The Theory of Regional Economic Integration

1: Introduction

The notion of regional financial integration is characterized as countries of a geographic district approaching simultaneously in some kind of agreement to foster trade and development. Investorswords.com defines NAFTA as the “North American Free Trade Agreement. A 2004 agreement reached by the United States, Canada, and Mexico that instituted a schedule for the phasing out of tariffs and eliminated a variety of fees and other hindrances to encourage free trade between the three North American countries.” Under this trade agreement, all non-tariff obstacles to agriculture will be eradicated by 2008. NAFTA is advised a free trade area kind of agreement. The first attribute of a free trade area is the liberalization of trade guideline for members. Second, the exclusion of trade obstacles put against members. This encompasses the exclusion of tariffs, quotas, and diverse non-tariff obstacles, or a promise to eliminate such trade obstacles by a certain date.

In other phrases, Regional financial integration is an agreement amidst nations in a geographic district to decrease and finally eliminate, tariff and non tariff obstacles to the free flow of items or services and components of output amidst each others. It can be furthermore mentions as any kind of placement in which nations acquiesce to coordinate their trade, fiscal, and/or monetary principles are mentioned to as financial integration. Obviously, there are numerous distinct grades of integration.

Free Trade Area: A free trade area happens when a assembly of nations acquiesce to eradicate tariffs between themselves, but sustain their own external tariff on trades from remainder of the world. The North American Free Trade Area is an demonstration of a FTA. When the NAFTA is completely applied, tariffs of automobile trades between the US and Mexico will be zero. However, Mexico may extend to set a distinct tariff than the US on auto trades from non-NAFTA countries.

Customs Union: A customs union happens when a assembly of nations acquiesce to eradicate tariffs between themselves and set a widespread external tariff on trades from remainder of the world.

Common Market: A common market sets up free trade in items and services groups widespread external tariffs amidst constituents and furthermore permits for the free mobility of capital and work over countries.

Economic Union: An economic union normally will sustain free trade in goods and services, set widespread external tariffs amidst constituents, permit the free mobility of capital and work, and will furthermore relegate some fiscal expending responsibilities to a supra-national agency.

Regional Economic Integration plays a foremost significance function in global trade. It enhances trade amidst constituent through the elimination of culture obstacles, and rapidly and considerably advances the share of assets and general dynamism, by fostering larger affray amidst the taking part nations and by supplying more inducements for the introduction of new and quickly altering technologies and output methods. It assists to accelerate nationwide investments and foreign direct investments in alignment to come by worldwide competitiveness in the face of expanding globalization.

Regional Economic Integration stimulates financial development in nations and presents added profits from free trade beyond worldwide agreements for example GATT and WTO. Economic interdependence conceives inducements for political collaboration and decreases promise for brutal confrontation. Together, the nations have the financial clout to enhance trade with other nations or trading blocs.

2: Defining the theory of regional economic integration.

According the American Marketing Association, the comparative advantage theory, in global marketing, is a theory that holds that a country can gain from trade even if it has an absolute disadvantage in the production of all goods, or, that it can gain from trade even if it has an absolute advantage in the production of all goods. This theory can be used to support regional economic integration because it allows a country to trade in goods or services that they normally don't produce and to focus on goods and services they do produce. The production capabilities of each country vary because they have different levels of education, workforce, natural resources, capital, etc. Regional Trade Agreements (RTA) also helps these countries with their productions capabilities without the trade restrictions.

The comparative advantage theory shows the advantage of regional economic integration. Without the trade restrictions, because of Regional Trade Agreements, the normal trade barriers aren't there and countries can increase their production, thus increasing their exports. This in turn would increase world production and increase the balance of imports and exports.

Also another advantage of regional economic integration is that countries that enter into Regional Trade Agreements can help each other by reducing trade restrictions and barriers more efficiently. The comparative advantage theory shows that Regional Trading Agreements which promote free trade will help the member countries of the trading bloc reduced trade barriers faster.

Another advantage is the political cooperation of neighboring countries. It can reduce the potential for violent conflict and increase their political weight on the world stage.

One disadvantage of regional economic integration is the fear of regional trading blocs competing against each other. Although trade would be free within the bloc, it would lead to high tariffs for those countries outside the bloc or for other regional trading blocs. This would cause a decrease in trade between blocs.

Another disadvantage is that some believe that countries will lose their autonomy or national sovereignty. A country would become reliant on the trading bloc because they would have to give up some control over their fiscal and monetary policies or trade policies. The country would look to the trading bloc for imports and would only export to countries within the bloc. The governments of the countries might begin to look to the bloc for leadership, thus losing it identity.

Another disadvantage is the lost of jobs. With free trade, certain industries will seek out countries, within the trading bloc, where they can pay lower wages and decrease their production costs. They will move their production to these countries, thus increasing the unemployment rate.

There are five phases of regional financial integration: Free Trade Area, Customs Union, Common Market, Economic Union, and Political Union.

  • A free trade area has no obstacles for the trade of items amidst constituent countries.
  • A customs union is a free trade area, but furthermore has a widespread external trade policy.
  • A common market is a customs union, but furthermore permits output to move between members.
  • An economic union is a common market, but furthermore has a widespread currency, levy rate, and monetary and fiscal policies.
  • A political amalgamation is an economic union, but with a unified political bureaucracy for all members.

Regional integration in Europe can be traced back to the end of World War II. With Europe pain the brunt of both World Wars, numerous accepted that the nations weren't large sufficient to contend in the world market or in world politics. The European Coal and Steel Community were formed in 1951 to eliminate the obstacles of trade of coal, metal, and steel. The initial constituents were France, Italy, Belgium, Luxembourg, West Germany and the Netherlands.

The European Community (EC) was founded in 1957 with the marking of the Treaty of Rome. The treaty made a general market. The EC altered its title to the European Union (EU), one of two trading blocs in Europe, in 2004 after the ratification of the Maastricht Treaty. The EU is in the economic union stage of regional integration with a widespread currency called the Euro. However, not all constituent nations have taken up the Euro, the United Kingdom being the most famous member. They have 25 constituent nations currently.

The second bloc is the European Free Trade Association (EFTA). The EFTA was founded in 1960 for those nations that didn't desire to connect or were not permitted to connect the EC. The EFTA had seven initial constituent nations, but actually has 4 constituent nations, Iceland, Liechtenstein, Norway, and Switzerland. The last cited two nations are origin constituents of the EFTA.

3: Regional monopolies and International Trade Law.

The European Union had its early beginnings with an agreement between some western European countries to promote the free trade of coal, iron, steel, and scrap metal. The Treaty of Rome in 1957 created what was known as the European Community. In 2004, the name changed to the modern day European Union with the ratification of the Maastricht Treaty. Currently the EU has 25 member countries with two more scheduled to join in 2007. When those Bulgaria and Romania join in 2007, the combined population of the EU will be almost one-half of a billion people. One of the rules for membership is that countries must have a functioning competitive market economy.

Since the collapse of communism in the late 1980s, many smaller countries were formed as result of breaks from present day Russia. Their change from a communist style government and economy has been a difficult transition. Certainly, those countries are not as economically developed as countries that have been under democracy and capitalism for years such as the United Kingdom and France. A telling sign of the stark differences can be seen from the GDP per Capita for the top four member countries and the bottom four. As seen below the top four are all long time democratic countries and the bottom four are all former soviet countries. These statistics get from the CIA world fact book.

Top Four - GDP per Capita Bottom Four - GDP per Capita

Luxembourg - 72,945 Latvia - 13,784

Ireland - 42,859 Poland - 13,797

Denmark - 36,079 Lithuania - 15,443

Austria - 35,002 Slovakia - 17,239

As seen above the members of the EU have vast ranges of economic development. Most of the older members to the EU have long had open markets that have helped to strengthen their economies. The younger members to the EU come from an economy that was very stringent and help to the ideals of a communist philosophy. Now that these countries have been added to the EU signifies their commitment to free market ideals. Adopting these ideals is a requirement for induction.

The EU is a major force to be reckoned with in the global economy. "Even though the EU corresponds only seven percent of the global population it accounts for in the region of one fifth of the global imports and exports." (European Union , 2006, p.45) Two-thirds of EU trade takes place within member countries. Opening up the markets within the EU has made for better competition for consumers.

As shown, regional economic integration has many benefits for the countries that are part agreements with other countries. Integration can help increase competition and lower prices for consumers. It can also help countries who might have smaller or less capable economies compete and have access to goods that otherwise would not normally be as accessible.

4: Trade Hindrances and their elimination.

In the globalizing world, it is but logical that most trade groups contain countries in the same area of the world to offer trade agreements to obtain mutual benefits. Neighboring countries tend to ally for several reasons:

  • The distances that goods need to travel between such countries are short.
  • Consumers' tastes are likely to be similar, and distribution channels can be easily established in adjacent countries.
  • Neighboring countries may have a common history and interests, and they may be more willing to coordinate their policies (Balassa, 2006, p23-47).

This is why in the enlargement with countries from Central and Eastern Europe has become an important factor in the strengthening the European Union (EU). The general view is that this enlargement will substantially affect the functioning of the European Union. However, the institutional structure of the European Union, which was initially designed for a union of only six member states, might not be suitable for a European Union of 27 or more member states. The problems associated with enlargement and their possible solutions have been discussed at two intergovernmental conferences (in 2006-2007 and in 2000) leading to treaty reforms made at Amsterdam and Nice (Steunenberg, 2002, p.1-25).

Often dubbed as the largest and most comprehensive of the regional economic groups, the European Union began as a customs union, but the formation of the European Parliament and the establishment of a common currency, the euro, makes the EU the most ambitious of all the regional trade groups. Although the EU remains the dominant trading bloc in Europe, the European Free Trade Association and Central European Free Trade Association are other regional trading blocs that promote free trade.

The European Union has been moving toward a single market since the passage of the Single European Act of 1987. Although progress is being made, a survey of the European business community at the end of 2001 revealed that trade would be improved with the easing of national and EU rules. Particularly, the study revealed that:

  • A large number of companies are dissatisfied with the quality of their regulatory environment.
  • Most companies have not yet felt any impact from government's attempts to simplify legislation, particularly companies in France, Germany, and Denmark.
  • At least 50 billion euro could be saved with better-quality legislation.
  • Finland is regarded as the easiest member state to trade with, whereas the United Kingdom and Italy are the most difficult (Hofheinz and Shishkin, 2002, p57).

The United States is the EU's largest trading partner. Relations between the two trading powerhouses worsened in early 2001 when the United States passed heavy steel tariffs and farm subsidies. Tensions have eased as the United States continues to add EU exemptions to the steel tariff and as the United States promises to ease agricultural protectionist measures. The EU also won a ruling by the World Trade Organization (WTO) in August 2002 against the United States, which had been granting tax breaks to its companies that had a foreign presence. The WTO ruled this to be an illegal export subsidy, allowing the EU to impose sanctions on the United States of up to $4 billion. The EU will most likely wait to apply the sanctions, hoping that the United States will change its tax laws, thus helping to ease the trade tensions that already exist (Wall Street Journal, 2002). There are still barriers to trade with the United States, including tariffs, differences in legal and regulatory systems, and the absence of international standards.

During the formation of the European Union, the organizing countries focused mainly on economic integration and left foreign policy to the individual countries. Realizing the benefits a common foreign policy would be to the EU, member countries began formalizing objectives in 2003 on armed conflicts, human rights, and other international foreign policy issues. Progress in this area has been slow, and the desire to incorporate an EU rapid-reaction force is constantly stalled due to differences in member opinion. National attitudes are currently the driving force behind European policy. Most European countries support the United States in the war on terror. However, countries are splintered in their views on the Middle East. Although Britain supports the United States in the war on Iraq, other countries oppose the views of the United States. The EU will continue to push toward a common foreign policy that will help align national differences and bring the member nations one step closer to complete integration (The Economist, 2002).

One of the EU's major challenges is that of expansion. The next level of expansion, set in 2004, is to include Poland, Hungary, Czech Republic, Slovenia, Slovakia, Latvia, Estonia, Lithuania, Malta, and Cyprus. Bulgaria and Romania have been given a date of 2007, and Turkey has been put on hold while it continues to improve its human rights record (The Economist, 2002). On July 1, 1992, the Central European Free Trade Association (CEFTA) went into effect, with the Czech Republic, Slovakia, Hungary, and Poland as members. Since CEFTA's inception, Bulgaria, Romania, and Slovenia have joined the economic cooperation. CEFTA's goal was to establish a free trade area by 2000 that has the EU's basic trade structure (Richter & Toth, 2004).

Although some of these countries will joined the EU in 2004, CEFTA countries continue to promote trade and prepare for accession to the EU (CEFTA, 2004).

The acquisition of the 13 new countries has been predicted to increase the EU's population by 100 million, enlarge its land by one-third, and add $400 billion to its economic output (Rossant, 2002, p65). The admission will bring many difficult problems to the zone. Most countries in Central and Eastern Europe are poor, have fledgling democracies, and depend greatly on agriculture-as much as 20 percent of gross national income (GNI), compared with only 6 percent on average in the EU. They will thus strain the EU's financial resources. This happened in 2001 where these 13 nations had a significantly lower per capita GNI ($9,648) than the existing 15 members of the EU ($23,815) (World Bank, 2001). Another problem of expansion is governance. Both geographically and economically large members of the EU, such as France and Germany, fear that the addition of so many new countries will weaken their control and influence. On the other hand, the addition of 10 new countries, and possibly 3 more later, will certainly move the EU ahead of NAFTA in total population and increase the EU's power as an international trading block.

For example, in Latvia's case, in September 2003, the Latvian referendum vote won decisive support for EU membership. Despite the strong support, there have been some questions about what the implications of EU enlargement would be for the people of Latvia. By early 2004, some Latvians began to express concern about the prospect of increased immigration and the prospects for their livelihoods. Indeed, the local Latvian press has highlighted the increasing trend by farmers from Denmark, Finland and the Netherlands to purchase farmland in Latvia with the purpose of benefiting from EU subsidies. Laws which have been implemented to limit the sale of property and land in Latvia have come into being rather late in the game, according to the press, and there is some degree of fear that they will be unable to deter the mass purchase of desirable farmland by foreigners.

However, risks in investing in Latvia lie in its history of shaky and short-lived governments. In 2004, the country installed its twelfth government in 13 years. Corruption is part of the problem, with foreign businesses, in particular, complaining of local and state bureaucracies demanding bribes for the myriad permits needed to carry on business. Private and business interests also have too strong a grip on Latvian politics, and their rivalries sometimes lead to erratic policies. Latvia's unproductive and relatively large agricultural sector will cause problems now that the country has joined the EU. Latvia's many small farmers will not be able to compete with the big, modern producers in Western Europe (Anderson, 2008, p86).

Ultimately, the EU is a tremendous market in terms of both population and income, and it is one that companies cannot ignore. Merger and acquisition activity has really picked up in Europe. The market in Europe is still considered fragmented and inefficient compared with the United States, so most experts feel that mergers, takeovers and spinoffs will continue in Europe for years to come. U.S. companies are now buying European companies to gain a market presence and to get rid of competition. Also, European firms are also acquiring other European firms to improve their competitive advantage against U.S. companies and to expand their market presence.

However, due to the gloomy economic outlook in the EU and the strength of the euro, business confidence at the end of 2002 was low. Although the stronger euro proves its success amidst economic woes, it also has its downside for European business. Companies feel they are getting priced out of export markets and that U.S. demand for euro-priced goods is falling as goods become more expensive relative to the dollar. Some companies feel they can't react quickly enough to the rise in the euro because of new EU regulations and strict employment protection laws. These external issues may force European regulators to sort out the EU's labor problems and force companies to lower costs to become more competitive and beneficial moves in the long run.

5: Regional economic integration and globalization (in realm of WTO).

The globalization mania has undoubtedly become the buzz phrase in today's world of economics and its influences on evolving economics lift several principle and study matters that need to be appreciated methodically that if globalization is an inescapable truth or just another schism of the evolved financial super powers. Nevertheless a powerful impetus that globalization has developed in the localities of trade, foreign direct buying into and other capital flows and product markets, presents evaluation of global financial prospects as they sway evolving nations and investigates the connection between evolving nations and the world economy.

The expanding integration of evolving nations with global finances discovers the possibilities and trials that originate from such integration. The participation of evolving nations in the accelerated stride of integration over the past ten years has shown large disparities while some evolving nations have quickly amplified their undertakings in the world trade capital markets, numerous others have not, and become less integrated with the global economy.

Many nations of the world lagging in global integration are amidst the poorest because there is close connection between development presentation and integration. Rapid development tends to encourage more open finances and lagging integration is a signal of certain principle deficiencies, furthermore integration of finances can be a means to higher development rate by better asset share, larger affray, move of expertise and get access to foreign savings.

The stride of integration amidst evolving nations has been very uneven, though, in the aggregate evolving nations kept stride with the world rate of trade integration. The ratio of trade to GDP dropped in 44 out of 93 evolving nations in the last decade. Similarly the circulation of foreign direct buying into was furthermore garbled in eight evolving nations accounted for two thirds of foreign direct which inflow in 199093, while half of all evolving nations obtained little or none.

Countries that are lagging in integration will more expected face a favourable external natural environment in which to undertake restructures, and these restructures have a large function to play in furthering growth. However, organising the transition in the direction of expanded integration will be a tough and vital dispute for the evolving nations lagging integration vis-a-vis world economy.

What necessitate for a evolving finances like Pakistan to delink the finances from globalization method in the backdrop of South East Asian Currency Crisis and if it could be economically injurious for our finances in currency as well as for supply markets, still stay a inquiry mostly unanswered and needs several principle and study matters to be chased especially with the aftermath of the currency urgent position lately appeared in our region. Moreover, premier economists and even economic killers like George Soros have at last arrive to recognize the need to command this globalization mania. Nevertheless, there is a long way to proceed in the evolution of the Asian model. One can't anticipate the identical vigorous stride of advancement and financial development as Asian tigers skilled in the last ten years or so. There will be set-back furthermore, but if the right principles are chased, the Asian urgent position will turn out much like the one Mexico where just after two year, Mexico is steady again. Its finances are growing at an outstanding rate. We need not be pessimists about Asia; chasing right principles can turn round the situation.

China can play a very important function in this consider as a guarantor of last holiday resort in the district, since it has the biggest forex (foreign exchange) reserves in the world besides Japan. Drawing China into the regional coalition to stabilize Asia should be a key strategic target of the principles of Asian impedes countries.

In the granted financial scenario, the target of government of Pakistan should be equipped up to double-check that in the awaken of global financial integration the macro-economic principles should be so conceived as to accumulate impetus of financial integration, development and capital mobility in the altering natural environment round us. The imbalances in macroeconomic variables for example inflation, yield and paid work have to be rectified through fine-tuning of fiscal and monetary policies. More pressingly financial principles should be so conceived to confirm, that no farther devaluation of the currency becomes inescapable, since the erosion of currency worth is an harmful occurrence premier to liability trick vicious cycle in the finances, which we are currently opposite and it farther aggravates our financial ills particularly because of our inelastic trades and elastic exports.

A certain allowance of comparable proficiency is absolutely needed for our commerce and agriculture to sustain our financial equilibrium in the worldwide markets in which as asserted by the WTO paradigm, all components of output, can without coercion move globally anticipate labour. The message Pakistan can discover from Asian economic urgent position, demand that we should analyze our position objectively in our own financial structure and prudently take befitting assesses to bypass the recurrence of the pattern seen elsewhere.

The new millennium appears to be going the age of regional collaboration in one way or the other in the awaken of uneven globalization. Production and circulation structure are evolving multi layered with integration influencing some levels more deeply than others. Under such attenuating components, Pakistan should cement its bond with South-East Asian and Asia Pacific nations by searching financial collaboration with ASEAN and APEC to gain it stake in the Asian market by finding out tremendous possibilities-untapped after the flexibility of trade and buying into in the region. The "East look' principle will without a question be a timely development and help Pakistan to stabilize it finances under the moving financial global set-up where the world is concentrated its trade undertakings more inside regional financial blocks, like European Union, NAFTA and ASEAN.

6: Conclusion

As the EU moves nearer to a free-market, borderless finances, the European Court of Justice should extend to eliminate obstacles to takeovers, therefore making it simpler to trade. As described in the Wall Street Journal, “Soon the referees may proceed even further: unfastening the airline commerce to consolidation; limiting the EU's power to force businesses to share thoughtful property; and farther dwindling the EU's proficiency to halt business deals” (Hofheinz and Shishkin, 2002). EU countries are finding it tough to rendezvous the criteria of the steadiness and development pact partially because of the latest worsening in the economy. For demonstration, Germany, France, Italy, and Portugal failed to come to the goal for government shortfalls by 2004, therefore compelling the deadline to be moved to 2006. Changes will most expected be made to the steadiness and development pact as a outcome of the application of the 10 nations in 2004 or the future adoption of the euro by Britain (The Economist, 2002). Many matters face the EU as we move through time, but there are numerous possibilities for businesses to elaborate their markets and causes of provide as the EU augments and embraces more of Europe.

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