Economic Integration PDF

ECONOMIC INTEGRATION: A process whereby countries cooperate with one another to reduce or eliminate barriers to the international flow of products, people or capital. Aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agr...

ECONOMIC INTEGRATION: A process whereby countries cooperate with one another to reduce or eliminate barriers to the international flow of products, people or capital. Aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement. TWO APPROACHES TO ECONOMIC INTEGRATION: INTERNATIONAL APPROACH Involves international conferences under the World Trade Organization (WTO). The purpose of the international conference is to reduce barriers to international trade and investment. a firm may be able to produce and sell more products, earning more revenue, and increasing their home country's gross domestic product (GDP). WTO: the only global international organization dealing with the rules of trade between nations. ECONOMIC APPROACH Involves agreements among a small number of nations whose purpose is to establish free trade among themselves while maintaining barriers to trade with the rest of the world. Example: European Union LEVELS OF ECONOMIC INTEGRATION As the level of economic integration increases, so does the complexity of its regulations. This involves a set of numerous regulations, enforcement, and arbitration mechanisms to ensure that importers and exporters comply. The complexity comes at a cost that may undermine the competitiveness of the areas under economic integration since it allows for less flexibility for national policies and a loss of autonomy. The devolution of economic integration could occur if the complexity and restrictions it creates, including the loss of sovereignty, are no longer judged to be acceptable by its members.  FREE TRADE Tariffs between member countries are significantly reduced, and some are abolished altogether. The general goal of free trade agreements is to develop economies of scale and comparative advantages, promoting economic efficiency. ○ Economies of scale occur when more units of a good or service can be produced on a larger scale with (on average) fewer input costs. Example: Stores such as Costco and Walmart are examples of economies of scale. They utilize this principle by buying huge quantities of goods in order to receive low bulk prices, and they pass on the savings to their customers. A large and complex economy having a free trade agreement with smaller economies is better positioned to negotiate advantageous clauses and dispute resolution. A challenge concerns resolving disputes as free trade agreements tend to offer limited arrangements and dispute resolution mechanisms. Therefore, they are prone to the respective influence and leverage of the involved nations, which can lead to different outcomes depending on their economic size. Free Trade Agreements ○ The United States has comprehensive free trade agreements in force with 20 countries. These are: Australia Bahrain Canada Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Honduras Israel Jordan Korea Mexico Morocco Nicaragua Oman Panama Peru Singapore USMCA Tariff Bloc: is a group of countries that reduce or eliminate tariffs to enhance the free flow of goods. Examples of tariff bloc groups, NAFTA and the European union. North American Free Trade Agreement (NAFTA), a controversial trade pact signed in 1992 that gradually eliminated most tariffs and other trade barriers on products and services passing between the United States, Canada, and Mexico. Benefits of tariff bloc NAFTA led to lower prices the benefited consumers Economies of scale occur when more units of a good or service can be produced on a larger scale with (on average) fewer input costs. Example: Stores such as Costco and Walmart are examples of economies of scale. They utilize this principle by buying huge quantities of goods in order to receive low bulk prices, and they pass on the savings to their customers. CUSTOM UNION: ○ agreement between two or more countries to remove trade barriers and lower or eliminate tariffs. ○ Sets common external tariffs ( a tariff, or tax, applied to imported goods by a group of countries that have formed a customs union.) among member countries, implying that the same tariffs are applied to third countries, a common trade regime is achieved. ○ Useful to level the competitive playing field and address the problem of re-exports where importers can be using preferential tariffs ( Levy lower rates of duty on imports from one another than they do on imports from third countries) in one country to enter (re-export) another country with which it has preferential tariffs. Example: Central American Common MArket (CACM) with custom union member: Honduras, nicaragua, Guatemala Example: European Union COMMON MARKET: ○ Services and capital are free to move within member countries, expanding scale economies and comparative advantages. ○ However, each national market has its own regulations, such as product standards, wages, and benefits. ○ is an agreement between two or more countries removing all trade barriers between themselves, establishing common tariff and non-tariff barriers for importers, and also allowing for the free movement of labor, capital and services between themselves.  Example: the European Common Market, which aims to provide the free movement of goods, capital, services, and labor within the European Union. ECONOMIC UNION: ○ All tariffs are removed for trade between member countries, creating a uniform market. ○ There are also free movements of labor, enabling workers in a member country to move and work in another member country. ○ Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. ○ monetary union where a common currency is used, such as the European Union (Euro). Example: The European Union (EU) ○ The countries of the EU coordinate their respective economic policies, laws and regulations so they can work together to address economic and financial issues. The EU also has a common currency, the Euro, used by 19 EU members. POLITICAL UNION: (also known as legislative union or state union) ○ Represents the potentially most advanced form of integration with a common government and where the sovereignty of a member country is significantly reduced. ○ Only found within nation-states, such as federations where a central government and regions (provinces, states, etc.) have a level of autonomy over well-defined matters such as education. Example: Example is the US where each US state has its own government that sets policies and laws. But each state grants control to the federal government over foreign policies, agricultural policies, welfare policies and monetary policies. Goods, services, labor and capital can all move freely without any restrictions among the US states and the government sets a common external trade policy Advantages of the levels of economic integration: Helps developing nations take advantage of economies of scale by integrating with developed nations. Expands production capacity and creates new opportunities. Supports international specialization. Leads to the development of new products with quality output. Free flow of labor, capital, and goods. Increases bargaining power, efficiency, and productivity levels of small countries. Creates political harmony between member countries. Disadvantages Trade diversions may deflect small countries’ economies and land and contribute to member countries. Developing countries become dependent on more developed nations, thus becoming depressed regions. Member nations must follow trade regulations and monetary and fiscal policies set by non-member nations. Increased competition may harm high-cost producers. Can lead to a political disturbance and rivalry between two nations.