Chapter 8 Regional economic integration Lecture plan Why regionalism?

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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.


  • 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

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