Chapter 9: Regional Economic Integration

LO9-1 Levels of Economic Integration

Economic integration refers to different ways countries can join together economically, ranging
from minimal cooperation to complete unification. Here are the different levels of economic
integration, from least integrated to most integrated:
1. Free Trade Area (FTA)
 Member countries remove all barriers to the trade of goods and services with each other.
No Tariffs or Quotas, Independent Trade Policies
2. Customs Union
 Eliminates trade barriers between member countries and adopts a common external trade
policy. A unified tariff policy for trade with non-member countries.
3. Common Market
 No trade barriers between member countries, a common external trade policy, and allows
free movement of factors of production (labor, capital).
4. Economic Union
 Involves the free flow of products and factors of production among member countries, a
common external trade policy, and additional economic policy integration. Common
Currency, Unified tax rates, common monetary, and fiscal policies.
5. Political Union
 The most integrated form of economic integration where a central political apparatus
coordinates the economic, social, and foreign policy of member states.


LO9-2 The Case for Regional Integration

Economic Case for Integration
1. Benefits of Free Trade:
 Specialization and Efficiency: Countries can focus on producing goods and
services where they have a comparative advantage, leading to greater efficiency .
 Dynamic Gains: Free trade stimulates economic growth by opening up markets,
which can lead to increased innovation and efficiency.
2. Foreign Direct Investment (FDI):
 Technology Transfer: FDI brings technological, marketing, and managerial
expertise to host countries.
  Economic Growth: By attracting FDI, countries can stimulate their economic
growth through improved knowledge and practices.
3. Regional vs. Global Integration:
 Easier Coordination: Achieving free trade and investment is easier among a
smaller number of geographically proximate countries compared to the entire
world.
 Policy Harmonization: Fewer countries mean fewer perspectives to reconcile,
making it simpler to establish common rules and policies.
Political Case for Integration
1. Peace and Stability:
 By linking economies, countries create incentives for political cooperation and
reduce the likelihood of conflict.
2. Enhanced Political Influence:
 By uniting their economies, countries can enhance their political weight on the
global stage, enabling them to better compete and negotiate in international
markets.
Impediments to Integration
1. Economic Costs:
 While the overall economy may benefit, certain groups, such as workers in low-
skill industries, may lose their jobs as production shifts to countries with lower
labor costs.
2. National Sovereignty:
 Economic integration requires countries to cede some control over their monetary,
fiscal, and trade policies. This can be a major hurdle as countries are reluctant to
give up sovereignty.

LO9-3: Economic and Political Arguments Against Regional Economic

Integration
Economic Arguments Against Integration:
1. Trade Diversion:
 Definition: Trade diversion occurs when trade shifts from a more efficient
exporter outside the regional agreement to a less efficient one within the
agreement.
  This can lead to higher costs and inefficiencies, ultimately reducing the overall
economic welfare of the region.
 Trade diversion can offset the benefits gained from trade creation within the
region.
2. Unequal Distribution of Benefits:
 Larger and more economically developed countries tend to gain more from
regional integration due to their competitive advantages.
 Smaller or less developed countries may not experience the same level of
benefits, and might even suffer from increased competition that can overwhelm
their domestic industries.
 Industries in smaller economies may collapse, leading to job losses and social
issues, which can create political tension and resistance to further integration.

LO9-4: History, Scope, and Future Prospects of Key Regional Agreements

Historical Context and Evolution:
1. Post-War Europe:
 Motivation: The devastation of World War II motivated European countries to
seek lasting peace and economic stability through integration.
 Initial Steps: The European Coal and Steel Community (ECSC) was formed in
1951 to manage coal and steel production collectively, laying the groundwork for
broader integration.
2. Formation of the European Union (EU):
 Treaty of Rome (1957): Established the European Economic Community (EEC),
aiming to create a common market.
 Single European Act (1987): Aimed to remove trade barriers and create a single
market by 1992.
 Maastricht Treaty (1992): Transformed the EEC into the EU and set the stage
for the introduction of a common currency, the euro.
Current Scope:
1. European Union (EU):
 Membership: 27 countries after the exit of the United Kingdom in 2020.
 Single Market: Allows for the free movement of goods, services, capital, and
people.
  Common Currency: The euro, adopted by 19 of the member states, facilitating
easier trade and economic integration.
2. NAFTA/USMCA:
 NAFTA: Implemented in 1994, aimed to eliminate trade barriers between the US,
Canada, and Mexico.
 USMCA: Replaced NAFTA in 2020, updating and revising trade rules to reflect
modern economic realities.
3. ASEAN:
 ASEAN Free Trade Area (AFTA): Promotes economic integration among its 10
member states in Southeast Asia.
 Goals: Reducing tariffs and non-tariff barriers, fostering economic cooperation
and integration.
Future Prospects:
1. EU Expansion and Integration:
 Eastern Europe: Continued efforts to integrate Eastern European countries and
enhance political and economic stability in the region.
 Challenges: Managing diverse economic structures, political systems, and public
opinion on integration.
2. North America:
 USMCA: Continued focus on modernizing trade rules and addressing labor,
environmental, and digital trade issues.
 Political Dynamics: Ongoing negotiations and adjustments to meet the changing
economic and political landscape.

LO9-5: Implications for Management Practice

Market Access and Expansion:
 Opportunities: Regional agreements open up larger markets for businesses, reducing
tariffs and simplifying regulatory requirements.
 Strategic Expansion: Companies can expand their operations and access new customer
bases more easily.
Strategic Planning and Adaptation:
  Supply Chain Management: Firms need to optimize their supply chains to take
advantage of reduced trade barriers and increased market access.
 Investment Decisions: Managers must consider the implications of regional agreements
on their investment strategies, including where to locate production facilities and how to
manage cross-border operations.
Regulatory Compliance and Standards:
 Harmonized Regulations: Businesses must ensure compliance with harmonized
standards and regulations across member countries.
 Adjustments: This may involve changes in product standards, labeling, and certification
processes to meet regional requirements.
Increased Competition:
 Competitive Pressures: Regional integration increases competition, driving firms to
innovate and improve efficiency.
 Cost Management: Companies need to focus on reducing costs and enhancing their
competitive edge to thrive in a more integrated market.