Chapter 8 Regional economic integration Lecture plan Why regionalism?

Chapter 8 Regional economic integration

Lecture plan

• Why regionalism?

• Definition of regional economic integration

• Five levels of regional economic integration

• industrial free trade area; full free trade area; customs union; common market; economic union

• Trade effects of regional integration

• Regional groups: EU, NAFTA, AFTA, MERCOSUR

• Bilateral free trade agreements

• Is regionalism the path to globalism?

Regional economic integration

• Agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services and factors of production among each other.

• It is estimated that currently there are about 220 regional trade arrangements!

Regional trade arrangements

• Exception to MFN (Most Favoured Nation) rule in GATT/WTO; allows regional agreements to provide higher preferential treatment to members than to non-members.

• Five levels of regional economic integration

• industrial free trade area
• full free trade area
• customs union
• common market
• economic union

Regional economic integration Free Trade Area (FTA)

• No tariffs and quotas among members

• National tariffs against non-members

• Partial (industrial) FTA and full FTA

• Australia’s bilateral FTAs with New Zealand, Singapore, USA, Thailand

• Pluri-lateral FTA: EFTA, NAFTA, AFTA

Regional economic integration customs union

• No tariffs and quotas among members.

• Common tariffs operate against non-members.

• Examples: European Community EC (1968) MERCOSUR (South American Union)

Regional economic integration common market

• Abolition of restrictions on factor movements

• Example:

• The European

• ‘Single Market’ (1992)

Regional economic integration economic union

Trade effects of integration

• Trade creation

• – trade up through lower-cost goods and services (e.g. European Union: industrial sector)

• Trade diversion

• – less efficient producers inside the area replace more efficient external producers (e.g. EU: common agricultural policy)

Intra-regional trade under major regional trade agreements, 2002, $US billion, %

Intra-exports as % of total merchandise exports of selected regional trading blocs

Intra-imports as % of total merchandise imports of selected regional trading blocs

European economic integration

• 1957 European Communities (6): France, Western Germany, Italy, Belgium, Luxemburg, Netherlands

• 1968 Customs union

• 1973 UK, Ireland, Denmark, Greece (1981), Spain and Portugal (1986)

• 1992 European single market

• 1996 Austria, Finland, Sweden

• 2002 European Monetary Union (currently 12 members)

• 2004 10 new members: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic and Slovenia (500 million people).

North American Free Trade Agreement (NAFTA)

• US, Canada, Mexico

• Became law 1/1/1994

• Over 15 year period

• – tariffs reduced (99% of goods traded)
• – non-tariff barriers reduced
• – investment opportunities increased

• Protects intellectual property

• Three-side agreements

• – environmental protocols
• – labour protocols
• – snap-back provision

• Special treatment for many industries

MERCOSUR (Southern Common Market)

• Originated in 1988 as a free trade pact between Brazil and Argentina

• Expanded in March 1990 to include Paraguay and Uruguay

• Combined population of 200 million

• 1995: 5-year plan to move to full customs union

• Objective: South American Free Trade Area (SAFTA)

The Free Trade Area of the Americas (FTAA)

• Old plan of ex-US president George Bush, pursued now by his son.

• FTAA = 34 nations (including NAFTA and MERCOSUR members) with population of 880 million; world’s largest free trade area.

• The Quebec 34-country Summit of March 2001 agreed on an FTAA to be launched in 2005.

• President Bush obtained fast-track authority (now renamed Trade Promotion Authority).

ASEAN (10)

• AFTA = ASEAN Free Trade Area; launched in 1992

• Members: Singapore, Indonesia, Thailand, Malaysia, Philippines, Brunei, Vietnam, Burma, Laos, Cambodia (550 million people).

• On the Common Effective Preferential Tariff (CEPT) of AFTA, the 6 founding members agreed (individually) to achieve a minimum of 85% of the tariff lines on their inclusion lists in the 0-5 % range by 2000, covering 90% of intra-ASEAN trade.

• They also brought forward from 2003 to 2002 the date of implementation of the CEPT; few extensions (e.g cars).

• ASEAN + 3 (China, Japan, South Korea).

• ASEAN–China FTA: >1.7 billion people; GDP: US$1.65 trill.

MFN simple mean tariffs 1999 vs CEP tariff rates 1999, 2003, % in selected ASEAN countries

Automotive MFN tariffs in selected ASEAN countries, %

Three-way balance (E. Asia, EU, US) output, trade with the ROW*, reserves

Why the push for East-Asian integration?

• East Asian financial crisis

• Failures of WTO and APEC to make headway on trade liberalisation

• Positive inspiration provided by European integration (especially the euro)

• Broad disquiet with behaviour of both the US and EU

• Based on Bergsten, 2000. (See References.)

Bilateral Free Trade Agreements (FTAs)

• Singapore’s free trade agreements with

• US, Japan, Australia, New Zealand, Mexico

• Mexico-European Union

• Australia’s FTAs with

• New Zealand, Singapore, Thailand, USA (under Australian Senate approval)

• Australian discussions for FTAs with China and Malaysia

The share of regional trading blocs in Australia’s merchandise exports 1974, 1989, 2002

Is regionalism a path to globalism?

• Two key questions:

• 1. Does regional integration increase or decrease global economic welfare?

• 2. Will regional trading blocs lead to global trade more quickly than the multilateral process?

• Two views

• regional trading blocs = ‘stumbling’ blocs

• regional trading blocs = building blocs

• Hopefully, the latter view will prevail.

References

• Bergsten, F. 2000, ‘Towards a tripartite world’, The Economist,15 July.

• Gionea, J. 2003, International Trade and Investment, McGraw-Hill, Sydney.

• Hill, C. 2003, International Business, Competing in the Global Marketplace, McGraw-Hill, New York.

Australia’s trade with ASEAN in passenger motor vehicles, A$ million, 1999–2003

Australia’s trade with NAFTA in passenger motor vehicles (PMV), A$ million, 1999–2003

Australia’s trade with NAFTA in motor vehicle parts (MVP), $A million, 1999–2003

Australia’s cumulative trade (PMV + MVP) with NAFTA, A$ million, 1999–2003