Regional Economic Integration

REGIONAL
ECONOMIC
INTEGRATION
What is Regional Economic Integration
 Regional economic integration can be best defined as an
agreement between groups of countries in a geographic
region, to reduce and ultimately remove tariff and non-tariff
barriers to the free flow of goods, services, and factors of
production between each other.
 Regional integration helps countries- especially small and
medium sized countries--- scale up their supply capacity
through regional production networks and become more
globally competitive. This development could take place
through sector wide transformations in agriculture,
manufacturing, and services.
Four main types of Regional Economic Integration
I. FREE TRADE AREA- This is the most basic form of economic cooperation. Member countries
remove all barriers to trade between themselves but are free to independently determine trade
policies with nonmember nations. An example is the North American Free Trade Agreement
(NAFTA).
II. CUSTOMS UNION -This type provides for economic cooperation as in a free-trade zone. Barriers
to trade are removed between member countries. The primary difference from the free trade
area is that members agree to treat trade with nonmember countries in a similar manner.
III. COMMON MARKET-This type allows for the creation of economically integrated markets
between member countries. Trade barriers are removed, as are any restrictions on the
movement of labor and capital between member countries. Like customs unions, there is a
common trade policy for trade with nonmember nations. The primary advantage to workers is
that they no longer need a visa or work permit to work in another member country of a common
market. An example is the Common Market for Eastern and Southern Africa (COMESA)
IV. ECONOMIC UNION-This type is created when countries enter into an economic agreement to
remove barriers to trade and adopt common economic policies. An example is the European
Union (EU)
PROS
The pros of creating regional agreements include the following:
• Trade creation. These agreements create more opportunities for
countries to trade with one another by removing the barriers to trade and
investment. Due to a reduction or removal of tariffs, cooperation results
in cheaper prices for consumers in the bloc countries. Studies indicate
that regional economic integration significantly contributes to the
relatively high growth rates in the less-developed countries.
• Employment opportunities. By removing restrictions on labor
movement, economic integration can help expand job opportunities.
• Consensus and cooperation. Member nations may find it easier to
agree with smaller numbers of countries. Regional understanding and
similarities may also facilitate closer political cooperation.
CONS
The cons involved in creating regional agreements include the following:
• Trade diversion. The flip side to trade creation is trade diversion. Member countries
may trade more with each other than with nonmember nations. This may mean
increased trade with a less efficient or more expensive producer because it is in a
member country. In this sense, weaker companies can be protected inadvertently with
the bloc agreement acting as a trade barrier. In essence, regional agreements have
formed new trade barriers with countries outside of the trading bloc.
• Employment shifts and reductions. Countries may move production to cheaper labor
markets in member countries. Similarly, workers may move to gain access to better
jobs and wages. Sudden shifts in employment can tax the resources of member
countries.
• Loss of national sovereignty. With each new round of discussions and agreements
within a regional bloc, nations may find that they have to give up more of their political
and economic rights. In the opening case study, you learned how the economic crisis
in Greece is threatening not only the EU in general but also the rights of Greece and
other member nations to determine their own domestic economic policies.
The Economic Geography of Regional Integration
The removal of tariff and nontariff barriers across national

borders can enable small and medium-sized firms to
consolidate, specialize, and gain economies of scale in
production that will help them achieve competitiveness on a
regional and global scale.
Steps to Regional Integration
1. Start Small
2. Think Global
3. Compensate the least fortunate
Does Regional Integration Confound Global Trade?
 Groups of countries all over the world have formed various

kinds of economic cooperation agreements, primarily to
enhance issues of mutual interest - not solely trade.
 Economists are concerned that as a result of these
negotiations, the prospects of creating a truly open global
economic system that benefits all countries may recede.
Some governments may initiate regional pacts to cement
diplomatic, environmental, or security ties and risk slowing
the momentum behind multilateral (global) trade
liberalization.
The European Union
The EU, Headquartered in Brussels, Belgium, is the most highly
evolved example of regional integration in the world. It is already in the
fourth stage of the economic integration process and is moving toward
the final step that requires political union with common defense and
foreign policy instructions. After the devastation of infrastructure in
Europe during World War II, the United States helped to rebuild Europe
through Marshall Plan. The International Bank for Reconstruction and
Development was established in 1944 to help rebuild and stabilize
European economies. The objective of all of these initiatives was to
create strong, democratic, independent, and united Europe based on
free-market principles and open economic systems.
The European Union
The origins of the EU can be traced to the creation of the European
Coal and steel community (ECSC), which established a common market
in coal, steel, and iron ore among the six founding member countries:
France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg
in 1952. The objective of ECSC was to encourage member countries to
cooperate in steel production, thereby preventing these countries from
warring with each other. Thus, peace and prosperity were the primary
reasons for the creation of ECSC.
The North American Free-Trade Agreement (NAFTA)
NAFTA is a comprehensive free-trade agreement among Canada,

United States and Mexico that addresses issues ranging from the
protection of workers’ rights and the environment to phased reduction
of tariff and nontariff trade barriers, which were finally eliminated in
2009.
NAFTA has three major objectives. First is the expansion of trade in

goods and services through the phased elimination of all trade barriers
including tariffs, quotas, and licensing restrictions, among the parties.
Second is the protection of intellectual property rights. Third is the
creation of institutions to address potential problems.

Association of South East Asian Nation (ASEAN)
ASEAN was founded half a century ago in 1967 by the five Southeast Asian
nations of Indonesia, Malaysia, Philippines, Singapore and Thailand. This was
during the polarized atmosphere of the Cold War, and the alliance aimed to
promote stability in the region. Over time, the group expanded to include its
current 10 members. Brunei joined in 1984, Vietnam in 1995, Laos and
Myanmar in 1997, and Cambodia in 1999.
The Association of Southeast Asian Nations (more commonly known as
ASEAN) is an intergovernmental organization aimed primarily at promoting
economic growth and regional stability among its members.
 Regional cooperation was further extended with the creation of the ASEAN
Plus Three forum in 1997, which included China, South Korea and Japan. And
then the East Asia Summit, which began taking place in 2005 and has
expanded to include India, Australia, New Zealand, Russia and the United
States.
ASEAN Security Community (ASC)
 Since ASEAN’s establishments in 1967, tension has never

escalated into armed confrontation among its member
countries. Its objective is to ensure that countries in the
region live in peace with one another and rely exclusively on
peaceful processes in the settlement of intra-regional
differences.
ASEAN Economic Community
 The goal is to create a stable, prosperous, and highly competitive

ASEAN economic region, in which there is free flow of goods, services,
investment, and capital; and simultaneously to reduce poverty and
socioeconomic disparities. Although the ASEAN Economic Community
calls for the establishment of a single market and production base,
unlike the EU it does not call for the free movement of labor across
ASEAN. Launched in 1992, the ASEAN Free Trade Area has been in
place since 2007.
 It aims to promote economies of scale and specialization in
production by eliminating tariff and nontariff barriers among member
countries. Other major integration-related economic activities include:
financial sector liberalization; road, railway, pipeline, seaport, and
airport connectivity and modernization; interconnectivity of
telecommunication services; and human resource development.
ASEAN Sociocultural Community
 The objective is to ensure that the ASEAN workforce is well prepared

to benefit from the economic integration process that is underway.
Programs are being put into place through investments in basic and
higher education; training, R&D, and raising the standard of
disadvantaged groups and rural population through better public
health care and social protection.
Regional Integration In Latin America
 Although the countries of Latin America have significant natural as well as

human resources, the region has been a patchwork of constantly changing
regional trade and investment agreements as will be discussed next.
 The first step toward free trade in Latin America was taken with the signing
of treaty of Montevideo in 1960, creating the Latin American Free Trade
Association (LAFTA). Seven countries – Argentina, Brazil, Chile, Mexico,
Paraguay, Peru, and Uruguay --- indicated their intention to create a free
trade zone by 1972, but this was not completed because members were
unable to agree upon the timetable and the phased lowering of tariff
barriers. In 1969, frustrated by the lack of progress in LAFTA, Bolivia, Chile,
Columbia, Ecuador and Peru joined in creating the Andean Group, which
aimed to create economic integration through reduced taxes, a common
external tariff, and investment in the poorer industrial areas of their
respective countries

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REGIONAL

The removal of tariff and nontariff barriers across national

 Groups of countries all over the world have formed various

NAFTA is a comprehensive free-trade agreement among Canada,

NAFTA has three major objectives. First is the expansion of trade in

 Since ASEAN’s establishments in 1967, tension has never

 The goal is to create a stable, prosperous, and highly competitive

 The objective is to ensure that the ASEAN workforce is well prepared

 Although the countries of Latin America have significant natural as well as

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