Global Trade Operations
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Week4LectureSlidesupdated-OMGT2243.pptx
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OMGT 2243:
Global Trade Operations
Week: 4
Regional economic integration
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Learning objectives
After you have read this chapter, you should:
Be able to explain the different levels of regional economic integration.
Understand the economic and political arguments for regional economic integration.
Understand the economy and political arguments against regional economic integration.
Be familiar with the history, current scope and future prospects of the world’s most important regional economic agreements.
Understand the implications for business that are inherent in regional economic integration agreements.
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Introduction
Regional economic integration (REI) refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other.
Regional trade agreements are designed to promote free trade:
but instead the world may be moving toward a situation in which a number of regional trade blocks compete against each other.
As a process, REI involves behaviours designed to abolish discrimination between firms which belong to different national states.
As a state of affairs, REI represents an absence of discrimination between national economies, but to varying degrees.
Forces stimulating the regional integration
There are five levels of economic integration:
A hierarchy determined by the removal of restrictions to the free flow of goods, services, and factors of production between member countries:
A free trade area
A customs union
A common market
An economic union
A political union.
Levels of economic integration
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Levels of economic integration
1. A free trade area eliminates all barriers to the trade of goods and services among member countries, but members determine their own trade policies for nonmembers:
the European Free Trade Association (between Norway, Iceland, Liechtenstein and Switzerland)
the North American Free Trade Agreement (between the US, Canada and Mexico- now superseded by USMCA)
the Closer Economic Relations CER (between Australia and New Zealand).
How different is USMCA from NAFTA (US perspective)- increase in tariffs for car from Canada and Mexico
Greater access to Canadian dairy
Increase in tariff quota from $20 to $150 for Canadian consumers to buy goods online from US
Strengthening IP rights
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Levels of economic integration
2. A customs union eliminates trade barriers between member countries and adopts a common external trade policy:
The Andean Community (between Bolivia, Columbia, Ecuador and Peru) is an example of a customs union.
Gulf Cooperation Council (between Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE)
3. A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production:
MERCOSUR (between Brazil, Argentina, Paraguay, Uruguay, and provisionally since 2006, Venezuela) is aiming for common market status.
2) Economic efficiency, closer political and economic ties
Customs union in 2015
Common electricity grid
Qatar- SA, UAE and Bahrin
Kuwait and Oman lobbying
3) free movement of labor and capital among its members East African Common Market (Kenya, Uganda and Tanzania), and West African Common market (ECOWAS are: Benin, Burkina Faso, Cabo Verde, Côte d’Ivoire, The Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.)
New argument Brexit- Common market 2.0
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Levels of economic integration
4. An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, harmonised tax rates, and a common monetary and fiscal policy:
The European Union (EU) is an imperfect economic union.
5. A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states:
The EU is headed toward at least partial political union, and the United States is an example of even closer political union:
The United States of Europe
Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the U.S. Federal Reserve. Fiscal policy is the collective term for the taxing and spending actions of governments.
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Levels of economic integration
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The economic case for integration
All countries gain from free trade and investment:
The free trade argument.
Regional economic integration is an attempt to exploit the gains from free trade and investment.
‘Global’ free trade seems unreasonable… REI is more realistic.
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The political case for integration
Linking countries together, making them more dependent on each other:
creates incentives for political cooperation and reduces the likelihood of conflict.
gives countries greater political clout when dealing with other nations.
demonstrated through the EU.
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Impediments to integration
Economic integration can be difficult because:
while a nation as a whole may benefit from a regional free trade agreement, certain groups within nations may lose:
e.g. the French farmers in the EU
Australian dairy farmers under the CER.
it implies a loss of national sovereignty:
e.g. England and its currency and the EU.
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The case against regional integration
Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts:
Trade creation occurs when low cost producers within the free trade area replace high cost domestic producers.
Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers.
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The case against regional integration
Consideration of the relativities between:
static effects; and
dynamic effects.
Trade Creation:
High cost domestic producers in individual member countries are displaced by efficient producers from other member countries… trade is created and efficient producers gain scale economies (the dynamic effects).
Consumers benefit from lowered prices and better quality.
Trade Diversion:
Lower cost producers from outside are replaced by higher cost producers from within. This is a static effect.
The case of Australian agriculture.
Global welfare is increased if trade creation > trade diversion.
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Regional economic integration in Europe
Europe has two trade blocs:
The European Union (EU) with 28members.
The European Free Trade Area (EFTA) with four members.
The EU is seen as the world’s next economic and political superpower.
EFTA Iceland, Liechtenstein (lick sten tain), Norway, and Switzerland
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European Union members
Members are in green
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Evolution of the European Union
The EU was formed as a result of the devastation of two world wars on Western Europe and the desire for a lasting peace, and the desire by the European nations to hold their own on the world’s political and economic stage.
The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel and scrap metal formed in 1951.
The European Economic Community was formed in 1957 at the Treaty of Rome with the goal of becoming a common market.
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Political structure of the European Union
There are four main institutions of the EU:
the European Commission – responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws.
the Council of the European Union – the ultimate controlling authority within the EU.
the European Parliament – debates legislation proposed by the commission and forwarded to it by the council.
the Court of Justice – the supreme appeals court for EU law.
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The Single European Act
The Single European Act: was adopted by the EU in 1987.
committed the EC countries to work toward establishment of a single market by December 31, 1992.
was born out of frustration among EC members that the community was not living up to its promise.
provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case.
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The establishment of the euro
The Maastricht Treaty committed the EU to adopt a single currency.
By adopting the euro, the EU has created the second largest currency zone in the world after that of the US dollar.
The euro is used by 19 of the 28 member states.
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The establishment of the euro
Benefits of the euro:
There are savings from having to handle one currency, rather than many:
Reduced transactions costs of doing business.
A common currency will make it easier to compare prices across Europe.
European producers will be forced to look for ways to reduce their production costs in order to maintain their profit margins.
It should give a strong boost to the development of highly liquid pan-European capital market.
A pan-European euro denominated capital market will increase the range of investment options open both to individuals and institutions.
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The establishment of the euro
Costs of the euro:
National authorities lose control over the monetary policy.
The EU is not an optimal currency area (an area where similarities in the underlying structure if economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy).
Since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar.
Initially, the euro fell in value relative to the dollar, but strengthened to high of near USD1.50 in mid 2008.
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Enlargement of the European Union
Many countries have applied for EU membership.
Ten countries joined on May 1, 2004 expanding the EU to 25 states, with population of 450 million people, and a single continental economy with a GDP of €11 trillion.
In 2007, Bulgaria and Romania joined bringing membership to 27 countries.
In 2013, Croatia joined EU
The new countries were not able to adopt the euro until at least 2007, nor would there be free movement of labour between new and existing countries before then.
Brexit
Article 50 is a plan for any country that wishes to exit the EU to do so. It was created as part of the Treaty of Lisbon - an agreement signed up to by all EU states which became law in 2009.
Any EU member state may decide to quit the EU, that it must notify the European Council and negotiate its withdrawal with the EU, that there are two years to reach an agreement.
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Source: BBC, 2018
Brexit
"hard" Brexit could involve the UK refusing to compromise on issues like the free movement of people even if it meant leaving the single market or having to give up hopes of aspects of free trade arrangements. At the other end of the scale, a "soft" Brexit might follow a similar path to Norway, which is a member of the single market and has to accept the free movement of people as a result of that.
Common market 2.0??
January 31 Brexit day!!!
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Source: BBC, 2018
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Regional economic integration in the Americas
There is a move toward greater regional economic integration in the Americas.
The biggest effort is the North American Free Trade Area (NAFTA):
The North American Free Trade Area (NAFTA) became law January 1, 1994
NAFTA’s participants are the United States, Canada and Mexico.
USMCA replacing NAFTA is signed on September 30, 2018.
Other efforts include the Andean Community and MERCOSUR.
A hemisphere-wide Free Trade Area of the Americas is under discussion.
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Economic integration in the Americas
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The North American Free Trade Agreement
NAFTA:
was to abolish tariffs on 99 percent of the goods traded between members by 2004.
removed most barriers on the cross-border flow of services.
protects intellectual property rights.
removes most restrictions on FDI between the three member countries.
allows each country to apply its own environmental standards, provided such standards have a scientific base.
establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages or child labour are ignored.
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The North American Free Trade Agreement
NAFTA’s supporters argued that:
Mexico will benefit from increased jobs as low cost production moves south and will attain more rapid economic growth as a result.
The US and Canada will benefit from the access to a large and increasingly prosperous market and from the lower prices for consumers from goods produced in Mexico.
US and Canadian firms with production sites in Mexico will be more competitive on world markets.
Critics of NAFTA argued that:
that jobs would be lost and wage levels would decline in the U.S. and Canada.
Mexican workers would emigrate north.
pollution would increase due to Mexico's more lax standards.
Mexico would lose its sovereignty.
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The North American Free Trade Agreement
Research indicates that NAFTA’s early impact was subtle, and both advocates and detractors may have been guilty of exaggeration.
The agreement has helped to create the background for increased political stability in Mexico.
Several other Latin American countries have indicated their desire to eventually join NAFTA.
Currently both Canada and the U.S. are adopting a wait and see attitude with regard to most countries.
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Regional economic integration in Asia and the Pacific
Several efforts have been made to integrate in Asia and the Pacific.
ANCERTA – Australia-New Zealand Closer Economic Relations Trade Agreement – ‘CER’:
Australia and New Zealand
ASEAN:
Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia.
APEC:
Australia, Brunei, Canada, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, Chile, Peru, New Zealand, Papua New Guinea, Russia, Philippines, Singapore, Malaysia, Vietnam, Thailand and United States.
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Regional economic integration in Asia and the Pacific
Association of Southeast Asian Nations – ASEAN
Created in 1967.
Economic, political and social cooperation.
Little was accomplished until the early 1990s but significant progress towards free trade and a single market since.
Asia Pacific Economic Cooperation – APEC
Founded in 1990 to ‘promote open trade and practical economic cooperation’.
Promote a sense of community.
Slightly more than half of world’s GDP.
Slightly less than half of global trade.
Some time ago the influential Brookings Institution expressed concern that APEC ‘is in grave danger of shrinking into irrelevance as a serious forum’.
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Regional economic integration in Asia and the Pacific
The CER between Australia and New Zealand
Began in 1983, superseding the Aust NZ Free Trade Agreement, but free trade in goods was achieved in 1990, and in nearly all services in 1989.
Supported by an array of bilateral arrangements such as government procurement and movement of people.
A Trans Tasman Mutual Recognition Arrangement facilitates movements of persons between the two countries.
For example, no specific agreement on FDI, restrictions are minimal as there exists high levels of agreement on competition policy.
Both countries have benefited:
Australia is NZ’s principal trade and investment partner, while NZ is Australia’s fifth largest export market, seventh largest source of imports, and third largest destination for Australia investment abroad.
The CER is somewhat more than a free trade agreement.
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ASEAN countries
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APEC members
Union of South American Nations
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Regional economic integration in Asia and the Pacific
Other Australia and New Zealand free trade agreements:
Australia with Singapore (July 2003)
Australia with Thailand (Jan 2005)
Australia with US (Jan 2005)
New Zealand with Singapore (Jan 2001)
New Zealand with Thailand (July 2005)
New Zealand with Brunei, Chile and Singapore (Nov 2006)
New Zealand with China (October 2008).
Regional economic integration in Asia and the Pacific
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ASEAN-Australia-New Zealand (AANZFTA) — 1 January 2010 for eight countries: Australia, New Zealand, Brunei, Burma, Malaysia, the Philippines, Singapore and Vietnam. For Thailand: 12 March 2010. For Laos: 1 January 2011. For Cambodia: 4 January 2011. For Indonesia: 10 January 2012
Malaysia-Australia (MAFTA) — 1 January 2013
Korea-Australia (KAFTA) — 12 December 2014
Japan-Australia (JAEPA) — 15 January 2015
China-Australia (ChAFTA) — 20 December 2015
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP TPP)- 8 March 2018
(Source: DFAT, 2018; AFR, 2018)
Commodity level cooperation- OPEC
Organisation of the petroleum exporting countries (OPEC)
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Questions ???
