6 Introduction Three levels of economic integration Global: trade liberalization by GATT or WTORegional: preferential treatment of member countries in the groupBilateral: preferential treatment between two countriesRegional and bilateral agreements are against the MFN clause (normal trading relations), but allowed under WTO.Visit for regional trade agreements.
7 Four stages (types) of economic integration FTA (free trade area):no internal tariffs among members, but each country imposes its own external tariffs to the third country.NAFTA (North America Free Trade AgreementAFTA (ASEAN Free Trade Area)EFTA (European Free Trade Area)Customs union:no internal tariffs and common external tariffsMercosur (Southern Common Market),CACM (Central American Common Market)CARICOM (Caribbean Community and Common Market)
8 Four stages (types) of economic integration Common market:free movement of products and factors (resources), which is customs union plus factor mobilityEU (European Union – previously EEC)Economic union:common market plus common currencycoordination of fiscal and monetary policyEMU (Economic and Monetary Union)
9 Levels of Economic Integration Level of IntegrationPolitical UnionEconomic UnionNAFTACommon MarketCustoms UnionFree Trade AreaEU 1992
11 + Coordinated Economic Fig. 2-1: A Hierarchy of Regional Economic Integration InitiativesFree TradeAreaElimination ofTrade BarriersCustomsUnion+ Common ExternalTrade PositionsCommonMarket+ Labor/CapitalMobilityEconomicUnion+ Coordinated Economicand Fiscal PolicyPoliticalUnion+ Coordinated Politicaland Social Policy
12 Reasons Why Trade Blocs Get Formed Geographical proximity and often the sharing of common borders as in the European Union and NAFTACommon economic and political interests as in the European Union and the ASEANSimilar ethnic and cultural backgrounds as in the Free Trade of the AmericasSimilar levels of economic development as in the European UnionSimilar views on the mutual benefits of free trade as in NAFTARegional political needs and considerations as in the ASEAN
14 Economic effects of economic integration Static effects: Short-term effects (shift of production)Trade creation: production shifts to more efficient member countries from inefficient domestic or outside countries.Trade diversion: production shift to inefficient member countries from more efficient outsiders.Dynamic effects: Long-term effectsCost reduction due to economies of scaleCost reduction due to increased competition.
15 Economic Case for Regional Integration Stimulates economic growth in countriesCountries specialize in those goods and services efficiently produced.Additional gains from free trade beyond international agreements such as GATT and WTO.
18 Major Developments Favoring Free Trade The emergence of the World Trade Organization (WTO)The emergence of regional trade blocs, such as the North American Free Trade Agreement (NAFTA), the expanded EU, and other regional trade agreements like MERCUSUR in South America