Unit 05 Economic Integration

ECONOMIC INTEGRATION FOR BORDERLESS TRADE
Unit-5
INTERNATIONAL BUSINESS ENVIRONMENT
1
VIPULKUMAR N M
Assistant Professor,
Department of Commerce,
Kristu Jayanti College, Bengaluru

ECONOMIC INTEGRATION
 Economic integration is the unification of economic policies between different states
through the partial or full abolition of tariff and non-tariff restrictions on trade taking
place among them prior to their integration. This is meant in turn to lead to lower
prices for distributors and consumers with the goal of increasing the level of welfare,
while leading to an increase of economic productivity of the states.
 Economic integration is an economic arrangement between different regions, marked
by the reduction or elimination of trade barriers and the coordination of monetary and
fiscal policies. The aim of economic integration is to reduce costs for both consumers
and producers, and to increase trade between the countries taking part in the
agreement.
2

ADVANTAGES OF ECONOMIC INTEGRATION
 Trade Creation: Member countries have (a) wider selection of goods and services not previously
available; (b) acquire goods and services at a lower cost after trade barriers due to lowered tariffs or
removal of tariffs (c) encourage more trade between member countries the balance of money spend
from cheaper goods and services, can be used to buy more products and services
 Greater Consensus: Unlike WTO with huge membership (147 countries), easier to gain consensus
amongst small memberships in regional integration
 Political Cooperation: A group of nation can have significantly greater political influence than each
nation would have individually. This integration is an essential strategy to address the effects of
conflicts and political instability that may affect the region. Useful tool to handle the social and
economic challenges associated with globalization
 Employment Opportunities: As economic integration encourage trade liberation and lead to market
expansion, more investment into the country and greater diffusion of technology, it create more
employment opportunities for people to move from one country to another to find jobs or to earn
higher pay. For example, industries requiring mostly unskilled labor tends to shift production to low
wage countries within a regional cooperation
3

DISADVANTAGES OF ECONOMIC INTEGRATION
 Creation Of Trading Blocs: It can also increase trade barriers against non-member
countries.
 Trade Diversion: Because of trade barriers, trade is diverted from a non-member country to
a member country despite the inefficiency in cost. For example, a country has to stop trading
with a low cost manufacture in a non-member country and trade with a manufacturer in a
member country which has a higher cost.
 National Sovereignty: Requires member countries to give up some degree of control over
key policies like trade, monetary and fiscal policies. The higher the level of integration, the
greater the degree of controls that needs to be given up particularly in the case of a political
union economic integration which requires nations to give up a high degree of sovereignty.
4

Stages/ Kinds of Economic Integration 5

Preferential Trade Area
Preferential Trade Areas (PTAs) exist when countries within a geographical region
agree to reduce or eliminate tariff barriers on selected goods imported from
other members of the area. This is often the first small step towards the creation
of a trading bloc. Agreements may be made between two countries (bi-lateral), or
several countries (multi-lateral).
6

Free Trade Area
Free Trade Areas (FTAs) are created when two or more countries in a region
agree to reduce or eliminate barriers to trade on all goods coming from other
members. The North America Free Trade Agreement (NAFTA) is an example of
such a free trade area, and includes the USA, Canada, and Mexico.
7

Customs Union
 A customs union involves the removal of tariff barriers between members,
together with the acceptance of a common (unified) external tariff against
non-members.
 Countries that export to the customs union only need to make a single
payment (duty), once the goods have passed through the border. Once inside
the union goods can move freely without additional tariffs. Tariff revenue is
then shared between members, with the country that collects the duty
retaining a small share.
8

Common Market
 A common (or single) market is the most significant step towards full economic
integration. In the case of Europe, the single market is officially referred to a the
'internal market'.
 The key feature of a common market is the extension of free trade from just tangible
goods, to include all economic resources. This means that all barriers are eliminated
to allow the free movement of goods, services, capital, and labour.
 In addition, as well as removing tariffs, non-tariff barriers are also reduced and
eliminated.
 For a common market to be successful there must also be a significant level of
harmonisation of micro-economic policies, and common rules regarding product
standards, monopoly power and other anti-competitive practices. There may also be
common policies affecting key industries, such as the Common Agricultural Policy
(CAP) and Common Fisheries Policy (CFP).
9

Full Economic Union
 Economic union is a term applied to a trading bloc that has both a common
market between members, and a common trade policy towards non-members,
although members are free to pursue independent macro-economic policies.
 The European Union (EU) is the best known Economic union, and came into force
on November 1st 1993, following the signing of the Maastricht Treaty (formally
called the Treaty on European Union.)
10

Monetary Union
Monetary union is the first major step towards macro-economic integration, and
enables economies to converge even more closely. Monetary union involves scrapping
individual currencies, and adopting a single, shared currency, such as the Euro for the
Euro-17 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean.
This means that there is a common exchange rate, a common monetary policy,
including interest rates and the regulation of the quantity of money, and a single
central bank, such as the European Central Bank or the East Caribbean Central Bank.
11

Fiscal Union
A fiscal union is an agreement to harmonise tax rates, to establish common levels
of public sector spending and borrowing, and jointly agree national budget
deficits or surpluses. The majority of EU states agreed a fiscal compact in early
2012, which is a less binding version of a full fiscal union.
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Economic and Monetary Union
Economic and Monetary Union (EMU) is a key stage towards compete integration,
and involves a single economic market, a common trade policy, a single currency
and a common monetary policy.
13

Complete Economic Integration
Complete economic integration involves a single economic market, a common trade
policy, a single currency, a common monetary policy, together with a single fiscal
policy, including common tax and benefit rates – in short, complete harmonisation
of all policies, rates, and economic trade rules.
14

European Union
 The European Union is a unique economic and political union between 28
European countries that together cover much of the continent.
 The EU was created in the aftermath of the Second World War. The first steps were
to foster economic cooperation: the idea being that countries that trade with one
another become economically interdependent and so more likely to avoid conflict.
 The result was the European Economic Community (EEC), created in 1958, and
initially increasing economic cooperation between six countries: Belgium, Germany,
France, Italy, Luxembourg and the Netherlands. Since then, a huge single market
has been created and continues to develop towards its full potential.
15

From economic to political union
 What began as a purely economic union has evolved into an organization
spanning policy areas, from climate, environment and health to external relations
and security, justice and migration. A name change from the European Economic
Community (EEC) to the European Union (EU) in 1993 reflected this.
 The EU is based on the rule of law: everything it does is founded on treaties,
voluntarily and democratically agreed by its member countries.
 The EU is also governed by the principle of representative democracy, with citizens
directly represented at Union level in the European Parliament and Member States
represented in the European Council and the Council of the EU.
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Mobility, growth, stability and a single currency
 The EU has delivered more than half a century of peace, stability and prosperity,
helped raise living standards and launched a single European currency: the euro. In
2012, the EU was awarded the Nobel Peace Prize for advancing the causes of peace,
reconciliation, democracy and human rights in Europe.
 Thanks to the abolition of border controls between EU countries, people can travel
freely throughout most of the continent. And it has become much easier to live, work
and travel abroad in Europe.
 The single or 'internal' market is the EU's main economic engine, enabling most
goods, services, money and people to move freely. Another key objective is to
develop this huge resource also in other areas like energy, knowledge and capital
markets to ensure that Europeans can draw the maximum benefit from it.
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Human rights and equality
One of the EU's main goals is to promote human rights both internally and around
world. Human dignity, freedom, democracy, equality, the rule of law and respect for
human rights: these are the core values of the EU. Since the Lisbon Treaty's entry in
force in 2009, the EU's Charter of Fundamental Rights brings all these rights together
in a single document. The EU's institutions are legally bound to uphold them, as are
EU governments whenever they apply EU law.
Transparent and democratic institutions
The enlarged EU remains focused on making its governing institutions more
transparent and democratic. More powers have been given to the directly elected
European Parliament, while national parliaments play a greater role, working
the European institutions. In turn, European citizens have an ever-increasing number
of channels for taking part in the political process.
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Countries
 The EU was not always as big as it is today. When European countries started to
cooperate economically in 1951, only Belgium, Germany, France, Italy,
Luxembourg and the Netherlands participated.
 Over time, more and more countries decided to join. The Union reached its
current size of 28 member countries with the accession of Croatia on 1 July 2013.
 Brexit was the withdrawal of the United Kingdom from the European Union and
the European Atomic Energy Community on 31 January 2020 GMT. The UK is
the only country to formally leave the EU, after 47 years of having been a
member state of the EU and its predecessor, the European Communities, since 1
January 1973
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21
The 27 member countries of the EU
Austria Italy
Belgium Latvia
Bulgaria Lithuania
Croatia Luxembourg
Cyprus Malta
Czech Republic Netherlands
Denmark Poland
Estonia Portugal
Finland Romania
France Slovakia
Germany Slovenia
Greece Spain
Hungary Sweden
Ireland United Kingdom

Countries using the euro
 The euro (€) is the official currency of 19 out of 28 EU member countries. These
countries are collectively known as the Eurozone.
 The euro is the most tangible proof of European integration – the common
currency in 19 out of 28 EU countries and used by some 338.6 million people
day. The benefits of the common currency are immediately obvious to anyone
travelling abroad or shopping online on websites based in another EU country.
EU monetary cooperation
 The Economic and Monetary Union involves the coordination of economic and
fiscal policies, a common monetary policy and the euro as the common currency.
The euro was launched on 1 January 1999 as a virtual currency for cash-less
payments and accounting purposes. Banknotes and coins were introduced on 1
January 2002.
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Which countries use the euro?
 The euro (€) is the official currency of 19 out of 28 EU member
countries. These countries
Eurozone Countries:
 Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,
Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia, Spain are collectively known as the
Eurozone.
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The Economic and Financial Crisis
The economic crisis has prompted intense and sustained action by the EU's
national governments, the European Central Bank and the Commission since it
erupted worldwide in 2008. All have been working closely together to support
growth and employment, protect savings, maintain a flow of affordable credit for
businesses and households, ensure financial stability, and put in place a better
governance system for the future.
https://youtu.be/9eufLQ3sew0
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Established
1985
Membership
Eight States―Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
Six observers—China, Japan, European Union, Republic of Korea, United States, Iran
 The idea of regional cooperation in South Asia was first raised in November 1980. After
the foreign secretaries of the seven founding countries—Bangladesh, Bhutan, India, Maldives,
Pakistan, and Sri Lanka—met for the first time in Colombo in April 1981. This was followed a few
months later by a meeting of the Committee of the Whole, which identified five broad areas for
regional cooperation. The foreign ministers, at their first meeting in New Delhi in August 1983,
adopted the Declaration on South Asian Association for Regional Cooperation (SAARC) and
launched the Integrated Program of Action (IPA) in the five agreed areas of cooperation: agriculture;
rural development; telecommunications; meteorology; and health and population activities. Later,
transport; postal services; scientific and technological cooperation; and sports, arts, and culture
added to the IPA. Afghanistan became the newest member of SAARC at the 13th annual summit in
2005. China and Japan were granted observer status at the same.
27

The South Asian Association for Regional Cooperation (SAARC) comprises
Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka.
SAARC is a manifestation of the determination of the peoples of South Asia to work
together towards finding solutions to their common problems in a spirit of
friendship, trust and understanding and to create an order based on mutual
respect, equity and shared benefits. The main goal of the Association is to
accelerate the process of economic and social development in member states,
through joint action in the agreed areas of cooperation
28

EVOLUTION
The idea of regional cooperation in South Asia was first mooted in November 1980.
After consultations, the Foreign Secretaries of the seven countries met for the first time
in Colombo, in April 1981. This was followed, a few months later, by the meeting of the
Committee of the Whole, which identified five broad areas for regional cooperation.
The Foreign Ministers, at their first meeting in New Delhi, in August 1983, formally
launched the Integrated Programme of Action (IPA) through the adoption of the
Declaration on South Asian Regional Cooperation (SARC). At the First Summit held in
Dhaka on 7-8 December 1985, the Charter establishing the South Asian Association
for Regional Cooperation (SAARC) was adopted.
29

OBJECTIVES
The objectives, principles and general provisions, as mentioned in the SAARC Charter, are as follows :
 - To promote the welfare of the peoples of South Asia and to improve their quality of life;
 - To accelerate economic growth, social progress and cultural development in the region and to
provide all individuals the opportunity to live in dignity and to realize their full potentials;
 - To promote and strengthen collective self-reliance among the countries of South Asia;
 - To contribute to mutual trust, understanding and appreciation of one another's problems;
 - To promote active collaboration and mutual assistance in the economic, social, cultural, technical and
scientific fields;
 - To strengthen cooperation with other developing countries;
 - To strengthen cooperation among themselves in international forums on matters of common
interests; and
 - To cooperate with international and regional organizations with similar aims and purposes.
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PRINCIPLES
 - Cooperation within the framework of the Association is based on respect for the principles
of sovereign equality, territorial integrity, political independence, non-interference in the
internal affairs of other states and mutual benefit.
 - Such cooperation is to complement and not to substitute bilateral or multilateral
cooperation.
 - Such cooperation should be consistent with bilateral and multilateral obligations of the
member states.
 - Decisions at all levels in SAARC are taken on the basis of unanimity.
 - Bilateral and contentious issues are excluded from its deliberations.
31

Organization Structure of SAARC
 The SAARC comprises five layers of organizational structure:
1. Council: At the top, there is the Council represented by the heads of the government of the
member countries. The council the apex policy making body. It meets once in 2 years time.
2. Council of Minister: It is to assist the council. It is represented by the foreign minister of the
member countries. Its functions include:
1. Formulation of policies
2. Review of functioning
3. Deciding new areas of cooperation
4. Chalk our additional mechanism
5. Decide about general issues of common of interest of the SAARC member.
3. Standing Committee: It is comprised by the foreign secretariat of the member government. Its
major functions are:
1. To monitor and co-ordinate the programmes
2. To determine inter-sectored priorities
3. To mobilise cooperation within and outside the region
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4. Programming Committee: It consist of the senior official of the member
governments. Its functions include:
 1. Scrutinizing the budget of the secretarials
 2. Finalizing the annual schedule
 3. External activities assigned by the standing committee
 4. Analyses the respects of the technical committee.
5. Technical Committee: It consist of the represented of the member nations. Its
function are:
 1. To formulate project and programmer
 2. To monitor and execute the projects
 3. To submit reports.
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The Technical Committee convers the areas such as: Agriculture, Communication,
Environment, Rural Development, Health and Population, Science and Technology,
Tourism and Transport.
6. Secretarial: The SAARC secretarials is located in Nepal. Its function include:
1. Coordination, execution and monitoring of SAARC activities
2. Servicing the SAARC meetings
3. Work as communication link between the SAARC and other international forum.
The secretarials is headed by the secretary-General appointed by the Council of
Ministers. These are 7 Director (One from each member nation) and the general
service staff.
34

BRICS
 BRICS is the acronym for an association of five major emerging national
economies: Brazil, Russia, India, China and South Africa. Originally the first four
were grouped as "BRIC" (or "the BRICs"), before the induction of South Africa in
2010. The BRICS members are all leading developing or newly industrialized
countries.
 As of 2015, the five BRICS countries represent over 3.6 billion people, or half of
the world population; all five members are in the top 25 of the world by
population, and four are in the top 10.
36

History
The term "BRIC" was coined in 2001 by then-chairman of Goldman Sachs Asset
Management, Jim O'Neill, in his publication Building Better Global Economic BRICs. The
foreign ministers of the initial four BRIC states (Brazil, Russia, India, and China) met in
New York City in September 2006 at the margins of the General Debate of the UN
General Assembly, beginning a series of high-level meetings. A full-scale diplomatic
meeting was held in Yekaterinburg, Russia, on 16 June 2009.
37

BRICS - Objectives, Summits, Need and Disparities
About BRICS
 – BRICS is a acronym for an association of five major emerging national economies:
Brazil, Russia, India, China and South Africa
 – Originally called as BRIC as South Africa was not included till 2010.
 – The term "BRICS" was coined in 2001 by then-chairman of Goldman Sachs Asset
Management, Jim O'Neill
 – Common characteristics are large, fast-growing economies all developing or
newly industrialized countries.
38

Importance of BRICS
 – As of 2014, the five BRICS countries represent almost 3 billion people, or
approximately 40% of the world population. – The five nations have a
combined nominal GDP of US$16.039 trillion, equivalent to approximately
20% of the gross world product,
 – They have an estimated US$4 trillion in combined foreign reserves.
39

Summits
1. Yekaterinburg Summit (2009)
Consensus on improving the global economic situation and reforming financial
institutions. BRIC nations announced the need for a new global reserve currency,
which would have to be "diversified, stable and predictable“
2. Brasilia Summit (2010)
South Africa officially became a member nation. Iran and nuclear weapons,
development, the furtherance of the BRIC as an international body, the global
economic situation at the time, reform of financial institutions, the financial G20, and
cooperation and issues related to global governance.
3. Sanya Summit (2011)
Economics, anti-terror law under UN auspices, United Nations Security Council
reform, decision to cease mutual trade payments in U.S. dollars and instead
henceforth give credits to one another in their national currencies alone.
40

4. New Delhi summit (2012)
A proposal to create a joint BRICS development bank that would finance
investments in developing nations
5. Durban Summit (2013) Negotiations for setting up the bank.
6. Fortaleza Summit (2014) Creation of two financial institutions: the New
Development Bank (NDB) to finance infrastructure and “sustainable
development” projects, with $50 billion in capital to start with, and the $100
billion Contingent Reserve Arrangement (CRA), to tide over members in
financial difficulties.
41

 7. Ufa Summit (2015)
 The 7th BRICS summit was the seventh annual diplomatic summit of the
head of states or government of the BRICS member states. It was held in
the Russian city of Ufa in Bashkortostan on 8–9 July 2015
 8. The 2016 BRICS summit was the eighth annual BRICS summit, an
international relations conference attended by the heads of country or
heads of government of the five member countries Brazil, Russia, India,
China and South Africa. The summit was held from 15 to 16 October 2016
at the Taj Exotica hotel in Benaulim, Goa, India.
42

Disparities with BRICS
1. The dominance of China in BRICS is problem for others. The Chinese economy is now not only the
second largest in the world but also larger than the economies of all the BRICS together.
2. China's political aspiration creates a challenges that has made it difficult for it to make consensus.
3. China’s manipulation of its currency has resulted in significant problems for the manufacturing sectors
of other emerging powers. Central banks of other countries have registered protest against
undervalued yuan
4. There is doubt if BRICS can emerge as a unified political force.
5. BRICS is a loose grouping of countries that share interests in particular areas but that play by different
rules. It is not a formal international alliance.
6. It maintains a low profile on security issues. BRICS will never attempt to make the group into a
traditional security framework.
7. With the exception of the NDB and the CRA, the BRICS framework has not proven very efficient or
substantive.
8. The BRICS have little in common. The Chinese economy is 28 times the size of South Africa’s. Income
per person in India is one-tenth that in Russia.
9. Brazil, India, South Africa are democratic countries while Russia, China are authoritarian regimes 10.
Russia, Brazil and South Africa export different commodities, while China exports manufactured goods
and India exports services.
43

 BRICS Bank Structure
 - New Development Bank will have an initial subscribed capital of $50 billion which will
be raised to $100 billion.
 - The five members will have an equal share for each in the bank, so no one member
dominates the institution.
 - Headquarters – Shanghai
 - Bank will have African Regional Center in South Africa - India will assume the first
presidency of the bank.
 - Chairman of Board of governance will be Russian
 - The emergency reserve fund - which was announced as a "Contingency Reserve
Arrangement" will also have $100bn and will help developing nations avoid short-term
liquidity pressures.
 - It will have $41 billion from China, $5 billion from South Africa and $ 18 billion from
remaining nations.
44

Need of a BRICS bank
 1. Global financial institutions like IMF and world bank are dominated by U.S and
western countries
 2. IMF and world bank follows different voting power based on quota system.
Though China is second largest economy after U.S it has fewer voting rights.
 3. The financial institution created by BRICS will reduce the importance of US
dollar as a global currency and eventually it will increase importance of Yuan
 4. IMF cash assistance program is conditional. If a country's foreign policy clashes
with US then it will be difficult to obtain a loan.
 5. It will provide resources for infrastructure development of developing countries.
45

Unit 05 Economic Integration

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