.
• Integrative action in one sector requires further actions in related sectors.
• Elites recognize substantial problems cannot be addressed domestically via political spillover.
• Member states experience difficulties but need agreement to safeguard interdependence and upgrade common interests.
• Swapping concessions happens.
• States refrain from vetoing proposals.

The Context

• Economic, social, and technical matters become nominally apolitical.
• Ultimate economic and social problems are inseparable from the political.
• Functionalism assumes a relationship between economics and politics,
• Neofunctionalism assumes this relationship is continuous.
• The supranational style stresses the indirect penetration of the political via the economic.

Intergovernmentalism

• Key actors focus on Heads of State
• Bargains happen among political leaders of major states in a region.
• Power-related variables are important.
• Big states exercise a de facto veto over integration rules.
• Small states are bought off.
• Governments play an important role in integration.

Security Dimension of Integration

• Integration is explained in "Power politics and international trade" (1993) by Joanne Gowa and Edward Mansfield.
• Politico-military alliances effects, colonial relationships, and wars impact bilateral trade.
• Trade is higher among allied countries vs adversaries.
• Alliances help minimize security risks with trade.
• Commercial exchange is promoted, which generates wealth and strengthens alliances.

Customs Union Theory

• Theory focuses on markets of goods.
• Theory focuses on Jacob Viner’s (1950) “The Customs Union Issue”.
• It eliminates intra-area trade barriers
• It equalizes tariffs on imports from non-member countries.

Trade Creation Effect

• Inefficient industries are replaced by cheaper imports from efficient member states.
• Increases economic welfare.
• trade increases between two countries due to a customs union formation.
• Reduced tariffs and trade barriers increase trade and economic activity.

Trade Diversion Effect

• Customs union's external tariff against third countries can cause a trade diversion effect.
• Suppliers with the lowest costs have a competitive disadvantage.
• Tariffs discourage imports from third countries.
• Imports from less efficient sources are encouraged.
• Reduces a country's economic welfare.

Net Welfare Effect of a Customs Union

• Empirical questions must be asked.
• It depends on trade amounts, unit costs, transportation costs, and economies of scale.
• The degree of trade diversion must be small.
• Members must have trade among themselves.
• Common tariff must be low.
• A global union avoids all trade diversion.

Motives of Customs Unions

• Customs unions have an impact on terms of trade.
• Terms of trade are the ratio of average price of exported goods to imported goods.
• Improved terms of trade increase the amount of imports that can be purchased.
• Prices of exported goods increase relative to the prices of imported goods
• Countries can purchase more imports for same amount of exports.
• Export prices are likely to fall after outside tariff imposition.
• The terms of trade gain may offset the welfare loss due to trade diversion.
• Integration has a major economic effect.

Changed Preferences

• A preference is shown for domestic goods.
• Countries at a comparative disadvantage want more domestic production.
• Customs unions align with frameworks like GATT.

Optimal Currency Area Theory

• It understands conditions under which to create a currency union.
• The theory focuses on money, goods, and production markets.
• Optimal currency area: a geography where a single currency makes the most economic sense.
• Traditionally, each country maintains its own currency.
• Robert Mundell wrote "A Theory of Optimal Currency Areas" (1963).
• Benefit countries that share strong economic ties.
• Capital markets and trade are facilitated through closer integration.
• Each country loses ability to direct fiscal and monetary policy for individual economies.

Fiscal Federalism

• It is not concerned with changes in governance policy rules.
• Theories are static
• Focus is placed on market relations,
• No emphasis is placed on institutions.
• Political and supranational.
• Regional integration implications go beyond trade.
• Participating countries share common conduct rules and reciprocal obligations.
• Complex regulatory problems remain once tariffs are removed.

Reciprocal Relationship Factors

• Reasons for adopting a federal structure are examined.
• Fiscal federalism refers to the distribution of taxation and spending powers.
• Fiscal federalism issues relate to regional institution-building.
• Free trade, capital mobility, and monetary union have raised the coordination desirability of fiscal coordination among EU member states.
• Coordination ranges from simple agreements to mutually adopted policies.

Balassa Stages of Regional Integration

• Free Trade Area(FTA), abolishes tariffs and quotas for imports but each retains tariffs.
• Customs Union (CU), sets a FTA common tariffs for trade.
• Common Market (CM), abolishes tariffs and restrictions on factor movement.
• Economic Union (EUN), market with co-ordination.
• Total Economic Integration, is where relevant policies must comply with subsidiarity.

Preferential Trade Arrangements (PTAs)

• Prefer lower trade barriers than on trade with non-member nations.
• The loosest form of economic integration.
• The UK had the the British Commonwealth Preference Scheme with members and former members of the British Empire, in 1932.
• The WTO has a database on the PTAs. _ PTAs undergoing implementation have to follow The Transparency Mechanism for PTAs in 2010.
• Non-reciprocal preferential schemes are PTAs.

WTO – Regional Trade Agreements (RTAs)

• RTAs have increased with a notable increase in plurilateral agreements.
• WTO has core principles of, Non- discrimination.
• Under WTO, RTAs are reciprocal preferential trade agreements subject to rules.
• Free trade areas (FTAs) and Customs unions (CUs).
• Trade barriers are removed in free trade areas wherein.
• retains it trades to nonmembers each nation.

Free Trade Association

• 1960 - the European Free Trade Association (EFTA): the UK, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland
• 1993 - the North American Free Trade Agreement (NAFTA), formed by the USA, Canada, and Mexico.
• A customs union allows no tariffs, harmonizes all, barriers to addition.
• 1957 -the Netherlands Luxembourg trade policies toward the world setting Common Market: West Germany, France, Italy, Belgium.
• the Zollverein by 1834. _ Sovereign states: by significant a number of in large proved, which Germany.

• By allowing movement of labour, unions are increasing the a customs market is:
• the status of the union market 1993.
• state policies the and by unioning or still further economics states are by:

Points:

• Luxembourg Union Belgium: Benelux the now after the, formed EU World economic:
• US WWII a complete.
• Free, development zones.: Recent duty zones.
• Materials and foreign intermediate duty investments countries these.