1 Understand international economic integration Definition; levels of international economic integration (global, regional); reasons for global and regional economic integration Definition Economic in.
1 Understand international economic integration: Definition; levels of international economic integration (global, regional); reasons for global and regional economic integration Definition: Economic integration meaning describes the collaboration of two or more economies to lower or remove trade barriers and create a shared market and business opportunities for one another How Does Economic Integration Work? Economic integration strives to harmonize economic policies among member nations to promote mutual trade and economic and political interests It, along with little government interference, creates more business prospects worldwide As a result, it is a crucial component of regional and global economic developments Levels of international economic integration: - Global economic integration - efforts to reduce trade and investment barriers around the globe + Benefits + Challenges - Regional economic integration refers to agreements between countries in a geographic region to reduce or to eliminate tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other Example: CPTPP & AEC + Benefits Improve market efficiency; Share the costs of public goods or large infrastructure projects; Decide policy cooperatively and have an anchor to reform; Have a building block for global integration; Reap other non-economic benefits, such as peace and security + Challenges Countries may have different preferences on priorities for regional integration, depending on their connectivity gaps, economic geography, or preferences for sovereignty in specific areas Regional integration’s impact on trade and investment flows, allocation of economic activity, growth, income distribution are often difficult to assess Lack of adequate complementary policies and institutions may lead to inefficient outcomes For instance, policy barriers at the border may offset the gains transport infrastructure cooperation Regional integration creates winners and losers, notably within countries Policies and institutions are needed to ensure that regionalism is inclusive and social, environmental, governance risks are managed A bilateral trade agreement confers favored trading status between two nations By giving them access to each other's markets, it increases trade and economic growth Each agreement covers five areas: First, it eliminates tariffs and other trade taxes This gives companies within both countries a price advantage It works best when each country specializes in different industries Second, countries agree not to dump products at a cheap cost Third, the governments refrain from using unfair subsidies Fourth, the agreement standardizes regulations, labor standards, and environmental protections Fewer regulations act like a subsidy It gives the country's exporters a competitive advantage over its foreign competitors Fifth, they agree to not steal the other's innovative products Reasons for Regional Integration Economic enhancement of the member states (Free trade & FDI) A desire to jog the multilateral system into faster and deeper action than the GATT/WTO in selected areas Political Reasons Linkages of economies create interdependencies that reduce the potential for violent conflict Grouping gives countries more political clout world-wide Impediments Painful adjustments in certain segments of economy Threat to national sovereignty Understand regional economic integration: Definition; indicate the similarities and differences between different forms of regional economic integration (free trade area, customs union, common market, economic union, political union) Definition Regional integration is the process by which two or more nation-states agree to cooperate and work closely together to achieve peace, stability, and wealth The similarities and differences between different forms of regional economic integration (free trade area, customs union, common market, economic union, political union) levels of Regional Integration Free trade Tariffs (a tax imposed on imported goods) between member countries are significantly reduced, and some are abolished altogether Each member country keeps its tariffs regarding third countries, including its economic policy The general goal of free trade agreements is to develop economies of scale and comparative advantages, promoting economic efficiency A challenge concerns resolving disputes as free trade agreements tend to offer limited arrangements and dispute resolution mechanisms Therefore, they are prone to the respective influence and leverage of the involved nations, which can lead to different outcomes depending on their economic size A large and complex economy having a free trade agreement with smaller economies is better positioned to negotiate advantageous clauses and dispute resolution Customs union Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries; a common trade regime is achieved Custom unions are particularly useful to level the competitive playing field and address the problem of re-exports where importers can be using preferential tariffs in one country to enter (re-export) another country with which it has preferential tariffs Movements of capital and labor remain restricted Common market Services and capital are free to move within member countries, expanding scale economies and comparative advantages However, each national market has its own regulations, such as product standards, wages, and benefits Economic union (single market) All tariffs are removed for trade between member countries, creating a uniform market There are also free movements of labor, enabling workers in a member country to move and work in another member country Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration A further step concerns a monetary union where a common currency is used, such as the European Union (Euro) Political union Represents the potentially most advanced form of integration with a common government and where the sovereignty of a member country is significantly reduced Only found within nation-states, such as federations where a central government and regions (provinces, states, etc.) have a level of autonomy over well-defined matters such as education Customs Union: Indicate advantages and disadvantages of a customs union to members, and give examples Advantages: Increase in trade flows and economic integration The main effect of a free-trade agreement is that it increases trade between member countries It helps improve the allocation of scarce resources that satisfy the wants and needs of consumers and boosts foreign direct investment (FDI) Customs unions lead to better economic integration and political cooperation between nations and the creation of a common market, monetary union, and fiscal union Trade creation and trade diversion The effectiveness of a customs union is measured in terms of trade creation and trade diversion Trade creation occurs when the more efficient members of the union sell to less efficient members, leading to a better allocation of resources Example: Non-EU goods still flood into Turkey a lot The imports of Turkey from the other countries rocketed from approximately 18.9 billion USD to 152.1 billion USD >< while Turkey’s imports from the EU countries rose approximately from 24.3 billion USD to 88.7 billion USD Trade diversion occurs when efficient non-member countries sell fewer goods to member countries because of external tariffs It gives less efficient countries in the union the opportunity to capitalize on their position and sell more goods within the union Example: It could be said that the trade diversion effect on Turkey’s foreign trade did not occur throughout the period of the customs union The ratio of the EU in Turkish export and import has decreased considerably from 54 per cent to 43.5 per cent in exportation and from 56 per cent to 36.7 per cent in importation One would note, however, that the total share of other countries has impressively increased respectively from 44 per cent to 55.1 per cent in exports and 44 per cent to 62.8 per cent in imports during the 1996 and 2014 time period Reduces trade deflection One of the main reasons a customs union is favored over a free trade agreement is because the former solves the problem of trade deflection This occurs when a non-member country sells its goods to a lowtariff FTA (free trade agreement) country, which then resells to a high-tariff FTA country, leading to trade distortions The presence of a common external tariff in customs unions helps avoid problems that arise from tariff differentials Disadvantages Loss of economic sovereignty Members of a customs union are required to negotiate with non-member countries and organizations such as the WTO This is necessary to maintain a customs union; however, it also means that individual member countries are not free to negotiate their own deals If a country wants to protect an infant industry in its market, it is unable to so by imposing tariffs or other protective barriers due to the liberal trading policies Similarly, if a country wants to liberalize its trade outside the union, it is unable to this due to the common external tariff Distribution of tariff revenues Some countries in the union not receive a fair share of tariff revenues This is common among countries like the UK that trade relatively more with countries outside the union Around 20%-25% of the tariff revenue is retained by the member who collects the revenue It is estimated that the cost of collecting this revenue exceeds the actual revenue collected Complexity of setting the tariff rate A common problem faced by customs unions is the complexity of setting the applicable tariff rate The process is very costly and time-consuming Member countries often find it hard to forgo the trade of certain goods or services because another country in the union is producing it more efficiently The problem is usually faced by developing countries and is a major issue that the UK is dealing with during Brexit Describe how each form of regional economic integration affects international trade and investment, and give examples FTA: in which member countries agree to gradually eliminate formal barriers to trade in products and services within the bloc, while each member country maintains an independent international trade policy with countries outside the bloc NAFTA is an example The free trade area emphasizes the pursuit of comparative advantage for a group of countries rather than for individual states Governments may impose local content requirements, which specify that producers located within the member countries provide a certain proportion of products and supplies used in local manufacturing If the content requirement is not met, the product becomes subject to the tariffs that member governments normally impose nonmember countries The custom union is the second level of regional integration, similar to a free trade area except that member states harmonize their external trade policies and adopt common tariff and nontariff barriers on imports from nonmember countries MERCOSUR, an economic bloc in Latin America, is an example of this type of arrangement The adoption of a common tariff system means that an expoter outside MERCOSUR faces the same tariff and nontariff barriers when trading with any MERCOSUR member country Determining the most appropriate common external tariff is challenging, because member countries must agree on the percentage level of the tariff and on how to distribute proceeds from the tariff among the member countries In the third stage of regional integration, member countries establish a common market (also know as a single market), in which trade barriers are reduced or removed, common external barriers are established, and products, services, and factors of production such as capital, labor, and technology are allowed to move freely among the member countries Like a customs union, a common market also establishes a common trade policy with nonmember countries The EU is a common market It has gradually reduced or eliminated restrictions on immigration and the cross – border flow of capital A worker from an EU country has the right to work in other EU countries, and EU firms can freely transfer funds among their subsidiaries within the bloc Common markets are hard to create because they require substantial cooperation on labor and economic policies Since labor and capital can flow freely inside the bloc, benefits to individual members vary; skilled labor may move to countries where wages are higher, and investment capital may flow to countries where returns are greater In the EU, for example, Germany has seen an influx of workers from Poland and the Czech Republic, because these workers can earn much higher wages in Germany than they can in their home countries An economic union is the fourth stage of regional integration, in which member countries enjoy all the advantages of early stages but also strive to have common fiscal and monetary policies At the extreme, each member country adopts identical tax rates The bloc aims for standardized monetary policy, which requires establishing fixed exchange rates and free convertibility of currencies among the member states, in addition to allowing the free movement of capital This standardization helps eliminate discriminatory practices that might favor one member state over another Through greater mobility of products, services, and production factors, an economic union enables firms within the bloc to locate productive activities in member states with the most favorable economic policies The EU has made great strides toward achieving an economic union For example, seventeen EU countries have astablished a monetary union in which a single currency, the euro, is now in circulation Monetary union and the euro have greatly increased the ease with which European financial institutions establish branches across the Eu and offer banking services, insurance, and savings products The single currency also makes trading and investment easier for European firms doing business within the union To achieve greater economic integration, economic union member countries strive to eliminate border controls, harmonize product and labeling standards, and establish region – wide policies for energy, agriculture, and social services An economic union also requires its member to standardize laws and regulations regarding competition, mergers, and other corporate behaviors To facilitate free trade inservices, member countries harmonize procedures for licensing of professionals so that a doctor or lawyer qualified in one country can practice in any other country Understand the World Trade Organization (WTO): Definition, the basic principles of GATT/WTO; GATT vs WTO; objectives and functions of WTO; organizational structure of WTO; WTO and Regional Trade Agreements (RTAs) Definition: WTO ● is the only international organization dealing with the global rules of trade between nations ● its main function is to ensure that trade flows as smoothly, predictably and freely as possible ● is a forum for governments to negotiate trade agreements ● is a rule- based, member –driven organization – all decision are made by the member governments, and the rules are the outcome of negotiations among members The basic principles of GATT/WTO: GATT: Most-Favored-Nation (MFN) Treatment: This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article of the GATT 1947 It states that each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them, i.e., each contracting party is required to treat all contracting parties in the same way that it treats its “most-favoured nation” Reciprocity: GATT advocates the principles of “rights” and “obligations” Each contracting party has a right, e.g access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis In a way, this is closely associated with the MFN principle Transparency: Fundamental to a transparent system of trade is the need to harmonize the system of import protection, so that barriers on trade can be reduced through the process of negotiations The GATT therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only” Tariff Binding and Reduction: When GATT was established, tariffs were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction The text of the 1947, GATT lays out the obligations on the contracting parties in this regard WTO: Trade without discrimination Most Favoured Nation (MFN) All nations should be treated fairly No one country can give a particular favor to another member country For example, if one government lowers tariffs for one country, the other member countries must follow suit National treatment rule All items, whether domestic or imported, receive the same treatment Local products, as well as those imported from other nations, are treated fairly and equally Freer trade: gradually, through negotiation - Lowering trade barriers is one of the most obvious means of encouraging trade At first these focused on lowering tariffs on imported goods The WTO agreements allow countries to introduce changes gradually, through “progressive liberalization” Developing countries are usually given longer to fulfill their obligations (?) Predictability: though binding and transparency - - With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition – choice and lower prices The multilateral trading system is an attempt by governments to make the business environment stable and predictable In the WTO, when countries agree to open their markets for goods or services, they “bind” their commitments The system tries to improve predictability and stability in other ways as well o One way is to discourage the use of quotas and other measures used to set limits on quantities of imports since administering quotas can lead to more red-tape and accusations of unfair play o Another is to make countries’ trade rules as clear and public (“transparent”) as possible Promoting fair competition - The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate o The system does allow tariffs and, in limited circumstances, other forms of protection More accurately, it is a system of rules dedicated to open, fair and undistorted competition Encouraging development and economic reform Promoting Economic Reform and Development is encouraged WTO vs GATT - Unlike WTO commitments, the GATT agreement and structure remained "provisional." “GATT rules mainly applied to trade in goods whereas the WTO covers other areas, such as services, intellectual property, etc.” GATT had contracting parties whereas the WTO has members Comparatively speaking, the WTO is a permanent institution with its own Secretariat, whereas the GATT was merely a set of multilateral treaty regulations without any organisational base GATT agreement allows a country to follow domestic legislation while WTO doesn’t While many GATT clauses were plurilateral and hence selective, practically all WTO agreements are multilateral in nature, requiring commitment from the whole membership The WTO also covers certain grey areas, such as agriculture, textiles and clothing, not covered under the GATT The dispute settlement system under the WTO is much more efficient, speedy, and transparent unlike the GATT system which was highly susceptible to blockages Objectives and functions of WTO Objectives: Raising standards of living Ensuring full employment Ensuring growth of real income and demand Expanding production and trade Sustainable development Protection of the environment Functions: To facilitate the implementation, administration, and operation of trade agreements To provide a forum for trade negotiations among member countries To deal with trade disputes among it member countries To carry out periodic reviews of its members' national trade policies To assist developing countries in trade policy issues, through technical assistance and training programs To cooperate with other international organizations Organizational Structural of the WTO Decisions are made by the entire membership- consensus Highest institutional body: The Ministerial Conference Second level: General Council Third level: Councils for each broad area of trade Fourth level: Subsidiary bodies WTO and Regional Trade Agreements (RTAs) RTAs actually support the WTO GATT (Article 24&5) allow WTO members to conclude RTAs, as a special exception, provided certain strict criteria are met In the WTO, RTAs are defined as reciprocal trade agreements between two or more partners They include FTAs & CUs RTAs seem to violate the WTO’s principle The WTO agreements recognize that under some circumstances, setting up a CU or FTA would violate the WTO’s principle of nondiscrimination for all WTO members All WTO members now have an RTA in force Understand the meaning of trade creation, trade diversion; static and dynamic welfare effects of the customs union; customs union and the theory of the second best Trade creation occurs when domestic production in a member nation is replaced by lower-cost imports from another member nation • Leads to increased welfare for members as nations specialize in comparative advantages • Leads to increased welfare for non-members as increased real income spills over into increased imports from rest of the world Trade diversion occurs when lower-cost imports from non-members are replaced by higher cost imports from members • By itself, trade diversion lowers welfare as it shifts resources away from comparative advantages • Trade diverting customs union also results in trade creation Change in welfare depends on relative magnitude of creation and diversion Dynamic welfare effects of the customs union Increased Competition, leading to greater efficiencies and technological improvements The most significant dynamic effect of customs union is the increase in intensity of competition within the union Competition stimulates the managerial efficiency and induces the industries to utilize new technology Economies of Scale from the enlarged market When a customs union is formed, expansion in the size of market, increased competition, increased specialization and consequent enlargement of plant size lead to the emergence of internal and external economies of scale The formation of EC resulted in economies of scale due to reduction in the range of differentiated products, increase in production run, pooling of skilled labour, capital resources, research and management Stimulus to Investment to take advantage of enlarged market, and to meet increased competition