Regional integration :recent trends

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REGIONAL INTEGRATION AGREEMENTS

Introduction

THE GROWTH OF REGIONAL TRADING BLOCS¡XOFTEN KNOWN as Regional Integration agreements (RIAs)¡Xis one of the major international relations developments of recent years.Most industrial and developing countries in the world are members of a regional integration agreement, and many belong to more than one more than one-third of world trade takes place within such agreements.The structure of regional agreements varies hugely, but all have one thing in common¡Xthe objective of reducing barriers to trade between member countries. At their simplest they merely remove tariffs on intra bloc trade in goods, but many go beyond that to cover non tariff barriers and to extend liberalization to trade and investment. At their deepest they have the objective of economic union, and they involve the construction of shared executive, judicial, and legislative institutions. During the last decade the move to regionalism has become a headlong rush.

Figure 1.1 gives the number of regional agreements notified to the General Agreement on Trade and Tariffs and the World Trade Organization (GATT/WTO) each year, and makes apparent the dramatic increase that occurred in the 10s. The World Trade Organisation (WTO) had been officially notified of as many as 50 PTAs by the end of 00. Of these, as many as 10 had been notified after January 15

151 156 161 166 171 176 181 186 11 16 001

The last 10 years have witnessed qualitative, as well as quantitative, changes in regional integration schemes. There have been three major developments.

„X The first is the recognition that effective integration requires more than reducing tariffs and quotas. Many other barriers have the effect of segmenting markets and impeding the free flow of goods, services, investments, and ideas, and wide ranging policy measures¡Xgoing well beyond traditional trade policies¡Xare needed to remove these barriers. This so-called deep integration was first actively pursed in the Single Market Program of the European Union (EU), and elements of this program are now finding their way into the debate in other regional agreements.

„X The second is the move from ¡§closed regionalism¡¨ to a more open model. Many of the trading blocs that were formed between developing countries in the 160s and 170s were based on a model of Import Substituting Development, and regional agreements¡Xwith high external trade barriers¡Xwere used as a way of implementing this model. The new wave of regional agreements¡Xincluding resurrection of some old agreements¡Xhave generally been more outward-looking, and more committed to boosting, rather than controlling, international commerce.

„X The third development is the advent of trade blocs in which both high-income industrial countries and developing countries are equal partners in agreements designed to bolster the economies of all the member countries. Perhaps the most important example of this is the North American Free Trade Area (NAFTA), formed in 14 when the Canada- U. S. Free Trade Agreement was extended to Mexico. EU has linked with the transition economies of Eastern Europe through the Europe Agreements, and has developed the EU-Turkey customs union and a Mediterranean policy potentially incorporating agreements with nearly every Mediterranean country.

New technologies and more liberal trading regimes have led to increased trade volumes, larger investment flows, and increasingly footloose production. All these considerations point to the need for a new analysis of regional integration agreements¡Xone that takes into account political as well as economic effects, that assesses the opportunities for deep integration, and captures the new potentials created by North-South agreements.

RECENT TRENDS IN ECONOMIC DEVELOPMENT

Mexico To Join NAFTA ¡§New ground was broken in 14 when the Canada¡VU.S. Free Trade Area was extended to Mexico through NAFTA. For the first time a developing country joined industrial countries as an equal partner in a trade bloc designed to bolster economic development in all three economies. ¡§

India, Japan to sign trade deals with SE Asia

REUTERS[ WEDNESDAY, OCTOBER 08, 00]

BALI Japan, still Asias sole economic superpower, and tomorrows giants China and India jostled for influence in Southeast Asia as they fleshed out plans on Wednesday for free trade agreements with the region. Leaders of the 10-member Association of South East Nations (ASEAN) a day earlier at their annual summit endorsed a plan to transform their region into a giant free trade zone by 00, although several urged a faster pace if they are to keep up with the rest of the world.

India, New Zealand to enhance trade, exports up %

[PTI. Monday October 1 .00]

The exports to New Zealand registered a growth of nine per cent during 00-0 at 68 million dollar as against imports which declined by seven per cent at $76 million, additional secretary, Ministry of Commerce, Vinay Bansal, said.

India, Thailand create free trade area, to strengthen defence ties

IANS[ FRIDAY, OCTOBER 10, 00]

BANGKOK India and Thailand on Thursday entered a new era in bilateral co-operation by signing five agreements, including a landmark one that sets out a roadmap for a free trade area between New Delhi and its key ally in Southeast Asia

POSSIBILITY OF A SPURT

India¡¦s move to have such a FTA with Thailand represents its first significant attempt to become part of a Regional Trade Bloc of some consequence . According to reports ,India will follow it up with a FTA with China. If similar agreement is worked out with China over the next couple of years, there would be significant gains for India¡¦s economy and industry, in terms of free flow of trade and investment. Besides , being part of an important regional bloc, it will also enhance India¡¦s bargaining capacity in the world market, because the presence of similarly situated member nations will put immense pressure on the Indian policy makers to align their own policies with those of other ASEAN countries so as to make investments equally attractive in India. And since in the next few decades, much of the global economic growth is likely to come from Asia, there is a strong case for India to work through FTA`s with Asian countries. More so, because open regional economic integration can strengthen bargaining positions .Again a fair agreement is easier to reach between more equal parties.

By signing the Free Trade Agreement with Thailand, and announcing that it is working on another one with Singapore, India has indicated to the world that it has at last abandoned its anti-bilateralism, anti-regionalism stand, and joined the RegionalTradeAssociation bandwagon. After long years of inertness, India appears to be working overtime towards regional integration. For instance, it has acceded to the Treaty of Cooperation in Southeast Asia.

It is high time that India joined the party. Today, every member of the World Trading Organization is a member of one Regional Trading Bloc or the other. In contrast (till now) India had taken the moral high ground and refused bilateralism, because it was publicly committed to multilateralism. While there is no known study on how much India may have lost notionally in terms of trade by not being a part of any Regional Trade Agreement, what is not in dispute is that the country had got itself isolated

Regional Economic Integration

Now that we have seen through the possibility of a spurt in regional economic integration,lets try to get a bird`s eye view on the various jargons used in this regard. By regional economic integration, we mean agreements among countries in a geographic region to reduce and ultimately remove ,tariff and nontariff barriers to the free flow of goods and services and factors of production between each other. The last decade had witnessed an unprecedented proliferation of regional arrangements.

¡§ The term Economic integration does not have a single meaning. It is used to describe interdependence among national economies which are engaged in international trade.It also refers to any group of national economies which are fully unified in an economic sense.Economic integration may be understood as a process leading to the complete abolition of all the discrimination between economic units belonging to different t national economies¡¨

A number of levels of economic integration are possible in theory. In order of increasing integration, they include a free trade area, a customs union, a common market, an economic union, and full political union.

Free Trade Areas, where tariff import restrictions among participating countries are removed but each country retains its own national tariff barriers against non-members. The best known real world example of a free trade area is the European Free Trade Association(EFTA). More recent examples include the Closer Economic Relations (CER) agreement between Australia and New Zealand and the much hyped free trade area between Canada and the United States, CUSTA

Customs Union, where internal barriers to trade are removed and a common external trade policy is adopted. The European Economic Community (EEC) began as a customs union.

Common Market is similar to a customs union, except that a common market also

allows factors of production to move freely between countries. A real world example

of this type of economic integration would is the present form of the European Union.

Economic Union entails even closer integration and cooperation, including the establishment of a common currency and the harmonization of tax rates.

Political Union is the logical culmination of attempts to achieve ever-closer economic integration.

This Report

NO COUNTRY IS IMMUNE FROM THE EFFECTS OF regionalism as it shapes world economic and political relationships and influences the development of the multilateral trading system, and all countries face policy choices concerned with regionalism. Should they enter a regional integration agreement? With what other countries? What measures should be implemented¡Xsimple trade liberalization or deeper harmonization of domestic policies? There are no simple answers to these questions. Countries differ in their circumstances and in their political and economic objectives. Nevertheless, the economic tradeoffs that they face in making these choices can be identified and the process of decision making made better informed. This is the objective of this report.We shall first discuss the benefits a country stands to gain by joining a regional integration arrangement ¡K¡K..¡¦¡¦¡¦¡¦¡¦

REGIONAL INTEGRATION IS GOOD POLITICS

REGIONAL INTEGRATION IS GOOD POLITICS IT MEETS political needs, such as security or enhanced bargaining power, and it satisfies influential lobbies. Indeed, the purpose of integration is often political, and the economic consequences, good or bad, are side effects of the political payoff. The most successful regional integration to date has been the European Union.

Here¡¦s how a president of the European Commission, Walter Hallstein, saw the balance between economic and political objectives in what he was doing ¡§We¡¦re not in business at all; we¡¦re in politics.¡¨

What has political development to do with regional integration?. When are they important, when are they illusory? However, there is another and more worrying reason why regional integration is good politics. This is because those economic effects that are most apparent¡Xlarger markets and economies of scale¡Xhappen to be favorable. As we show, other effects make the net economic impact of integration ambiguous, but these are often overlooked in political discourse. So, regional integration is good politics partly because it is ¡§soundbite economics,¡¨ based on only those effects that are easiest to grasp. Sometimes the net effects will be highly favorable, but sometimes ¡§soundbite economics¡¨ is seriously misleading the illusion of gain collides with the reality of large costs and major redistributions. The combination of political payoffs and soundbite economics is tempting, and goes far to explain the popularity of regionalism.

Regional integration may also be good economics, but the impetus for integration has usually not been the economics. Sometimes, good politics delivers bad economics. The political payoff may nevertheless be worth it If a country can substantially increase its security or lock in to democracy by joining a regional integration scheme, then it may be willing to accept a few hundred million dollars of costs as worthwhile. But sometimes the political benefits are ephemeral and the economic costs high. We show that the economic effects can vary enormously depending upon the characteristics of the country, the countries it chooses as partners, and the detailed design of the integration arrangement. Only by attending to these economic choices can the political momentum behind regional integration avoid the risk of driving an economy into costly mistakes.

Integration for Security

The politics that most concerned President Hallstein and his colleagues in building the EU was security. The preamble to the 151 treaty establishing the European Coal and Steel Community, out of which the EU grew, stated its aim as follows ¡§To create, by establishing an economic community, the basis for broader and deeper community among peoples long divided by bloody conflicts.¡¨

Security also played an important role in initiating regional integration in the Southern Cone. The Argentine and Brazilian militaries had long perceived each other as potential threats. Economic agreements covering steel and automobiles were signed in the mid-180s as part of an attempt to reduce tensions, and the creation of MERCOSUR in 11 reinforced this process. Rubens Ricupero, a former finance minister of Brazil (and now Secretary General of the United Nations Conference on Trade and Development) confirms the importance of MERCOSUR¡¦s security role.

The political impetus to European and Southern Cone integration was thus based on the belief that increasing trade would reduce the risk of intraregional as well as extra regional conflict. Similar motives are found in the creation of the association of Southeast Asian Nations (ASEAN)(to reduce tensions between Indonesia and Malaysia; see De Rosa 15), APEC, and the Central American Common Market (CACM), which include potential political and military opponents (Page 16). Anwar (14) argues that ASEAN has promoted regional peace, with intraregional conflicts among the five founding members before ASEAN was founded, but not afterward. There are various reasons why this might happen. Political scientists suggest that negotiations between political leaders on trade issues gradually build trust, so that elites learn to form cross-national coalitions for subsequent collaboration. The founding fathers of the European Community, Robert Schuman and Jean Monnet, went further. They considered that economic integration would make war ¡§materially impossible,¡¨

Integration for Bargaining Power

BY JOINING TOGETHER, THE WEAK CAN BECOME STRONG. JUST as workers band together in unions to increase their bargaining power against their employer, so small countries can band together to increase their bargaining power in trade negotiations. How important has the motive of solidarity been in regional integration, and how effective is solidarity in trade bargaining? The classic example of regional solidarity exerting economic power is that of the Organization of Petroleum Exporting Countries (OPEC).

The OPEC agreement is not strictly regional and does not involve economic integration, but it does illustrate what solidarity can achieve. Its objective was not to increase trade among its members but rather to coordinate a restriction in oil export volumes, equivalent to a

coordinated increase in export taxation. Hence, it was certainly a trade agreement. This was a successful bargaining strategy in that it raised the price of oil.

In trade bargaining, countries win gains from an agreement by making concessions. When groups have the power to menace, they can use their power to make fewer concessions.

TRADE POLICY GETS SHAPED BY THE POLITICAL NEEDS OF governments and by the political pressures exerted by well-funded lobbies. Adding a regional dimension to trade policy, meets some political needs and changes lobbying opportunities. Sometimes the political needs met by regionalism are highly valuable, such as the lock-in to democracy or to policy reform. Regional integration can also serve as an efficient tool to enhance security among member countries, as has occurred in some of the largest regional agreements. However, the political effects can sometimes be unexpected or opposite of the aspirations, as when regional preferences create such unfair redistributions that they provoke conflict. It is not surprising if the economic impact of these policies, good or bad, is not very influential in the decision to join a regional integration agreement. Ordinary people will be made poorer or better off, but to date these effects have usually been incidental to the political debate. When regional integration makes ordinary people better off, the neglect of economic analysis does not matter. But sometimes regionalism comes at a cost. To know whether that cost is worth paying we need to know how large it might be. For this, there is no alternative but to understand the economic effects of regional trade preferences.

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