_ Chapter-11: Regional Economic Integration ~ Chapter-12: International and Economic Organisation11 Regional Economic Integration Learning Outcomes bh After studying this chapter, you should be able to understand: > Regional Economic Integration > Types/Levels of Economic Integration > Major Regional Trading Groups > Regional Economic Integration in the Americas > Regional Economic Integration in Asia > Commodity Agreements 11.1 Regional Economic Integration Tinbergen defines international economic integration as “the creation of most desirable structure of international economy, removing artificial hindrances to the optimum operation and introducing deliberately all desirable elements of coordination or unification.”! This is a vague as well as an exhaustive definition. It is vague because it refers to ‘the creation of most desirable structure’ and does not specify the nature of structure for international economic integration. It is exhaustive because it relates economic integration to the ‘international economy’ and not to group of countries. Salvatore’ definition is simple. He defines it as “the commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together”? 1. J, Tinbergen, International Economic Integration, 2/e, 1965.conomic Integration, 2/e, 1965. 2. D, Salvatore, International Economics, 3/e, 1990.11.4 || International Business International economic integration, therefore, refers to a decision or process whereby two or more countries combine into a larger economic region by removing discontinuities and discriminations existing along national frontiers, and by establishing certain elements of cooperation and coordination between them. In fact, economic integration refers to the growing economic: interdependence that results when two or more countries within a geographic region form an alliance aimed at reducing barriers to trade and investment. 11.2 Types/Levels of Economic Integration “There are five possible levels of economic integration as shown in exhibit 1. These levels can be thought of as a continuum, with economic interconnectedness progressing from a low level of integration - the free trade area - through higher levels to the most advanced form of integration ~ the political union which no countries have yet achieved. POLITICAL UNION ECONOMIC UNION ‘COMMON MARKET FREE TRADE AREA 1. The Free Trade Area: The free trade area is the simplest and most common form of economic arrangement wherein the member countries agree to eliminate tariffs and other trade barriers among themselves but each member country retains its own tariff, trade restrictions and commercial policies with countries outside the bloc ie. non-member countries. Europea Free Trade Area (EFTA) and North American Free Trade A t minent examples of free trade area, 'greement (NAFTA) are pro! ‘The Customs Union: The second level of economic integration is the Customs Union which i similar to a free trade area except that the member countries adopt a common external tariffand commercial policy on imports from the outside world, i.e. non-members. An administrativé machinery is set up to review the trade relations with non-member countries as it is challenging to determine the most apt common external tariff acceptable by all member countries %¢ the method to distribute the revenue proceeds from tariff amongst the member countrié MERCOSUR, an economic bloc in Latin America is an example of this type of arrangement3 4 Regional Economic Integration || 11.5 Common Market: The member countries establish a common market, also known asa single market, in the third level of economic integration. In such a market, the trade barriers are reduced or eliminated i.e. free trade is allowed among its members, the member countries adopt a uniform commercial policy towards non-members and there is free movement of goods, services and factors of production such as capital, labour and technology among the member countries. In fact, the common market carries further the principle of customs union by allowing free movement of labour and capital along with goods among member countries. ‘The EUisa common market, It has gradually reduced or eliminated restrictions on immigration and the cross-border flow of capital within the bloc. Economic Union: The fourth stage ofregional integration istheeconomicunion inwhich member countries enjoy all the advantages of the previous stages as well as strive to have common fiscal and monetary policies which are harmonized and administered by a supranational institution. ‘Thus, there is a icant degree of coordination among the members of an economic union in the adoption of a common external tariff and domestic economic policies. The Economic Union (EU) aims at the formation of an economic union. In this direction, 19 EU countries have established a monetary union in which a single currency, the euro, is in circulation. Political Union: The ultimate form of economic integration is the political union in which the supranational authority consisting of the legislative, the executive and the judiciary coordinates the economic, social and foreign policy of the member countries. Trade among members takes place without obstruction and there is free movement of both labour and capital. The members havea common currency, a single central bank with a uniform monetary policy and a uniform tax and fiscal policy. Thus, each state would be an individual country but all are joined in a union. Benefits of Economic Integration Internati ae “emional economic integration benefits the members ofa regional group in a number ways: L {leads to better allocation of resources among member nations when trade restrictions are removed. improves the quality and quantity of factor inputs as a result of technological changes and increased capital flows, a increases production due to specialization based on comparative advantage. Ith it t (245 o better exploitation of economies of scale resulting in higher output. ‘creases the volume of trade, Xi Pes position | theterms of trade of the regional group with the rest of the world by better bargaining Ieinr . = Members» W'S economic efficiency within the group due to increased competition among incre ases ; factor mobility among member countries, ae11.6 || International Business 9, The member countries benefit from coordinated monetary and fiscal policies. 10, ‘The standard of living of the people becomes better with the availability of cheap and bete, products, large employment opportunities and rise in income level. 11. Member nations are able to achieve the common targets of full employment, high rates of economic growth and reduction in income inequalities etc. Disadvantages of Economic Integration ‘The disadvantages of regional economic integration can be enumerated as follows: 1, Since WTO rules do not cover non-tariff trade barriers, regional economic integration may lead to more trade diversion than trade creation. . It can reduce global free trade, particularly when member countries form a custom union tht results in substantial trade barriers outside the bloc. When economic blocs involve many countries of various sizes, regional integration can concentrate power into large firms and large nations inside the bloc. |. Regional integration results in economic restructuring, which may harm particular industries and firms. . When a country joins an economic bloc, it must relinquish some of its autonomy and national power to the bloc’ central authority. Individual countries risk losing some of their national identity. a . Regional economic integration can be harmful to a country’s economy in the absence of @ proper monitoring mechanism. x . Oligopolistic Collusion: With few big firms operating in member countries, it may lead to oligopolistic collusion among them. It may also encourage mergers and takeovers, thereby increasing monopoly power. Both these have the effect of keeping prices higher in the region bloc. 2 Misallocation of Resources: Resources may flow from less developed to more developed member countries within the union because there is free movement of labour and capital init ‘This leads to misallocation of resources thereby keeping the less developed states still worst. 11.3. Major Regional Trading Groups ‘The regional trading groups can be looked at either by location, such as the European Union, oF by type such as an FTA or customs union or common market. It becomes imperative to understand the implications for corporate strategy and how the removal of trade barriers can influence the trade in region. 11.3.1 The European Union ‘The European Union (EU) is a political and economic union of certain European states. At Pf eset has 28 member states: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Es°™Regional Economic Integration || 11.7 Finland, France, Germany, Greece, Hungary, Italy, Ireland, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Spain, Slovakia, Slovenia, Sweden and the United Kingdom (UK). In 2016, the UK voted to leave the EU, and negotiations about this are currently ongoing. ‘The predecessor of the EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict. The result was the European Economic Community (EEC) or ‘common market, created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Since then, 22other members joined and a huge single market (also known as the «internab market) has been created and continues to develop towards its full potential. What began as a purely economic union has evolved into an organization spanning policy areas, from climate, environment and health to external relations and security, justice and migration. A name change from the European Economic Community (EEC) to the European Union (EU) in 1993 reflected this. ‘The EU's main economic engine is the single market. To create this single market, a number of technical, legal and bureaucratic barriers to free trade and free movement between the EU’s member countries have been abolished. Asa result, companies have expanded their operations. The competition has brought prices down and given consumers more choice. At the same time, with the help of Europe's various competition and regulatory authorities, the EU works to ensure that these greater freedoms don't undermine fairness, consumer protection or environmental sustainability. ‘Many obstacles remain, however, in areas where integration is taking longer: + Fragmented national tax systems impede market integration and undermine efficiency + Separate national markets still exist for financial services, energy and transport + E-commerce between EU countries has been slower to take off than at national level, and rules, standards and practices vary considerably + The services sector is lagging behind the goods markets (although it has been possible since 2006 for companies to offer a range of services abroad from their home base) + Rules on the recognition of vocational qualifications need to be simplified to make it easier for qualified workers to find a job in another EU country. Not content with the economic integration envisaged in the Single European Act, the EU nations signed the Treaty of Maastricht in 1992 which sought to foster political and monetary union. A common currency ‘euro’ was adopted by the EU members while only Denmark, Sweden, and the United Kingdom have opted out of the common currency. The euro is administered by the European Central Bank (ECB) which has been responsible for setting monetary policy and for managing the exchange rate system for all of Europe since January 1, 1999. ‘The financial services market is a special case. The EU is seeking to build a strong, secure financial sector — while avoiding a repeat of the 2009 crisis — by supervising financial institutions, regulating complex financial products and requiring banks to hold more capital. The creation of the banking union transferred the mechanisms for bank supervision and resolution from national to EU level in several member countries.11.8 || International Business ‘There are also plans to set up an EU-wide capital markets union to: + Reduce fragmentation in financial markets + Diversify sources of finance + Strengthen flows of capital between EU countries + Improve access to finance for businesses, particularly small and medium-sized companies, In addition to reducing trade barriers for member countries, the EU has signed numerous bilateral free trade agreements with other countries outside the region which have benefitted all the member states of the EU. 11.3.2. The North American Free Trade Agreement (NAFTA) The North American Free Trade Agreement, or NAFTA, is a three-country accord negotiated by the governments of Canada, Mexico, and the United States that entered into force in January 1994. When negotiations for NAFTA began in 1991, the goal for all three countries was the integration of Mexico with the highly developed, high-wage economies of the United States and Canada. The hope was that freer trade would bring stronger and steadier economic growth to Mexico, providing new jobs and opportunities for its growing workforce and discouraging illegal migration from Mexico. For the United States and Canada, Mexico was seen both as a promising new market for exports and as a lower cost investment location that could enhance the competitiveness of U.S. and Canadian companies. NAFTAS terms, which were implemented gradually through January 2008, eliminated most tariffs on products traded between the three countries. Liberalization of trade in agriculture, textiles, and automobile manufacturing was a major focus. The deal also sought to protect intellectual property, establish dispute resolution mechanisms, and, through side agreements, implement labor and environmental safeguards. ‘There has been a consensus amongst economists that North American economies have been benefitted by NAFTA. Regional trade increased sharply and there was a sharp rise in cross border investments. But experts also say that it has proven difficult to extract the direct effects from other factors such as rapid technological change, increased trade with other countries such as China and unrelated domestic developments in each of the countries. Impact of NAFTA on the US ‘The US. trade with its North American neighbors has grown rapidly from the time NAFTA came into existence. Canada and Mexico are the two largest destinations for U.S. exports, accounting for more than a third of the total. Most estimates also conclude that the accord had a modest but positive impact on US. Critics of the accord, however, argue that it is to blame for job losses and wage stagnation in the United States, driven by low-wage competition, companies shifting production to Mexico !0 lower costs, and a widening trade deficit. But some other economists like Gary Clyde Hufbauer and Cathleen Cimino-Isaacs emphasize that increased trade produces gains for the overall U.S. econo™. ‘Though some jobs are lost due to imports, others are created as well and consumers benefit significantly from the falling prices and often improved quality of goods due to import competition, Hanson. economist and trade expert at the University of California, San Diego, says that the steepest decline in manufacturing jobs is mostly attributable to trade with China and underlying technological changRegional Economic Integration || 11.9 Impact of NAFTA on Mexico NABTA gavea major’ boost to Mexican farm exports to the United States since NAETAS implementation. Hundreds of thousands of auto manufacturing jobs have also been created in the country, and most studies have found that the pact had a positive impact on Mexican productivity and consumer prices. Mexican policymakers saw NAFTA as an opportunity to the Mexican economy. In addition to liberalizing trade, Mexico's leaders reduced public debt, introduced a balanced budget rule, stabilized inflation, and built up the country’s foreign reserves, Duc to its high dependence on exports to the US, Mexico was hard hit by the US recession 2008. Mexicos NAFTA experience has suffered from a disconnect between the promises of some of its supporters—that the pact would deliver rapid growth, raise wages, and reduce emigration—and the deal’s more mixed outcomes. Poverty remains at the same levels as prior to the accord and the expected “wage convergence” between U.S. and Mexican wages didn't take place. Mexican unemployment also rose, which some economists have blamed on NAFTA for exposing Mexican farmers, especially corn producers, to competition from heavily subsidized US. agriculture. Many analysts explain these divergent outcomes by pointing to the “two speed?” nature of Mexico’s economy, in which NAFTA drove the growth of foreign investment, high-tech manufacturing, and rising wages in the industrial north, while the largely agrarian south remains detached from this new economy. Ultimately, many experts caution, Mexico's recent economic performance has been affected by many non-NAFTA factors. The 1994 devaluation of the peso drove Mexican exports, while competition with Chinz’s low-cost manufacturing sector likely depressed growth. As Hanson has argued, “Mexico's struggles have largely domestic causes: poorly developed credit markets, a large and low-productivity informal sector, and dysfunctional regulation”. Impact of NAFTA on Canada Canada has seen strong gains in cross-border investment since the implementation of NAFTA. Agriculture, in particular, saw a boost (Canada is the leading importer of US. agricultural products). One of NAFTA biggest economic effects for Canada has been to increase bilateral U.S.-Canada ‘agricultural flows. Neither the worst fears of Canada’s trade opponents—that opening to trade would gut the country’s manufacturing sector—nor its highest hopes—that it would spark a rapid increase in productivity—came to pass. Canadian manufacturing employment held steady, but the “productivity gap” between the Canadian and US. economies wasn't closed. Future of NAFTA NAFTA has long been a political target. In 2008, then-presidential candidate Barack Obama responded to widespread trade skepticism among the Democratic base by promising to renegotiate NAFTA to include tougher labor and environmental standards, a pledge he subsequently abandoned. ‘The issue resurfaced in the 2016 presidential campaign, with both Senator Bernie Sanders (I-VT) and Donald ‘Trump criticizing the pact for bringing U.S. job losses. modern, fast-growing, highly productive economy and a traditional, low-productivity one are pulling in opposite directions, reducing GDP growth and progress in living standards.1,10 || International Business Eschewing the policy proposals, however, President Trump instead made good on his camps sromise to renegotiate NAFTA, and the three countries kicked off formal negotiations in August 20n, trump used tariffs as bargaining leverage throughout the process, applying import tariffs on steel ang Juminium in early 2018 and threatening to do the same with autos. Trumps demands included high standards for the auto industry, more access to Canada’s highly protected dairy market, better labor protections, dispute resolution reform, and new rules for intellectual property and digital commerce, In August 2018, the administration struck a deal with Mexico, and the following month Canad, agreed to new terms as well. In the updated pact, which Trump has labeled the U.S.-Mexico-Canady ‘Agreement (USMCA), the parties settled on a number of changes. As part of the deal, Canada agreed to allow more access to its dairy market and in return won several concessions. However, to take effect, the deal will have to be approved by all three countries’ legislatures; the earliest possibility would be early 2019. 11.4 Regional Economic Integration in the Americas ‘There are six major regional economic groups in the Americas, divided into Central American and South American. The Central America (excluding Mexico) has the Caribbean Community (CARICOM), the Central American Common Market (CACM) and the Central American Free ‘Trade Agreement (CAFTA-DR). The two major groups in South America are the Andean Community (CAN) and the Southern Common Market (MERCOSUR). The Union of South American Nations (UNASUR) was created in 2008 with the aim of merging CAN and MERCOSUR. However, UNASUR is in its initial phase. 11.4.1 CARICOM CARICOM came into being on 4 July 1973 with the signing of the ‘Treaty of Chaguaramas which was later revised in 2002 to allow for the eventual establishment of a single market and a single economy. CARICOM rests on four main pillars: economic integration; foreign policy coordination; human and social development; and security. These pillars underpin the stated objectives of the Community— + To improve standards of living and work; ‘The full employment of labor and other factors of production; Accelerated, coordinated and sustained economic development and convergence; Expansion of trade and economic relations with Third States; Enhanced levels of international competitiveness; Organization for increased production and productivity; Achievement of a greater measure of economic leverage; Effectiveness of Member States in dealing with Third States, groups of States and entities of a" description; and i Hl 5 ‘cies and The enhanced coordination of Member States’ foreign and foreign economic policies + enhanced functional cooperation.Regional Economic Integration || 11.11 CARICOM is the oldest surviving integration movement in the developing world. The community has achieved much, particularly through functional cooperation in education, in health, in culture, in security and is a respected voice in international affairs because of a coordinated foreign policy. 11.42 MERCOSUR Mercosur is an economic and political bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela calling for the “free movement of goods, services, and factors of production between countries” The four countries agreed to eliminate customs duties, implement a common external tariff (CET) and adopt a common trade policy toward outside countries and blocs, The charter members hoped to form a common market similar to that of the European Union, and even considered introducing a common currency. Mercosur is classified as a customs union by the WTO for trade in goods and an economic integration agreement for trade in services. Though trade rose within the bloc and a number of agreements were inked, regional integration began to slow following Brazil’s currency devaluation in 1999 and Argentina’s financial crisis in 2001, and since then trade disputes and other tensions have flared between the two countries. Experts say Mercosur’s future will largely hinge on decisions made in Buenos Aires and Brasilia. “Brazil and Argentina are two of each other’s most important trading partners. But both countries— especially because they're going through a difficult economic time—would benefit from opening of their markets more generally.” 11.5. Regional Economic Integration in Asia 11.5.1. Association of South-East Asian Nations (ASEAN) ‘The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, ‘Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the founding members of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN. Aims and Purposes As set out in the ASEAN Declaration, the aims and purposes of ASEAN are: 1. To accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations; To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region and adherence to the principles of the United Nations Charter; To promote active collaboration and mutual assistance on matters of common interest in the €conomic, social, cultural, technical, scientific and administrative fields; x11.12 || International Business » a . To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres; . To collaborate more effectively for the greater utilization of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples; . To promote Southeast Asian studies; and. To maintain close and beneficial cooperation with existing international and regional organizations with similar aims and purposes, and explore all avenues for even closer cooperation among themselves. Fundamental Principles In their relations with one another, the ASEAN Member States have adopted the following fundamental principles, as contained in the ‘Treaty of Amity and Cooperation in Southeast Asia (TAC) of 1976: 1. away Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations; .. The right of every State to lead its national existence free from external interference, subversion or coercion; . Non-interference in the internal affairs of one another; . Settlement of differences or disputes by peaceful manner . Renunciation of the threat or use of force; and 5. Effective cooperation among themselves. Achievements of ASEAN 1 » a ‘The main achievement of ASEAN has been the maintenance ofan uninterrupted period of peace and stability during which the individual Member Countries have been able to concentrate on promoting rapid and sustained economic growth and modernization, ASEAN’ overall trade has increased over the years. With its combined trade value, ASEAN is the fourth largest trading entity in the world after the European Union, the United States and Japan, ASEAN's modernization efforts have brought about changes in the region's structure of production as well as labour force composition. The proportion of the region's labor force engaged in agriculture has declined considerably. Industrial and service sectors have rapidly become the region's major sources of employment. These developments have advanced ASEAN members’ efforts to attain a status of newly-industrializing economies, . With a view to rationalizing and broadening the scope of existing industrial arrangements following the implementation of the CEPT Scheme for AFTA, the ASEAN Economic Ministers adopted a new ASEAN Industrial Cooperation (AICO) scheme in 1996, The AICO scheme aims to promote joint manufacturing industrial activities between ASEAN-based companies: . Economic cooperation between ASEAN and its immediate neighbors has been pursued both on a bilateral and regional basis.Regional Economic Integration || 11.13 6. At the sub-regional level, ASEAN supports the formation and operation of “natural growth areas” involving contiguous localities of several states, There are now three active growth areas in operation, namely, the Singapore-Johor-Riau Growth ‘Triangle (SIJORI), the Indonesia- Malaysia-Thailand Growth ‘Triangle (IMT-GT), and the Brunei Darussalam-Indonesia- Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA), . Cooperation in transportation and communicationsis being carried. out to develop multimodal transport and trade facilitation, achieve inter-connectivity in telecommunications and harmonize road transport laws and regulations, . Cooperation in tourism is one of the earliest areas of ASEAN activities that aimed at promoting the ASEAN region as a tourist destination, preserving the ASEAN cultural and environmental heritage, promoting intra-ASEAN travel and human resource development in the tourism sector. 1. The development of external economic relations is high on the agenda of ASEAN. It has been pursued through the establishment of linkages and various forums for economic consultations with other major economies or group of economies. In summary, ASEAN’s economic cooperation underwent two stages: The first stage covers the first 25 years of ASEAN’s existence, a period when the ASEAN countries laid down the foundations of cooperation and became familiarized with one another and initiated modest economic cooperation programs. The second stage began at the Singapore Summit of 1992, during which ASEAN launched the CEPT for AFTA promoting the whole ASEAN region as a competitive international production base for both local and foreign investors. This period also saw ASEAN actively involved in initiating and building regional economic linkages, engaging some of the most dynamic economies in the world. In the coming years ASEAN looks forward to move towards closer cohesion and economic integration while emphasizing sustainable and equitable growth. 11.5.2. Asia-Pacific Economic Cooperation (APEC) ‘The Asia-Pacific Economic Cooperation (APEC) is a regionaleconomic forum established in 1989 to leverage the growing interdependence of the Asia-Pacific. APEC 21 members aim to create greater Prosperity for the people of the region by promoting balanced, inclusive, sustainable, innovative and Secure growth and by accelerating regional economic integration. APEC operates as a cooperative, multilateral economic and trade forum, Member economies Participate on the basis of open dialogue and respect for views of all participants. In APEC, all economies have an equal say and decision-making is reached by consensus. There are no binding commitments or treaty obligations, Commitments are undertaken on a voluntary basis and capacity building projects help members implement APEC initiatives, APEC’ structure is based on both a “bottom-up” and “top-down” approach, Four core committees and their respective working groups provide strategic policy recommendations to APEC Leaders and Ministers who annually set the vision for overarching goals and initiatives, The working groups are then tasked with implementing these initiatives through a variety of APEC-funded projects. Members also take individual and collective actions to carry out APEC initiatives in their individual economies with the assistance of APEC capacity building projects. ‘The APEC Project. ‘Management Unit oversees APEC-funded projects in collaboration with working 8roups, Funding for projects is made possible by contributions from APEC members. The APEC Policy11.14 International Business Support Unit provides policy research, analysis and evaluation to assist in the implementation of APEC agenda, The APEC process is supported by a permanent secretariat based in Singapore. Achievements and Benefits [APEC has grown to become a dynamic engine of economic growth and one of the most important regional forums in the Asia-Pacific As a result of APEC work, growth has soared in the region, lifting millions out of poverty and creating a growing middle class in just over two decades, The various achievements of APEC are: 1. 10. n. Bringing the region closer together, reducing trade barriers, and smoothing out differences in regulations that have led to trade promotion while addressing sustainability and social equity, . In 1994, APEC Leaders committed to achieving the ‘Bogor Goals’ of free and open trade and investment by 2020 through reducing trade barriers in the region and promoting the free flow of goods, services and capital among APEC economies. Over time, the APEC agenda has broadened its focus to address behind-the-border barriers such as improving regulatory practices and the local business climate. |. Member economies improved the ease of doing business in the Asia-Pacific across all areas of the initiative, including starting a business, getting credit or applying for permits. . At the border, APEC economies have centralized export-import processes online, accelerating the time it takes for goods to travel across borders through ‘single window’ system. APEC capacity building workshops have provided training on software coding or legal issués to help APEC members implement their own Single Window systems. . ‘To improve behind-the-border barriers to trade, APEC has been working to foster transparency, competition and better functioning markets in the Asia-Pacific through regulatory reform, improving public sector and corporate governance, and strengthening the legal infrastructure. . APEC is working to connect the region through improving physical infrastructure linkages, people mobility and institutional ties across the Asia-Pacific, . By making it simpler for business people to travel, APEC is enabling them to conduct their business, trade and investment more easily through the use the APEC Business Travel Card which provides pre-approved frequent business travellers with visa clearance and fast-track entry through special APEC lanes at major international airports in the region. APEC is also improving logistics and transport networks to enable component parts and final goods to travel across multiple borders, contributing to a more efficient regional supply chain. ‘APEC is encouraging the development of clean technologies and greener growth across the region by lower tariffs on environmental goods. ‘Member economies are committed to reduce energy intensity in the region and have agreed to work toward doubling the share of renewables. Members are also committed to rationalizing and phasing out inefficient fossil fuel subsidies that encourage wasteful consumption. APEC has helped urban planners develop low-carbon model town plans for a series of cities throughout the Asia-Pacific. APEC projects also support the development of smart electricity grids that enable sources of clean power to be seamlessly connected to existing structures and distributed to rural communities. ee PN EL aNRegional Economic Integration || 11.15 12. Over the years, APEC has launched a wide variety of initiatives that have helped stimulate SME (Small and Medium Enterprises) development in the region, 13. Inaddition to supporting small businesses, APEC is working to ensure all members of the Asia- Pacific can participate in the growing economy by providing computer skills and training to vulnerable rural and urban communities, 11.5.3 The South Asian Association of Regional Cooperation (SAARC) ‘The South Asian Association of Regional Cooperation (SAARC) was created in 1985 as an expression of the region's collective decision to evolve a regional cooperative framework. Presently, there are eight member countries in SAARC namely Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka, It also has nine Observers, namely China, EU, Iran, Republic of Korea, Australia, Japan, Mauritius, Myanmar and USA. The basic aim of the organization is to accelerate the process of economic and social development in member states through joint action in the agreed areas of cooperation. Objectives ‘The following are the objectives of SAARC: To promote the welfare of the people of South Asia and to improve their quality of life. . To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential. ‘To promote and strengthen collective self-reliance among the member countries. To contribute to mutual trust, understanding and appreciation of one another's problems. . To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields. ‘To strengthen cooperation with other developing countries. ‘To strengthen cooperation among themselves in international forums on matters of common interest. 8. To cooperate with international and regional organizations with similar aims and purposes. pr yey no Principles SAARC is based on the following principles: 1. Cooperation within the framework of Association is based in respect of the principles of Sovereign equality, territorial integrity, political independence, non-interference in the internal affairs of other states and mutual benefit. 2. Such cooperation is to complement and not to substitute bilateral or multilateral cooperation. 3. Such cooperation should be consistent with bilateral and multilateral obligations of member states, General Provisions 1, Decisions at all levels in SAARC are taken on the basis of consensus of all member states. 2, Bilateral and contentious issues are excluded from the deliberations of the Association.11.16 || International Business Achievements of SAARC So far, the achievements of SAARC in boosting trade and regional cooperation are the following: 1, The establishment of SAPTA and reduction in quantitative controls, tariff and Non-tarigg barriers on imports and grant of concessions under it. . The setting up of Technical Committees for economic cooperation among SAARC Countries relating to agriculture, communications, education and culture, environment, health ang population, rural development, science and technology, tourism, transport, etc. Reduction/eradication of poverty has been one of the objectives of SAARC. In order to reduce poverty, SAARC has established a three-tier mechanism for exchanging information on poverty reduction programs which is passed on to member countries. 4, SAARC has created a reserve of food grains for meeting emergencies in member countries, y is managed by the SAARC Food Security Reserve Board that undertakes a periodic review and assessment of the food situation and prospects in the region. SAARC has set up SAARC Chamber of Commerce and Industry (SCCI) to promote trade and interaction of chambers of commerce and industry of member nations, to organize trade fairs and to confer with other trade organizations for increasing SAARC trade. SAARC established the SAARC Agricultural Information Centre (SAIC) which works as 2 central information institution for agricultural related resources like fisheries, forestry, livestock etc. It helps in exchanging regionally technical information relating to R&D activities and also publishes and distributes information among member countries on research and experiments conducted by agricultural institutes relating to agriculture. To develop the SAARC countries socially and economically, SAARC has entered into agreements and signed memorandum of understandings (MOUs) with a number of international and regional organizations. To help member states financially, SAARC has set up two funds; South Asian Development Fund (SADF) and SAARC Japan Special Fund. Encouraged by SAARC, the South Asian Growth Quadrangle (SAGQ) comprising India, Bhutan, Nepal and Bangladesh has been formed that aims at the economic development of Eastern India, Bangladesh, Nepal and Bhutan and the basin formed by the three major riverS~ Ganga, Meghna and Brahmaputra. x » ” 2 Sy © Criticisms of SAARC ‘Though trade liberalization between SAARC countries has made a good beginning, yet the following obstacles have to be overcome: 1, There are many commodities with large intra-trade which have not been included in the list of tariff concessions. 2. Many commodities on which trade concessions have been given are not traded among SAARC countries, 3. Member countries often bargain for removal of tariffs on the basis of the condition of every commodity. 4. Some member countries get benefits from other regional preferential arrangements which lead to duplication of preferences.Regional Economic Integration | 11.17 Despite the setting up of Technical Committee on ‘Transport, land and facilities are not available among SAARC countries due been increasing, Banking services are also not developed among SAARC countries. ‘The methods of credit instruments are different in each country. Consequently, there are delays and bottlenecks in buying and selling commodities, . Another obstacle in the way of SAARC trade is that every possesses the largest natural, financial, technical and manpower resources in the region, Naturally, its output of various commodities and export potential ate highest among the SAARC members With the removal of trade barriers among SAARC countries, informal (illegal) trade in goods has increased. As a result, bilateral trade balances have been adversely affected between the member states. water route transport to which intra-regional trade has not 'y member fear Indias superior status as it 11.6 Commodity Agreements Most of the exports of developing countries consist of primary goods characterized by low demand and inelastic supply. Fluctuation of prices on account of chan; ges in demand and supply conditions and adverse terms of trade force these countries to enter into international commodity agreements to protect their interests. However, such arrangements impose restrictions on the free movement of commodities in international trade often resulting in economic waste and the misallocation of scarce productive resources. But in general international commodity agreements are ‘agreements between governments of both Producing and consuming countries that attempt to raise and stabilize the prices of commodities. Such agreements aim to control supplies and prices and usually attempt to support price levels above those that would prevail in the absence of an agreement. International commodity agreements take various forms, employing the economic mechanisms of stocks, long-term multilateral contracts, and quotas, Stocks and multilateral contracts are designed Principally to achieve price stability. ieee Agreements: Quotas, if sufficiently flexible, can be directed toward maintaining price stabili ty. Export quotas are most commonly used. Under the Quota Agreement, the export quotas are fixed for each of the exporting c ‘ountries on the basis of a mutually agreed formula. These exporting senitties commit to restrict their exports to their quotas as decided by the central council. In the long TN, export quotas involve production controls else there'll be excess output. This surplus output may induce the cointries to cut Prices resulting in failure of the quota agreement. Any system of quotas promotes resource ‘misallocation, because quota shares often reward inefficient Producers and penalize efficient ones, Export quotas have been used to protect buffer stock arrangements. ithe price falls tothe lower limit, quotas are imposed to prevent large purchases for the buffer stock. is relieves problems of financing large stocks, but it also means that the buffer stock seldom acquires Supplies adequate to defend price ceilings at some later time, Buffer: Stock Arrangement: Buffer Stock. Arrangements attempt to stabilize the price ofa commodity Pan maximum and minimum levels, Price is artificially controlled as the managers of the buffer uy Up the commodity when the price falls below the minimum price (due to excess supply) Bee11,18 || International Business and sell when the price rises above the maximum price (due to insufficient supply). This approach has the disadvantage of requiring considerable capital to acquire and maintain the stock. If sufficient commodity stocks and financing to support them are not available, a buffer stock will exhaust itself without successfully controlling the price of the commodity. Historically, buffer stocks have failed to maintain price ceilings, but they have had somewhat more success in preserving floor prices. ‘Multilateral Contracts: A system of multilateral contracts is based on a negotiated price range, Consumer countries agree to purchase particular quantities at no less than the minimum price, while producer countries guarantee to supply stipulated quantities at no more than the maximum price, The market mechanism then functions between these price levels. The wider the price range, the closer the system approaches a free market, while the more restricted the range, the closer the system approaches export and import quotas with guaranteed prices. A principal flaw in the multilateral contract, aside from problems of enforcement, arises from the difficulty of anticipating the correct price range. If the range is lower or higher than “normal,” a transfer of income from one party to the other will result, Either consumers pay too much or producers receive too little. This difficulty in forecasting the required conditions is a problem for the other schemes as well. In summary, the purpose of international commodity agreements is to solve the problems of commodity trade. However, such agreements are extremely difficult to negotiate and operate. Moreover, their restrictive provisions for stocks, quotas, and contracts cause various degrees of additional waste and inefficiency. “ Review Questions + “The Common Market, Economic Union and Custom Union are different stages in the growth of regional economic integration, Elaborate. [D.U. B.Com (Hons.) 2008, 2010, 2014] ‘Economic integration is achieved after passing through different stages. Analyze the statement giving suitable examples. [D.U. B.Com (Hons.) 2009, 2012] . ‘Regional economic integration results in trade creation and trade diversion’. Critically evaluate this statement, giving suitable examples. [D.U. B.Com (Hons.) 2010] 4. Write short notes on any two of the following: [D.U. B.Com (Hons.) 2010] + NAFTA + SAARC + ASEAN How successfully ASEAN has promoted integration among various countries of Asia. (D.U. B.Com (Hons.) 2015] Explain the benefits which the developing countries can derive from economic integration, x » ws ra Enumerate the difficulties faced by developing countries in the formation of a customs union. aodRegional Economic Integration || 11.19 APPENDIX Trade Creation and Trade Diversion Trade Creation ‘Trade creation occurs when the consumption of higher cost domestic production of the home country (H) is replaced with the lower cost good of the partner country (P). This, in turn, leads to the production and theconsumption effect. Production effect takes place when the domestic production of good X is reduced or climinated and instead it is imported from the partner country, There's an increased consumption of the partner country substitute good in place of the domestic good X which was formerly available at a higher cost. This is the consumption effect of economic integration. The production effect and the consumption effect together constitute the trade creation effect of economic integration. Corresponding to the production effect and the consumption effect, trade creation leads to an economic gain of two types: fist, the saving in the real cost of the good which was previously produced domestically ata higher cost and now imported at a lower cost from the partner country, and second, the gain in consumers’ surplus from the substitution of higher cost good with a lower cost good. Thus, trade creation improves world welfare. Trade Diversion When the home country (H) imports goods from the higher cost partner country (P) instead of from the lower cost rest of the world country (W), it is termed as trade diversion. Thus, trade diversion has two aspects: first, an increase in the cost of good X which was previously imported from the rest of the world country (W) and now from the higher cost partner country (P); and second, a loss in consumers’ surplus as.a result of the substitution of a higher cost good from (P) for the lower cost good from (W). These two effects constitute the trade diversion effect of economic integration. This reduces the efficiency of world production because to produce the same output larger quantities of resources are needed. ‘That is why trade diversion decreases welfare for the world, according to Viner. Net Welfare Effect From the above, trade creation leads to a welfare gain and trade diversion to a welfare loss in country (H) asa result of economic integration. The net welfare effect is the difference between the welfare gain and the welfare loss, Thus, in terms of the net welfare effect if the trade creation effect predominates, the alliance is made better off and if the trade diversion effect predominates, it is made worse off. If the two effects happen to be equal, the gains and losses are equally distributed between the members of the union,12 International and Economic Organisation Learning Outcomes After studying this chapter, you should be able to understand: > ‘The General Agreement on Tariffs and Trade (GATT) > The World Trade Organization (WTO) » United Nations Conference on Trade and Development (UNCTAD) > ‘The International Monetary Fund (IMF) > International Bank For Reconstruction And Development (IBRD) > Difference between the IMF and the IBRD (World Bank) 12.1 The General Agreement on Tariffs and Trade (GATT) ‘The Havana Charter laid the foundation of the General Agreement on ‘Tariffs and Trade (GATT). The Problems experienced by the world in 1930s and during the Second World War due to the extensively imposed trade barriers caused the countries to align and create a liberal trading world trading system afer the Second World War. An International Conference on Trade and Employment was held in Havana in 1947-1948 for this purpose. A charter for establishing an International Trade Organization (TO) was drawn and signed by fifty-three nations but was not ratified by the US Congress and therefore, the ITO never came into existence, Simultaneously, twenty-three nations agreed to continue extensive ‘atiff negotiations for trade concessions at Geneva which were incorporated in the General Agreement12.2 || International Business on Tariffs and Trade, When few more nations signed the agreement on October 30, 1947, it came into force from January 1, 1948, On January 1, 1995, GATT merged into the World ‘Trade Organization and became history. What is GATT? Ninety-six governments, known as contracting parties, signed a multilateral treaty that led to the formation of GATT. GATT was neither an organization nor a court of, justice, but a multinational treaty that covered 80% of the world trade. It was a permanent international organization having a permanent Council of Representatives with its headquarters situated at Geneva, It was a decision making body with a code of conduct for international trade, and a mechanism sought by nations to liberate trade from the problems of extensive patterns of trade barriers. It was a forum where contr: to time to discuss and solve their trade rules provided for the settlement of tradi even authorized retaliatory measures, acting parties met from time problems and also negotiated to expand their trade. The GATT le disputes, called for consultations, waived trade obligations, and Objectives of GATT ‘Some of the fundamental principles contained in the Code of International Trade Conduct formed the basis of the objectives of GATT that are: 1. To follow the principle of unconditional Most Favoured Nation (MEN)! . 2. To carry on trade on the principle of non-discrimination, reciprocity and transparency. 3. To grant protection to domestic industry through tariffs only. 4. To liberalize tariff and non-tariff measures throu; In order to achieve these objectives, the Agreement (2) consultation, conciliation and settlement of disputes; ‘The ultimate aim of establishing liberal world tradi employment through a steadily growing effective de of the world, and expand the production and exch; Griticsm of GATT ‘The GATT rules were evaded extensively by the contracting parties over the years which led to the discontinuation of GATT. igh multilateral negotiations. Provided for: (1) multilateral trade negotiations and (3) waivers to be granted in exceptional cases. ling system was to raise living standard, ensure full mand and real income, optimally use the resources ange of goods worldwide, }. Since the inception of GAT, its rules were hardly applied to agriculture which was considered as a special case. Thus, the trade policies foll lowed by almost every developed country were inconsistent with the GATT rules, Undoubtedly, a number of tariff barriers were abolished by the developed countries but they were reluctant to abolish the remainin, g- Instead, they formulated new trade restrictions in the name of ‘voluntary export restraints, ‘market disruption’ etc. which were outside the rules of GATT. xy 1, The principle of MEN implies that tariff preferences accorded by acount tanother country are extended to all thers with which ‘thas trade relations. Artie Ideal wih unconditional MEN clause forall lmport and export datics tosses ne ato.International and Economic Organisation || 12.3 A host of bilateral, discriminatory and restrictive arrangements outside the GATT rules that restricted exports of developing countries to developed ones undermined the role of GATT. Since GATT rules on subsidies were not explicit, its (subsidies) increasing use served as another important limitation for GATT. = w ‘The contracting parties were allowed protection in case of urgency, such as subsidized imports or severe balance of payments difficulties, according to the “safeguard” rules under Article XIX of the GATT. However, these temporary constraints have become permanent characteristics of the world trading system. ‘The GATT rules in Article XXIV which permitted the formation of customs union and free- trade areas had been distorted and misused. These rules left many ambiguities which seriously weakened the GATT, serious weakness of the GATT was that it lacked any mechanism to get its rules implemented. ‘The recommendations of the experts under the dispute settlement system had no legal binding on the parties to the dispute. It was perhaps due to these inherent limitation in the working of the GATT that majority of trade between countries was being conducted outside of the purview of the GATT rules. However, despite these criticisms, 125 countries operated under the GATT rules whereas the remaining countries benefited through its MEN rule. x 12.2 The World Trade Organization (WTO) ‘The end of the Uruguay Round of GATT negotiations at Marrakesh, Morocco led to the inception of the World Trade Organization (WTO) that has a legal status and that enjoys the privileges and exemptions as given to the IMF and the World Bank. The Final Act embodying the results of the Uruguay Round of Multilateral Trade Negotiations, ratified by 123 ministers of member countries, comprises 28 agreements. Ithad two components: the WTO Agreements and the Ministerial Decisions and Declarations. The WTO Agreement covers the formation of the organization and the rules governing its working. Its annexure contains the Agreements covering trade in goods, services, intellectual property rights, plurilateral trade, GATT Rules, 1994, dispute settlement rules and trade policy review. Difference between GATT AND WTO ‘The WTO is a successor to GATT and has a very different character. The major differences between the two are as follows: [Sino GATT 1. | GATT had no legal status. WTO WTO has a legal status. It is created by an international treaty ratified by the government and legislature of member states, 2. | The GATT was a set of rules and procedures relating to multilateral agreements of a selective nature and was not binding on members. In case of a default, only those member countries who had signed the agreement were penalized. ‘The agreement forming part of the WTO is permanent and binding on all members. All the member states can take action against any defaulting member.