CHAPTER FOUR

Regional Economic
Integration
 Free Trade and Protection

Free Trade
• The doctrine of the free trade come as reaction to
policies and advocated by mercantilist , whose
sole aim seemed to be the acquisition of gold and
silver for the countries.

• Free trade does not mean absence of all tariff,

exchange control, subsides on production and
export. Such would be “ Pure trade”.

• Free trade simply means that tariffs do not hamper

with freedom to import.
 Contd

• Volume and direction of trade are not adversely

affected by tariffs and quotas.
• All foreign countries are treated in non
discriminatory manner.

• No preference is shown to the goods of particularly

country and no penal tariffs are imposed.

• Trade should be free excess regulations,

prohibitions, excess duties and restrictive barriers.
 Policy of Protectionism

• Protectionism is the policy of impositions of

regulations , prohibitions and excessive duties and
restrictive trade barriers.

• In other word , protectionism refers to government

innervation in trade market to protect specific
industries in its economy.

• The main objectives of imposing trade barriers are

to protect domestic industries from foreign
competitions.
 Contd

• The policy of protection has been well expressed

in the following words “ Nurse/nurture the
baby, protect the child and free the adult".

• Infant industry argument is however has not been

received favorable by some economists. They
argued that an infant will always infant, if its
given protection. Example MSEs
 Regional Economic Integration

• Regional economic integration refers to

agreements between countries in a geographic
region to reduce/ remove artificial trade barriers
like tariff ex. Export, import and transit duties
and non-tariff barriers ex. Export quota and
imported quota licensing b/n integrating
countries/ countries.

– in theory, regional economic integration benefits all

members
• Over the last two decades, the number of regional
trade agreements has been on the rise.
• A tariff is a tax levied on imports or
exports. Money collected under a tariff is
called a duty or custom duty which is
generally used interchangeably.
• Purpose of Tarif is:
• To generate revenue for the country
• To protect domestic Economy
• Protect consumers if Govt feels the products
endanger the society
 Types of Tariffs and trade Barriers

• Specific tariffs
• A fixed fee
• levied on one unit of an imported good is
referred to as a specific tariff. This
tariff can vary according to the
type of goods imported.
• Ad Valorem tariffs
• The phrase ad valorem is Latin for
• “according to value”, and this type
of tariff is levied on goods based on a
percentage of that goods’ value.
• NON-TARIFFS BARRIERS TO TRADE INCLUDE:
• is any measure other than a tariff that raises an obstacle to
the free flow of goods in the overseas market.
• Licenses
• A license is granted to a business by the government and
allows the business to import a certain type of good into
the country.
• Import Quotas
• An import quota is a restriction placed on the
• Amount of a particular good that can be imported. This sort
of action is often associated with the issuance of licenses
• Voluntary Export Restraints (VER)
• This type of trade barrier is “voluntary” since it restricts
the quantity of a good that an exporting country is allowed
to export to another country.
• Typically, VERs is a result of request made by the importing
country to provide a measure of protection for its domestic
businesses that produce substitute goods
• National Security
• Trade barriers are employed by developed
countries to protect certain industries that are
deemed strategically important, such as those
supporting national security
• Retaliation
• A tax that a government charges on imports to
punish another country for charging tax on its
own exports.
• Countries may also set tariffs as are taliation
technique if they think that a trading partner has
not played by the rules
• There are three ways to approach economic
integration in which countries decide to cooperate:

-Bilateral/ b/n two countries

-Regional &

-Global/multilateral integration.
• In theory, trade agreements promote free trade, but the
world may be moving toward a situation in which a
number of regional trade blocks compete against each
other.
 Cont…….
• Regional economic integration efforts to reduce
trade and investment barriers within one
region.
• Example: European Union (EU)

• Global economic integration efforts to reduce

trade and investment barriers around the globe.
• Example: General Agreement on Tariffs and
Trade (GATT), World Trade Organization
(WTO).
 Major Regional Economic Integrations

Group name Members

AFTA Brunei, Indonesia, Malaysia, Philippines,

Singapore, Thailand Vietnam
(ASEAN Free Trade Area)
ANCOM Bolivia, Colombia, Ecuador Peru, Venezuela

(Andean Common Market

APEC Australia, Brunei, Canada, Chile, China, Hong
Kong, Indonesia, Japan Malaysia, Mexico,
(Asia Pacific Economic
New Zealand, Papua New Guinea, Philippines,
Cooperation)
Singapore, South Korea, Taiwan Thailand,
United States

CACM (Central Costa Rica, El Salvador, Guatemala Honduras,

Nicaragua
American Common Market
 Cont…

CARICOM Anguilla, Antigua, Bahamas, Barbados,

(Caribbean Community) Belize, Dominica, Grenada, Guyana,

Jamaica, Montserrat St. Kitts-Nevis, St.
Lucia, St. Vincent and the Grenadines;
Trinidad-Tobago
ECOWAS Benin, Burkina Faso, Cape Verde Gambia,

(Economic Community of West Ghana, Guinea, Guinea-Bissau, Ivory Coast,

Liberia, Mali Mauritania, Niger, Nigeria,
African States
Senegal, Sierra Leone, Togo

EU Austria, Belgium, Denmark, Finland, France,

(European Union) Germany, Greece, Ireland, Italy, Luxemburg,

Netherlands, Portugal, Spain, Sweden,
United Kingdom
EFTA Iceland, Liechtenstein, Norway Switzerland

(European Free Trade Association)

 Economic Integration In Africa

• Currently, there are eight RECs recognised by the AU, each

established under a separate regional treaty:
o Economic Community of West African States (ECOWAS)
o Objectives, Promotion of cooperation &devt, Elimination of
custom duty, abolition of Trade restrictions, establishment of
Common tariff.
o Common Market for Eastern and Southern Africa (COMESA)

o Economic Community of Central African States (ECCAS)

o Community of Sahel-Saharan States (CEN-SAD)
o East African Community (EAC)
o Arab Maghreb Union (UMA)
o Intergovernmental Authority on Development (IGAD)
o Southern African Development Community (SADC)
 The Levels/Types of Regional Economic Integration
From least integrated to most integrated

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 A free Trade Area

• A free trade area is usually a permanent

arrangement between neighboring countries.
• It is grouping of countries to bring about free
trade between them.
• It involves a complete removal of tariffs on
goods traded among the member countries.

• Member countries are free to levy their external

tariffs on goods from out side free trade area( non
member countries).
 Contd
• Each members have right to have their own trade
policy on non member countries.
– North American Free Trade Agreement
(NAFTA) - U.S., Canada, and Mexico
– European Free Trade Association (EFTA) -
Norway, Iceland, Liechtenstein, and
Switzerland
– Asian Free Trade Area (AFTA)
 A Customs Union
• A custom union is more advanced level of
economic integration than free trade area.

• Like a member of free trade area , members of

custom union remove trade barriers to trade in
goods and services among the themselves.

• In addition , custom union establishes common

external trade policies with regard to non-
members.
 Contd

• Typically this takes the form of common tariff,

where imports from non members are subjected to
the same tariff when sold to any member country.

• Tarff revenue then shared among the member

countries.

• Thus, custom union indicates two basic

characteristics (free trade among the members and
uniform tariff policy towards outsider.
 Contd

For instance,
– Andean Community (Bolivia, Columbia,
Ecuador, and Peru) in South America.
– EU –custom union was established among the
original size by 1960’s. This has been
extended to each of the new EU member states
.
– The EU also agreed to form a custom union
with turkey in 1995.
 A common market

• The common market is a step ahead of the custom

union.

• Like custom union , a common market has no

barriers to trade among members and has a
common external trade policy.

• In addition, the common market removes

restrictions on the free movements of the factors
of production ( labor , capital and technology)
across borders .
 Contd
– Labor and capital are free to move because
there are no restrictions on immigration,
emigration, or cross-border flows of capital
between member countries.

For instance,
– EU common market
– MERCOSUR (Brazil, Argentina, Paraguay,
and Uruguay).
 Economic union
• Economic union represents full integration of
economies among the member states.

• In addition to elimination internal trade barriers,

adopting common market trade policies and
abolishing of restrictions of mobility of factors
production among members , an economic union
requires the member to coordinate their economic
policies as to blend their economies into a single
entity.
 Contd

• The economic union thus, achieve some degree

of harmonization of national economic policies
through common central bank, unified monetary
and fiscal policies.
– European Union (EU), through the adoption of the
euro.
 Political union

A political union involves a central political

apparatus that coordinates the economic, social, and
foreign policy of member states.
independent states are combined into a single union

– The EU is headed toward at least partial

political union
 The case for regional integration

Question: Should countries integrate their

economies?
 There are both economic and political arguments
supporting regional economic integration
– generally, many groups within a country oppose the
notion of economic integration
 There are two main impediments/challenges to
integration
1. It can be costly - while a nation as a whole may benefit
from a regional free trade agreement, certain groups
may lose
2. It can result in a loss of national sovereignty
 The case against regional integration

 Regional economic integration only makes

sense when the amount of trade it creates
exceeds the amount it diverts
• Trade creation occurs when low cost
producers within the free trade area replace
high cost domestic producers
• Trade diversion occurs when higher cost
suppliers within the free trade area replace
lower cost external suppliers
Benefits & Challenges of Economic Integration

Benefits
 Formerly protected markets are now open to exports and
direct investment
 Promotes peace by fostering closer economic ties and
building confidence.
 Disputes are handled constructively.
 Consistent rules make life easier and discrimination
impossible for participating countries within one region.
 Free trade and investment raise incomes and stimulate
economic growth.
 It may bring a larger market, simpler standards, and
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Challenges
 Economic integration can be difficult because:
While a nation as a whole may benefit from a
regional free trade agreement, certain groups may
lose
It implies a loss of national sovereignty
The lowering of barriers to trade and investment
between countries is likely to lead to increased
price competition within the EU and NAFTA.
Firms outside the blocs risk being shut out of the
single market by the creation of a “trade fortress”
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