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ECONOMIC INTEGRATION

ECONOMIC INTEGRATION. Dianna DaSilva- Glasgow. outline. Introduction What is regional integration Scope of RTAs Forms/levels of integration Theoretical background Static and Dynamic arguments for Integration (Developed Countries)

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ECONOMIC INTEGRATION

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  1. ECONOMIC INTEGRATION Dianna DaSilva- Glasgow

  2. outline • Introduction • What is regional integration • Scope of RTAs • Forms/levels of integration • Theoretical background • Static and Dynamic arguments for Integration (Developed Countries) • Static and Dynamic arguments for Integration (Developing Countries) • Welfare effects of customs unions • Case Study of CARICOM International Trade Theory- ECN 4202, 2016/2017

  3. INTRODUCTION • The theory of economic integration refers to the commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together. • Economic integration is also referred to regional integration arrangements (RIAs), Regional Trade Agreements (RTAs) etc. International Trade Theory- ECN 4202, 2016/2017

  4. WHAT IS INTEGRATION? • Integration is a process and a state of affairs. Regarded as a process it encompasses measures designed to abolish discrimination between economic units belonging to different national states; viewed as a state of affairs, it can be represented by the absence of various forms of discrimination between national economies. • Source: Bela Balassa (1961), the Theory of Economic Integration. International Trade Theory- ECN 4202, 2016/2017

  5. WHAT IS INTEGRATION? • Regionalism- “actions by governments to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions”.- Dictionary of Trade Policy Terms International Trade Theory- ECN 4202, 2016/2017

  6. SCOPE OF RTAs • The geographic and product coverage of RTAs. • In the WTO context, RTAs have both a more general and a more specific meaning. • General- RTAs have no relation to geographical location. International Trade Theory- ECN 4202, 2016/2017

  7. SCOPE OF RTAs • Specific- Based on territorial regional sub-systems which is the case for the majority of arrangements e.g. European Union (EU), Association of Southeast Asian Nations (ASEAN), the North American Free Trade Area (NAFTA), Mercado Común del Sur (Mercosur), Organization for African Unity (OAU). • The coverage and depth of RTAs varies. Majority go beyond tariff policies to address such emerging issues such as investment, competition, environment, labour, standards, customs administration, trade facilitation etc. International Trade Theory- ECN 4202, 2016/2017

  8. FORMS/LEVELS OF INTEGRATION • Economic integration occurs on a number of levels and may take various forms: • FORMS OF INTEGRATION • North- South, e.g EU-CARIFORUM EPA • South- South, Mercosur • North- North, NAFTA International Trade Theory- ECN 4202, 2016/2017

  9. FORMS/LEVELS OF INTEGRATION • LEVELS OF INTEGRATION • Free Trade Areas (FTAs)- Lowering of some tariff barriers among members but the maintenance of individual tariff barriers against non-members. E.g. The North American Free Trade Agreement (NAFTA),The Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA). • Customs Union- Liberalized intra-regional trade, common external barriers. e.g. Andean Community, Caribbean Community, Central American Common Market (CACM), Mercosur, Zollverein (German). International Trade Theory- ECN 4202, 2016/2017

  10. FORMS/LEVELS OF INTEGRATION • Common Market- Liberalized intra-regional trade, common external barriers and unfettered factor mobility. e.g. European Union. • Economic Union- Liberalized intra-regional trade, common external barriers, unfettered factor mobility and policy harmonization. E.g. European Union, USA, Benelux (Belgium, Netherlands and Luxembourg). International Trade Theory- ECN 4202, 2016/2017

  11. International Trade Theory- ECN 4202, 2016/2017

  12. THEORETICAL BACKGROUND • LIBERALIST VS DIRIGIST IDEAL OF ECONOMIC INTEGRATION • Liberalist (Allais, Ropke and Heilperin) see regional integration as a return to the pre- WW1 free trade ideals, that is, economic integration is synonymous with trade (and payments) liberalization. • Liberalist views are synonymous with open regionalism which is now embraced by current and emerging RTAs, for example, CARICOM now embraces open regionalism. International Trade Theory- ECN 4202, 2016/2017

  13. THEORETICAL BACKGROUND • Dirigist see integration as expanded state intervention to address policy concerns affecting the entire region, policy coordination. Philips (1957- social aspect of European Economic Cooperation) argues that there is no alternative to a directed market. The market can be extended not by liberalising it but by organising it. Source: Bela Balassa (1961), the Theory of Economic Integration. International Trade Theory- ECN 4202, 2016/2017

  14. Static and Dynamic arguments for Integration (Developed Countries) • Removal of barriers (e.g. EC 1913- mounting trade and payments restrictions) • To contract state intervention • To stimulate growth (economies of scale, lessening of uncertainty in intra-area trade and a faster rate of technological change) • Political arguments: • avoidance of future wars • creation of a third force in world politics • re-establishment of Europe as a world power. Source: BelaBalassa (1961), the Theory of Economic Integration. International Trade Theory- ECN 4202, 2016/2017

  15. Static and Dynamic arguments for integration (developing countries) • Economic development through increased cross- border investments, allowing for economies of scale • Ensure large market for development of new industries (economies of scale) • Increase global bargaining power • Reducing external vulnerability • Desire to imitate the EU example • Counter trade diversion from the E.U. Source: Bela Balassa (1961), the Theory of Economic Integration. International Trade Theory- ECN 4202, 2016/2017

  16. Static and Dynamic arguments for integration (developing countries) • Promoting regional stability and security through deeper political and economic cooperation (see example of experience of integration among ASEAN countries (Association of Southeast Asian Nations)). • Developing public goods and addressing regional externalities. • Theory of second best (Viner 1950, Meade 1955 and Lipsey and Lancaster 1956). International Trade Theory- ECN 4202, 2016/2017

  17. STATIC AND DYNAMIC GAINS FROM INTEGRATION • Economic development through increased cross- border investments, allowing for economies of scale • Advancing trade liberalization • Promoting regional stability and security through deeper political and economic cooperation (see example of experience of integration among ASEAN countries (Association of Southeast Asian Nations)). • Developing public goods and addressing regional externalities. International Trade Theory- ECN 4202, 2016/2017

  18. ECONOMIC INTEGRATION AND WELFARE • Welfare will be affected by: • a change in the quantity of commodities produced • a change in the degree of discrimination between domestic and foreign goods • a redistribution of income between the nationals of different countries • income redistribution within individual countries International Trade Theory- ECN 4202, 2016/2017

  19. ECONOMIC INTEGRATION AND WELFARE • Welfare has two components: i. real income (efficiency), ii. Distributional (equity) (exchange efficiency). • Welfare is measured, using partial equilibrium analysis, by trade diversion and trade creation. • Trade creation occurs when some domestic production in a nation that is a member of the customs union is replaced by lower cost imports from member nation. International Trade Theory- ECN 4202, 2016/2017

  20. ECONOMIC INTEGRATION AND WELFARE (Viner 1950) and Meade 1955) • A trade creating customs union always increases the welfare of members through greater specialization. • It may increase the welfare of non-members through higher incomes of members and therefore increased imports. International Trade Theory- ECN 4202, 2016/2017

  21. Illustration of a Trade Creating Customs Union International Trade Theory- ECN 4202, 2016/2017

  22. Illustration of a Trade Creating Customs Union • S1 + T is the price that non-members face • S1 is the price that members face • Nation 2 gains triangles CJM and HNM by allowing for more efficeint trade from members. International Trade Theory- ECN 4202, 2016/2017

  23. ECONOMIC INTEGRATION AND WELFARE • Trade diversion occurs when lower-cost imports from outside the customs union are replaced by higher cost imports from a union member. • Trade diversion reduces welfare because of the shift in production from more efficient producers to less efficient producers. • However it also creates trade within the union and may therefore increase or reduce welfare. International Trade Theory- ECN 4202, 2016/2017

  24. ILLUSTRATION OF A TRADE DIVERTING CUSTOMS UNION International Trade Theory- ECN 4202, 2016/2017

  25. ILLUSTRATION OF A TRADE DIVERTING CUSTOMS UNION • S1 represents supply from nation 1 • S3 represents supply from nation 3 • Nation 3 is a higher cost supply than nation 1 at the tariff price International Trade Theory- ECN 4202, 2016/2017

  26. FREE TRADE AREAS AND THE THEORY OF THE SECOND-BEST • The analysis of the welfare effects of a customs union is an example of the theory of the second best. The theory of the second best states that the elimination of a market distortion (like a tariff) does not necessarily mean an improvement in efficiency if there are other distortions present. If two market distortions are present then the elimination of one does not produce the second-best position, the first being the elimination of both distortions. International Trade Theory- ECN 4202, 2016/2017

  27. CONDITIONS FOR INCREASED WELFARE • Conditions under which a customs union is likely to be trade diverting/ trade creating • If trade barriers before the formation of a customs union are biased against future members relative to non-members, then a customs union is more likely to create trade. • Trade creation is more likely between geographic neighbors rather than between distant neighbors because transportation costs are less likely to be a barrier to trade creation. International Trade Theory- ECN 4202, 2016/2017

  28. MULTILATERAL FRAMEWORK WITHIN WHICH RTAs OPERATE • RTAs are governed by WTO rules. • RTAs would ordinarily be in breach of the guiding WTO principle of non-discrimination (MFN) defined in Article 1 of GATT, Article 11 of GATS, etc. • However, the WTO provides specific rules to govern such arrangements in order to reduce discrimination. International Trade Theory- ECN 4202, 2016/2017

  29. WTO RULES FOR RTAS • Article 24 of GATT, Paragraphs 4 to 10 (as clarified in the Understanding on the Interpretation of Article 24 of the GATT 1994) provide for the formation and operation of customs unions and free-trade areas covering trade in goods. • Article 24 says that if a free trade area or customs union is created, duties and other trade barriers should be reduced or removed on substantially all sectors of trade in the group. Non-members should not find trade with the group any more restrictive than before the group was set up. International Trade Theory- ECN 4202, 2016/2017

  30. WTO RULES FOR RTAS • Enabling Clause (i.e., the November 1979 Decision on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries- L/4903) refers to preferential trade arrangements in trade in goods between developing country Members; • Article 5 of GATS governs RTAs in the area of trade in services, for both developed and developing countries International Trade Theory- ECN 4202, 2016/2017

  31. INSTITUTIONAL SUPPORT IN THE WTO • Regional Trade Agreements Committee (CRTA) which was established on 6 February 1996, by the WTO General Council, (i) monitors the operation of RTAs to ensure compliance with WTO rules. • RTAs falling under Article XXIV are notified to the Council for Trade in Goods (CTG) which adopts the terms of reference and transfers the agreement to the CRTA for examination. • The notification of agreements falling under the Enabling Clause is made to the Committee on Trade and Development (CTD). International Trade Theory- ECN 4202, 2016/2017

  32. INSTITUTIONAL SUPPORT IN THE WTO • RTAs covering trade in services are notified to the Council for Trade in Services (CTS). These may or not be passed on to the CRTA. International Trade Theory- ECN 4202, 2016/2017

  33. TRENDS AND CHARACTERISTICS ON THE EVOLUTION OF RTAS • There has been tumultuous growth in the number of RTAs. 421 RTAs have been notified to the GATT/WTO up to December 2008. Of these, 324 RTAs were notified under Article XXIV of the GATT 1947 or GATT 1994; 29 under the Enabling Clause; and 68 under Article V of the GATS. At that same date, 230 agreements were in force. (see wto.org) International Trade Theory- ECN 4202, 2016/2017

  34. TRENDS AND CHARACTERISTICS ON THE EVOLUTION OF RTAS • By July 2005, only one WTO member — Mongolia, — was not party to a regional trade agreement. • Of these RTAs, free trade agreements (FTAs) and partial scope agreements account for over 90%, while customs unions account for less than 10 %. International Trade Theory- ECN 4202, 2016/2017

  35. TRENDS AND CHARACTERISTICS ON THE EVOLUTION OF RTAS • The increase in RTAs, coupled with the preference shown for concluding bilateral free-trade agreements, has produced the phenomenon of overlapping membership. For example: Small states belong to at least 2 to 4 RTAs (see Maurice Schiff- World Bank Research Development Group). • SPAGHETTI BOWL- Jagdish Bhagwatti- Term used to describe the growing number of RTAs to which countries belong. International Trade Theory- ECN 4202, 2016/2017

  36. TRENDS AND CHARACTERISTICS ON THE EVOLUTION OF RTAS • RTAs have therefore become a very prominent feature of the Multilateral Trading System (MTS) stirring debate as to whether they are, according to Jagdish Bhagwatti ‘stepping stones’ or ‘stumbling blocks’ to Multilateral Trade Liberalization. International Trade Theory- ECN 4202, 2016/2017

  37. TRENDS AND CHARACTERISTICS ON THE EVOLUTION OF RTAS • RTAs have increased in depth and scope- governing issues that have not gained consensus at the WTO. • Source: Clemens Boonekamp, Director, Trade Policies Review Division, WTO, “Regional trade integration under transformation”, International Trade Theory- ECN 4202, 2016/2017

  38. CONCERNS WITH RTAs- MTS • The regional economic impact of RTAs re trade liberalization and economic growth is ambiguous (trade creation vs. trade diversion). • RTAs may be trade diverting and welfare reducing if there are distortions in resource allocation (production) International Trade Theory- ECN 4202, 2016/2017

  39. CONCERNS WITH RTAs- MTS • The depth of intra-regional trade liberalization and sectoral coverage. Trade diversion (resource misallocation) is lower where similar liberalization benefits are granted to all trading partners (see Grim REPA Milner and Greenaway). • Overlapping nature of RTAs can hinder trade flows because of the costs to comply with multiple set of trade rules. International Trade Theory- ECN 4202, 2016/2017

  40. CONCERNS WITH RTAs- MTS • RTAs and their increased scope can potentially produce inconsistencies in the rules and procedures of RTAs and between RTAs and the WTO leading to regulatory confusion, distortion of regional markets and implementation problems. • The increased scope of RTAs have forced some issues onto the multilateral agenda that were not previously addressed such as services, intellectual property, environmental standards, investment and competition policies . International Trade Theory- ECN 4202, 2016/2017

  41. CONCERNS WITH RTAs- MTS • Overlapping RTAs can give rise to The proliferation of some theorists regard RTAs as an attempt by developed countries to coerce developing countries into ceding restraint on areas not addressed by the WTO (Global Europe Project) (See Norman Girvan and Clive Y. Thomas). International Trade Theory- ECN 4202, 2016/2017

  42. CONCERNS WITH RTAs- MTS • RTAs are being pursued as a trade policy option by countries that are embracing a multi-focused trade policy strategy. Such countries are using RTAs to seek to use them, in addition to multilateral agreements, to improve the global regulatory framework. • RTAs by their discriminating nature can potentially hinder the objective of a coherent and transparent multilateral trading system (MTS) by distorting trade flows from third parties (WTO Seminar) (See EC bananas WTO dispute). International Trade Theory- ECN 4202, 2016/2017

  43. CONCERNS WITH RTAs- MTS • RTAs can also distort global trade by diverting resources away from multilateral negotiations to regional and bilateral trade negotiations. • RTAs may result in imbalances between liberalization efforts globally and regionally due to the lack of an effective multilateral surveillance mechanism. International Trade Theory- ECN 4202, 2016/2017

  44. CASE STUDY OF CARICOM • Read for discussion articles • Bennett, Karl M. 1999. A Retrospective Look At The Role Of Trade And Regional Integration In Caribbean Development. • Moreira, Mauricio & Mendoza, E. 2007. Regional Integration: What is in it for CARICOM? • Brewster, H. 2009. The Future of CARICOM in a Changing International Environment. • See Course outline for additional reading materials on CARICOM integration. International Trade Theory- ECN 4202, 2016/2017

  45. INTEGRATION IN CARICOM • 1958 to 1962 West Indies Federation, a British construct aimed at creating a unified independent state comprised of the individual colonies in the region. • Ten colonies participated in the Federation: Jamaica, Cayman Islands, the Turks and Caicos Islands, Barbados, Antigua and Barbuda, Saint Christopher-Nevis-Anguilla, Monstserrat, Saint Lucia, Saint Vincent and the Grenadines, Grenada and Trinidad and Tobago. International Trade Theory- ECN 4202, 2016/2017

  46. INTEGRATION IN CARICOM • 1967 Caribbean Free Trade Association (FTA) was created with the signing of the Dickenson Bay Agreement by Trinidad and Tobago, Antigua, Barbados and Guyana. • In 1968, the membership of CARIFTA expanded to include: Dominica, Grenada, St. Kitts-Nevis-Anguilla, St. Lucia and St. Vincent and the Grenadines, Montserrat and Jamaica. In 1971 Belize (then British Honduras) joined the Association. • CARIFTA proposed the elimination of import duties and quantitative restrictions. Consequently, some 90 percent of intraregional trade was liberalized. International Trade Theory- ECN 4202, 2016/2017

  47. INTEGRATION IN CARICOM • 1973- Treaty of Chaguaramas created the Caribbean Community and Common Market (CARICOM), which was a customs union. • The customs union fostered increased intra-regional trade by implementation of a common tariff wall against imports through the CET (1996). International Trade Theory- ECN 4202, 2016/2017

  48. INTEGRATION IN CARICOM • 2001 Revised Treaty of Chaguaramas Established the Caribbean Community (common market), including the CARICOM Single Market and Economy (economic union). • Impetus for this came from the 1989 Grade Anse Declaration of the Heads of Government and the report of the West Indian Commission. • The amendment to the treaty was facilitated through the inclusion of nine protocols, addressing issues such as competition policy, industrial policy. International Trade Theory- ECN 4202, 2016/2017

  49. INTEGRATION IN CARICOM • The single market component of the CSME is based on the removal of restrictions to facilitate the free movement of goods, services, capital, skills and the establishment of business enterprises. • The single market also allows for harmonization and unification of commercial policy, legislation, regulations and administration to achieve common rules for all. International Trade Theory- ECN 4202, 2016/2017

  50. Further reading • Salvatore (2007) , Chapter 1 • Krugman and Obstfeld (2009), Chapters 1 and 2 International Trade Theory- ECN 4202, 2016/2017

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