3 Regional Economic Integration

Regional Economic
Integration
Unit 3

You should be able to:
• Explain regional economic integration, its evolution, and
its benefits and costs.
• Identify how economic geography helps explain, promote,
and segment regional integration blocs.
• Identify the primary reasons why countries are now
seeking to pursue regional integration at the expense of
multilateral trade liberalization.
• Explain why the European Union is seen as the most
advanced regional integration bloc.

You should be able to:
• Describe how NAFTA has affected U.S.–Mexico bilateral
trade in goods and services.
• Explain the importance of ASEAN and indicate why Asia
may become the most important free-trade region for
this century.
• Explain why regional integration in Latin America is
challenging and why there is potential for a grouping like
MERCOSUR to become more predominant.

What Is Regional Economic
Integration?
• Despite the fact that global trade and investment
liberalization can lead to global benefits—greater volume
of trade and investment across countries, faster economic
growth, job creation, tax revenues, increased
competition, and increased consumer welfare—some
countries prefer to work more closely within a regional
setting.

Integration?
• Regional integration includes a multitude of economic
and/or political steps that may be taken by member
states of a union to increase their global
competitiveness—not only preferential trade access.
• Regional integration helps countries—especially small and
medium-sized countries—scale up their supply capacity
through regional production networks and become more
globally competitive. (e.g. agriculture, manufacturing, and
services)

Integration?
• For regional integration to be successful, member
countries need to undertake spatial transformations i.e.
allowing efficient geographic distribution of economic
activities within and among countries.
• Furthermore, regional integration strategies need to be
customized to the economic geography (to make the best
use of the size and location) of the countries involved and
their openness to interaction with major world markets.

Stages of Regional Integration
Free-
trade area
Customs
union
Common
market
Economic
union
Political
Union

• First, two or more countries may create a free-trade area
by eliminating all barriers to trade, such as tariffs, quotas,
and nontariff barriers like border restrictions, while
keeping their own external tariffs (within WTO guidelines)
on members not included in the free-trade area.

• Second, when countries within a free-trade area have
differential external tariffs, imports will primarily enter
the free-trade area through the country that has the
lowest external tariffs and trade restrictions, thereby
causing other free-trade member countries to lose import
business.
• This may eventually lead to the creation of a customs
union, in which all free-trade member countries would
need to adopt a common external tariff with nonmember
countries.

• Third, within the member countries of the customs union,
investment (hence business and job opportunities) will
flow to countries that have the highest labor productivity
and low capital cost.
• This, in turn, may encourage the removal of barriers to
allow free movement of capital and labor within the
customs union, thereby creating a common market or
single market.

• Fourth, within the common market, the free movement of
labor and capital may encourage member states to
implement common social programs (on education,
employee benefits and retraining, health care, retirement
programs, etc.) and coordinated macroeconomic policies
(e.g., similar fiscal and monetary policies) that could lead
to the creation of a single regional currency and an
economic and monetary union.

• Finally, because member countries of the economic and
monetary union will work closely with each other on all
major business and economic issues, the urge to have
common defense and foreign policies may lead to the
creation of a political union (i.e., a group of countries that
will behave as a single country).

Pros and Cons of Regional Integration
The benefits of regional integration include:
1. Creating a larger pool of consumers with growing
incomes and similar cultures, tastes, and social values.
2. Encouraging economies of scale in production,
increasing the region’s level of global competitiveness,
and enhancing economic growth through investment
flows.
3. Freeing the flow of capital, labor, and technology to the
most productive areas in the region.

The benefits of regional integration include: (cont.)
4. Increasing cooperation, peace, and security among
countries in the region.
5. Encouraging member states to enhance their level of
social welfare to match that of the most progressive
states.

The costs of regional integration include:
1. Undermining the most-favored-nation status rule (the
lowest tariff applicable to one member must be
extended to all members), an essential principle of the
WTO.
2. Imposing laws and regulations that are uniform and that
at times do not take into account national economic,
cultural, and social differences.
3. Eliminating jobs and increasing unemployment in
protected industries.

The costs of regional integration include: (cont.)
4. Losing sovereignty, national independence, and identity.
5. Reducing the powers of the national government.
6. Increasing the probability of rising crime associated with
illegal drugs and terrorism because of the ease of
cross-border labor movements.

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.
• Economic Geography is the study of principles that
govern the efficient spatial allocation of economic
resources and the resulting consequences

Steps to Regional Integration
Start Small Think Global
Compensate
the Least
Fortunate
World Development Report (WDR)

Major Classes and Characteristics of
Regional Integration
Regional Blocs
Close to World
Markets
Remote Regions
with Large Local
Markets
Remote Regions
with Small Local
Markets

Regional Blocs Close to World
Markets
• Countries close to major markets have the advantage of
connecting to markets, suppliers, and ideas.
• Developed countries seek these regional trading blocs to:
1. expand their growth potential abroad as domestic
markets mature, and
2. deliver low-cost manufacturing platforms for locally
based firms.

Regional Blocs Close to World
Markets
• Regional trading blocs that are close to world markets—
such as the North American Free Trade Agreement
(NAFTA), the Dominican Republic–Central America Free
Trade Agreement (DR-CAFTA), the Caribbean Community
(CARICOM), as well as the bilateral U.S. free trade with
Chile and Colombia—have all benefited from privileged
access to U.S. markets

Regional
Blocs
Close to
World
Markets

Remote Regions with Large Local
Markets
• A large local market gives countries the advantage of
attracting industrial activities.
• If the country’s infrastructure is also well connected to
world markets, this advantage is reinforced.
• This second group of countries is far from world markets,
such as the United States, the European Union, and large
Asian economies, like China, India, and Japan.

Remote
Regions
with
Large
Local
Markets

Remote Regions with Small Local
Markets
• International integration is most difficult for countries in
regions that are divided, far from world markets, and lack
the economic size of a large local economy.
• Landlocked/Sea-locked countries
• “Bottom Billion” ~ Paul Collier(2007) - Central Asia; East,
Central, and West Africa; and the Pacific Islands

Remote
Regions
with
Small
Local
Markets

The European Union (EU)
• The EU, headquartered in Brussels, Belgium, is the most
highly evolved example of regional integration in the
world.
• The European Union is a political and economic union of
27 member states that are located primarily in Europe.
• 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 1951.

• The second major step was to approve the Treaty of Rome
in 1957, establishing the European Economic Community
(EEC) that called for free trade among members as well as
a common external tariff for nonmembers.
• The EU has delivered more than half a century of peace,
stability and prosperity, helped raise living standards and
launched a single European currency: euro.

• The abolition of border controls between EU countries
helped people to travel freely throughout most of the
continent. And it has become much easier to live, work
and travel abroad in Europe.
• The EU's main economic engine is the single market. It
enables most goods, services, money and people to move
freely. The EU aims to develop this huge resource to other
areas like energy, knowledge and capital markets to
ensure that Europeans can draw the maximum benefit
from it.

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.

• Austria
• Belgium
• Bulgaria
• Croatia
• Cyprus
• Czechia
• Denmark
• Estonia
• Finland
• France
• Germany
• Greece
• Hungary
• Ireland
• Italy
• Latvia
• Lithuania
• Luxembourg
• Malta
• Netherlands
• Poland
• Portugal
• Romania
• Slovakia
• Slovenia
• Spain
• Sweden

The goals of the European Union are:
1. promote peace, its values and the well-being of its
citizens
2. offer freedom, security and justice without internal
borders
3. sustainable development based on balanced economic
growth and price stability, a highly competitive market
economy with full employment and social progress, and
environmental protection
4. combat social exclusion and discrimination

The goals of the European Union are: (cont.)
5. promote scientific and technological progress
6. enhance economic, social and territorial cohesion and
solidarity among EU countries
7. respect its rich cultural and linguistic diversity
8. establish an economic and monetary union whose
currency is the euro.

The North American Free Trade
Agreement (NAFTA)
• The North American Free Trade Agreement (NAFTA),
which was enacted in 1994 and created a free trade zone
for Mexico, Canada, and the United States, is the most
important feature in the U.S.-Mexico bilateral commercial
relationship.
• As of January 1, 2008, all tariffs and quotas were
eliminated on U.S. exports to Mexico and Canada.
• Canada has always been the United States’ largest trade
partner, and Mexico has ranked third.

Agreement (NAFTA)
Major objectives
• Expansion of trade in goods and
services
• Protection of intellectual property
rights.
• Creation of institutions to address
potential problems(e.g. unfair
trade practices) and the
implementation of NAFTA rules
and regulations.

Agreement (NAFTA)
• Way back 2001-2003 and 2008- 2009, when the U.S.
economy slides into a recession, the impact on Mexico is
severe, as can be seen by the decrease in the volume of
Mexican exports to the United States and the decrease in
Mexican worker remittances from the United States.
• Mexico initiated steps to safeguard its economy
against this risk by signing a free-trade agreement
with the EU
• Maintain economic growth

Association of South East Asian
Nations (ASEAN)
• The Association of Southeast Asian Nations, or ASEAN,
was established on 8 August 1967 in Bangkok, Thailand,
with the signing of the ASEAN Declaration (Bangkok
Declaration) by the Founding Fathers of ASEAN: Indonesia,
Malaysia, Philippines, Singapore and Thailand.
• Brunei Darussalam joined ASEAN on 7 January 1984,
followed by Viet Nam on 28 July 1995, Lao PDR and
Myanmar on 23 July 1997, and Cambodia on 30 April
1999, making up what is today the ten Member States of
ASEAN

Nations (ASEAN)

Nations (ASEAN)
Aims and purposes
• accelerate the economic growth, social progress and
cultural development in the region
• promote regional peace and stability;
• promote active collaboration and mutual assistance on
matters of common interest in the economic, social,
cultural, technical, scientific and administrative fields;
• provide assistance to each other in the form of training
and research facilities in the educational, professional,
technical and administrative spheres;

Nations (ASEAN)
Aims and purposes (cont.)
• collaborate more effectively to encourage further growth
in the agriculture and industry, and trade sectors;
• promote Southeast Asian studies; and
• maintain close and beneficial cooperation with existing
international and regional organizations with similar aims
and purposes, and explore all avenues for even closer
cooperation among themselves.

Nations (ASEAN)
Three Pillars
1. Political-Security Community - to ensure regional peace
and a just, democratic, and harmonious environment.
2. Economic Community - the realization of the region’s
end goal of economic integration. It envisions ASEAN as
a single market and product base, a highly competitive
region, with equitable economic development, and fully
integrated into the global economy.
3. Socio-Cultural Community - all about realizing the full
potential of ASEAN citizens.

Mercado Común del Sur (MERCOSUR)
• The Southern Common Market (MERCOSUR) “Mercado
Común del Sur” is a regional integration process, initially
established by Argentina, Brazil, Paraguay and Uruguay,
and subsequently joined by Venezuela and Bolivia* -the
latter still complying with the accession procedure.
• Since its creation, its main objective has been to promote
a common space that generates business and investment
opportunities through the competitive integration of
national economies into the international market.

• Established multiple agreements
with countries or groups of
countries, granting them, in some
cases, the status of Associated
States – this being the situation of
the South American countries. These
participate in activities and meetings
of the Bloc and have trade
preferences with the States Parties.
• Signed commercial, political or
cooperation agreements with a
diverse number of nations and
organizations on all five continents.

Integration is a basic law of life; when we
resist it, disintegration is the natural
both inside and outside of us. Thus we
come to the concept of harmony through
through integration.”
~Norman Cousins

3 Regional Economic Integration

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