ECON5335 - International Economics

Chapter 7

Regional Integration

Regional integration allowed under GATT article XXIVStates that “The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.”What is a customs union?What is a free trade area?

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para 5 of section XXIV states “Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area”

Bela Belassa (1963) first came up with steps for countries to be more economically integrated

Steps are as follows:i) Free tradeii) Customs unioniii) Common marketiv) Economic unionv) Monetary unionvi) Fiscal unionvii) Political union

What’s the difference between a free trade area and a customs union?

Do countries wanting more regional integration have to follow in the order above?

•Level of integration •Description •Characteristics •Examples

•0 •Regional autarky • - bilateral trade agreements

•Japan (before ASEAN)

•A •FTA • - tariffs and quotas removed internally• - national tariffs retained against outside

•NAFTA

•B •Customs union • - tariffs and quotas removed internally• - common external tariff

•Mercosur

•C •Common market • - free movement of factors of production, goods and services

•EU (before EMU)

•D •Economic union • - harmonization or coordination of some national policies• - transfer of some policies to supranational level

•Competition policy in the EU

•E •Monetary union • - single currency• - single central bank

•ECB in the EU

•F •Fiscal union • - harmonization of taxes • - fiscal sovereignty

•EU to some degree

•G •Political union • - effective and democratic body at supranational level

•Does not exist out of a regional integration project

Many examples of regional economic integration around the world:North America – CUFTA and NAFTAEurope – EU, EFTA, BAFTA, CEFTACaribbean – CARICOMCentral and South America – Mercosur, SELA, CANAfrica – AU, SACU, COMESA, WAEMUAsia – ASEAN, AFTAAustralasia – ANZFTA - see http://www.wto.org/english/tratop_e/region_e/region_e.htm for more

Grew out of CUFTA – idea was to extend to Mexico, but whole new agreement happenedBasically a free trade area, but with side agreements on labor standards, environment, and migration of professionals“Rules of origin” allow for duty free trade as long as 62.5% of value added within NAFTAEnvironmental commission set up in Montreal to oversee complaints about environmental degradation“Snap-back” provision allows for tariffs to be restored if surge of imports threatens domestic industryTrade dispute mechanism consists of 3 experts – usually resolves disputes amicably – exceptions though (e.g. softwood lumber)

Maquiladora programUS boom of the 90s benefited maquiladoras, but China’s entry into the WTO has eroded competitiveness of plants, with many closingCritics say that although trade has increased, Mexican real wages in manufacturing have fallen, and also environmental degradation evidentDifficult to say if NAFTA has had large effects, as phased in over 10 years, and also lots of other events happeningImpact clearly much greater on Canada and Mexico than on the US

Yellow = EU members Grey = Candidate countries Cream = Non-members

Originally formed as a customs union for steel and coal (Treaty of Rome 1958)Grew into EEC – customs unionThen EC – common market (Single Market 1992)Then EU – economic union and some political pooling of sovereignty (European Parliament)Now EMU, which also involves monetary union (euro) (Treaty of Maastricht, 1991)Big debate in 90s surrounded widening vs deepeningNow 27 member states, with EMU adopted by only 13 member statesSwitzerland and Norway do not want to join, and France has effectively stopped Turkey from joining

Trade creation significantTrade diversion also present, although size differs depending on studyEMU is thought to have increased trade significantly, although estimates vary widelyGrowth and Stability pact has “coordinated” fiscal policyCommission acts as civil service but can also impose finesEuropean Council decides on major issues

ERM of the EMS (79)Delors report (89)Treaty of Maastricht (91)Currency crisis (92-93)Euro introduced and exchange rates fixed (99)Money euro introduced (02)Greece added (04)Slovenia added (07)Cyprus and Malta added (08)Slovakia added (09)Estonia added (11)

Euro also used by other countries – sometimes outside EuropeECB runs monetary policy but no centralized fiscal policyHence SGP (Dublin 1996)No exit clause for EMU in MaastrichtMajor cause of problems for GreeceNow austerity packages for all PIIGS“One size fits all” monetary policy means fiscal policy takes all the strain