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4 ECONOMIC INTEGRATION

4 ECONOMIC INTEGRATION. 6 ECONOMIC INTEGRATION. 6.1 Institutions of International Finance: World Bank and International Monetary Fund 6.2 Customs Unions and Free Trade Areas. John Maynard Keynes and Harry Dexter White White was the chief international economist at the U.S. Treasury

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4 ECONOMIC INTEGRATION

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  1. 4 ECONOMIC INTEGRATION

  2. 6 ECONOMIC INTEGRATION • 6.1 Institutions of International Finance: World Bank and International Monetary Fund • 6.2 Customs Unions and Free Trade Areas 6 Economic Integration - 6.1 Institutions Of International Finance

  3. John Maynard Keynes and Harry Dexter White White was the chief international economist at the U.S. Treasury In 1944, he drafted the American plan for the IMF that competed with the British Treasury blueprint drafted by Keynes The Founding Fathers of World Bank and IMF 6 Economic Integration - 6.1 Institutions Of International Finance

  4. THE WORLD BANK • Founded in 1944 by 44 countries (now 188 member countries) to finance the reconstruction of the war-ravaged economies of Western Europe • After Western Europe recovered and achieved economic self-sufficiency, the bank turned its attention to assisting developing countries Dr. Jim Yong Kim is the 12th president of the World Bank Group 6 Economic Integration - 6.1 Institutions Of International Finance

  5. The World Bank is a development Bank whichprovides loans, policy advice, technical assistance and knowledge sharing servicesto low and middle income countries to reduce poverty See also: http://www.worldbank.org 6 Economic Integration - 6.1 Institutions Of International Finance

  6. THE INTERNATIONAL MONETARY FUND (IMF) • Was established in Bretton Woods, USA, in 1944 and started operating in 1946 (first only 29 member countries) Christine Lagarde Managing Director, IMF 6 Economic Integration - 6.1 Institutions Of International Finance

  7. TO DAY: • “The IMF promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payments difficulties or to assist with poverty reduction.” 6 Economic Integration - 6.1 Institutions Of International Finance

  8. “Through its economic surveillance, the IMF keeps track of the economic health of its member countries, alerting them to risks on the horizon and providing policy advice. It also lends to countries in difficulty, and provides technical assistance and training to help countries improve economic management.” For more: http://www.imf.org/ 6 Economic Integration - 6.1 Institutions Of International Finance

  9. CritiqueStructural Adjustment Programs (SAPs) 6 Economic Integration - 6.1 Institutions Of International Finance

  10. Critique… • Structural Adjustment Programs (SAPs) are a set of economic policies that are implemented by International Monetary Fund (IMF) and World Bank (WB) in developing countries • They constitute the “conditionality” of loans provided by IMF and WB, leaving heavily indebted developing countries with virtually no choice but to implement them • The principle goal of SAPs is to address balance of payment problems and implement fiscal discipline. They also call for significant cuts in public services, trade liberalization, broadening the tax base, reducing marginal tax rates and minimal state regulation on economic activity • SAPs are traditionally based on a set of economic principles called “Washington Consensus,” a name that alludes to the city that both IMF and WB are headquartered in. 6 Economic Integration - 6.1 Institutions Of International Finance

  11. 6 ECONOMIC INTEGRATION 6.1 Institutions of International Finance: World Bank and International Monetary Fund 6.2 Customs Unions and Free Trade Areas 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  12. International Trade Liberalization: Global Approach • General Agreement on Tariffs and Trade, GATT (founded 1947, lasted until 1994, when it was replaced by the World Trade Organization in 1995) • GATT’s objectives were: • To establish the rules of conduct of international commerce • To provide a forum for multilateral talks aimed at lowering trade protection around the world; aims to reduce tariffs worldwide: First, Second, Third and Fourth Round 1947 - 1956, Dillion, Kennedy, Tokyo, Uruguay Rounds 1986 – 1994, Doha… 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  13. 6 Economic Integration - 6.1 Institutions Of International Finance

  14. World Trade Organization (WTO) • WTO established during the Uruguay round and started 1.1.1995 • 159  members (on 2 March 2013) (some 25 more countries applying membership) accounting for more than 97% of world trade • The agreements have three main objectives: • to help trade flow as freely as possible • to achieve further liberalization gradually through negotiations • to set up an impartial system of settling disputes 6 Economic Integration - 6.1 Institutions Of International Finance

  15. WTO Roberto Azevêdo Director-General of the WTO • Doha Round 2001 - • talks have stalled over issues, such as agriculture, industrial tariffs and non-tariff barriers, and services • significant differences are between developed nations led by EU, USA, and Japan and the major developing countries led mainly by India, Brazil, China, South Korea, and South Africa See for more http://www.wto.org 6 Economic Integration - 6.1 Institutions Of International Finance

  16. Trade without Discrimination • Most-favored-nation (MFN): treating other people equally       • Under the WTO agreements, countries cannot normally discriminate between their trading partners • Grant someone a special favor (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members • Exception: free trade agreements, such as EU and NAFTA 6 Economic Integration - 6.1 Institutions Of International Finance

  17. International Trade Liberalization: Global Approach continued • OECD (Organization for Economic Co-operation and Development) • established by 20 countries in 1960 • now 34 full members from the “developed”, industrialized countries* • sharing the principles of the market economy, pluralist democracy and respect for human rights • promoting policies to improve the economic and social well-being of people around the world * Accession talks with, Russia and enhanced engagement offered to Brazil, China, India, Indonesia and South Africa. 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  18. International Trade Liberalization: Regional Approach • Free trade among small number of nations; while maintaining some barriers with rest of the world • These are called preferential trading arrangements 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  19. Stages of Economic Integration No Internal Common Factor and Common Common Trade Barriers External Tariff Asset Mobility Currency Economic Policy Free Trade Are X Customs Union X X Single Market X X X Monetary Union X X X X Economic Union X X X X X 6 Economic Integration - 6.1 Institutions Of International Finance

  20. Examples of Regional Trade Agreements (RTAs): The number of RTAs from around 70 in 1990 to over 300 today. • The European Union (EU) – a customs union, a single market and now with a single currency • The European Free Trade Area (EFTA) • The North American Free Trade Agreement (NAFTA) – created in 1994 • Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay, and Venezuela • Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA) • Common Market of Eastern and Southern Africa (COMESA) • South Asian Free Trade Area (SAFTA) created in January 2006 and containing countries such as India and Pakistan 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  21. In addition • As of January 1, 2014, the United States has 14 FTAs in force with 20 countries • The United States is negotiating a regional FTA, the Trans-Pacific Partnership, with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam • USA and EU launched negotiations on the Transatlantic Trade and Investment Partnership in June 2013 6 Economic Integration - 6.1 Institutions Of International Finance

  22. EU Trade Agreements 6 Economic Integration - 6.1 Institutions Of International Finance

  23. The Road to EU in a Nut Shell • EEC formed in 1957 as CU among six countries:France, West Germany, Italy, Netherlands, Belgium and Luxemburg (signed the Treaties of Rome)* *Already in 1951, the same six countries formed the European Coal and Steel Community, which begins to unite European countries The signing of the Treaties of Rome 6 Economic Integration - 6.1 Institutions Of International Finance

  24. 6 Economic Integration - 6.1 Institutions Of International Finance

  25. Will preferential arrangements foster free trade? • There also is some concern among economists that regional trade agreements may make it more difficult, rather than easier, to achieve the ultimate objective of global free trade • The regional approach to trade liberalization could lead to the formation of large "trade blocs" which trade freely among members but choke off trade with the rest of the world 6 Economic Integration - 6.1 Institutions Of International Finance

  26. Will preferential arrangements foster free trade!continued • For this reason some economists have argued that the multilateral approach (MFN)1 to trade liberalization, represented by the trade liberalization agreements in successive WTO rounds, is more likely to achieve global free trade than the regional or preferential approach 1Most Favored Nations 6 Economic Integration - 6.1 Institutions Of International Finance

  27. Will preferential arrangements foster free trade?continued • Preferential trade arrangements are often supported because they represent a movement in the direction of free trade • If free trade is economically the most efficient policy, it would seem to follow that any movement towards free trade should be beneficial in terms of economic efficiency • It turns out that this conclusion is wrong! 6 Economic Integration - 6.1 Institutions Of International Finance

  28. Will preferential arrangements foster free trade?continued • Even if free trade is most efficient, it is not true that a step in that direction necessarily raises economic efficiency • Whether a preferential trade arrangement raises a country's welfare and economic efficiency depends on the extent to which the arrangement causes trade diversion versus trade creation 6 Economic Integration - 6.1 Institutions Of International Finance

  29. Trade Creation and Trade Diversion: Regional Integration and Welfare • The overall welfare effects of economic integration are ambiguous and require case-by-case judgment • Reason: integration is both a policy of protection and a move toward free trade 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  30. The effect of the protectionist element of integration is called trade diversion and • the effect of the trade liberalization element is called trade creation • The free-trade area's overall effect on welfare is determined by comparing the trade-creation and trade-diversion effects 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  31. 1. Let’s assume that a country has originally imposed a tariff t on all imports of X. Imports then being Q0 – Q1. • If trade creation dominates, the formation of a free-trade area will enhance welfare... Sdom Figure 1 PX 3. Trade diversion, however, causes an efficiency loss e (lost tariff revenue). PD SM + t G C P0 SNM + t a c b H d SM P1 J e SNM Ddom 2. Trade increases from Q0 - Q1 to Q2 - Q3, if a free trade area is formed with country M, causing a welfare gain c + d. Q3 Q1 Q0 Q2 QX 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  32. Figure 1: Welfare Effects of Economic Integration: Formation of a Free-Trade Area in Good X. SM denotes the supply of good X by member countries and SNM the supply by nonmember countries • Formation of a free-trade area causes a move from point C to point H in consumption. Trade increases as imports rise from Q0 - Q1 to Q2 - Q3, causing a welfare gain c + d • Trade also is diverted from nonmember countries toward member countries, causing an efficiency loss represented by the area of rectangle e 6 Economic Integration - 6.1 Institutions Of International Finance

  33. The net gain for the domestic country depends which is larger (c + d) or e! • Note that if member countries are the low-cost producers of the traded good, there will be no trade diversion effect and integration will unambiguously increase welfare • Note also that if tariff is low enough to make the tariff-inclusive price of nonmember imports lower than the price of member imports, the free-trade area will have no trade-creating or trade-diverting effects since no trade with member countries will occur 6 Economic Integration - 6.1 Institutions Of International Finance

  34. Why would a country create a FTA with a country A if it could improve its welfare more by forming one with country B? 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  35. Why would a country create a FTA... • To answer that we need to go beyond calculation of static gains and losses (i.e. trade creation and trade diversion) to dynamic gains: • there may be economies of scale in production in various good • so market size expands for the manufacturers in these two countries… • why not include country B as well? • maybe the economies of scale have already been fully exploited... 6 Economic Integration - 6.1 Institutions Of International Finance

  36. Why would a country create a FTA …continued 2. Preferential trading arrangements are some times formed for political (noneconomic) reasons • for instance, EU was formed because the European political leaders wanted to integrate their economies so completely that temptations to go on war would be diminished substantially 6 Economic Integration - 6.1 Institutions Of International Finance

  37. How efficient is EU in terms of trade creation? • Economists obtain estimates of the overall impact of integration by calculating the effects corresponding to areas a, b, c, d, and e (in our figure) for each major good traded • In the case of EU, most analysts agree that trade creation outweighs trade diversion; estimates suggest the EU's trade-creating effect has been about four times that of its trade-diverting impact 6 Economic Integration - 6.2 Customs Unions And Free Trade Areas

  38. Arguments Against Regionalism Arguments Against and For of Regional Trade Agreements • Bhagwati views the formation of regional trade arrangements (RTAs) as undermining the WTO • Regionalism is harmful because it encourages trade diversion 6 Economic Integration - 6.1 Institutions Of International Finance

  39. Arguments Favoring Regionalism • Paul Krugman argues that trade diversion from FTAs is low because trading blocs are “natural” trading areas • Due to proximity and similarity of cultures and standards of living, regional trade agreements stimulate trade that would have occurred even in the absence of an agreement 6 Economic Integration - 6.1 Institutions Of International Finance

  40. Next: ECONOMIC AND MONETARY UNION 6 Economic Integration - 6.1 Institutions Of International Finance

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