MOS Notes - Chapter 8 Notes Regional Economic Integration...

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Chapter 8 Notes: Regional Economic Integration 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 between each other. Becoming very popular, WTO receives notices continuously from countries notifying the WTO of participation in a regional trade agreement Dominant in Europe (European Union) Similar movements occurring in North America (NAFTA) Benefits: Move toward greater regional economic integration can potentially deliver important benefits to consumers and present firms with new challenges Rapid spread of regional trade agreements raises the fear among some of a world in which regional trade blocs compete against each other Levels of Economic Integration Free Trade Area (ex. NAFTA) Customs Union Common Market Economic Union (European Union) Political Union Free trade area: all barriers to the trade of goods and services among member countries are removed Customs union: eliminates trade barriers between member countries and adopts a common external trade policy Common market: also allows factors of production to move freely between members Economic union: involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy Political union: EU is moving towards political union, independent states were effectively combined into a single union Economic Case for Integration Total absence of barriers to the free flow of goods, services and factors of production among nations Unrestricted free trade and FDI are ideal Motivated by the desire to exploit the gains from free trade and investment Political Case for Integration Attempts to establish free trade areas, custom unions Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring states Reduces potential violent conflict between states and the countries can now enhance their political weight in the world Impediments to Integration
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Not easy to attain because: Costs: certain groups may lose while the nation as a whole benefits Concerns over national sovereignty: arise because close economic integration demands that countries give up some degree of control over such key policy issues such as monetary policy, fiscal policy and trade policy Against Regional Integration Costs are ignored Trade creation occurs when high-cost domestic producers are replaced by low cost producers within the free market area (or when higher-cost external producers are replaced by lower-cost external producers within the free trade area Trade diversification occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area Regional free trade will benefit the world only if the amount of trade it creates
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