Regional Economic Integration
• Refers to agreements among countries in a
geographic region tor educe, and ultimately
remove, tariff and non tariff barriers to the free flow
of goods, services and factors of production
between each other.
Levels of Economic Integration
• Political Union
• Economic Union
• Common Market
• Customs Union
• Free Trade Area
• Free Trade Area: all barriers to the trade of goods
and services among member countries are
Levels of Integration
• Customs Union: eliminates trade barriers between
member countries and adopts a common external trade
• Common Market: Has no barriers to trade between
member countries, includes a common external trade
policy, and allows factors of production to move freely
• Economic Union: involves free flow of products and
factors of production between member countries and
adoption of a common external trade policy. It also
requires common currency, harmonization of members’
tax rates, and a common monetary and fiscal policy.
Levels of Integration
• Political Union: Moving toward economic union,
raises questions of how to coordinate bureaucracy
accountable to the citizens of member nations.
Political union in which a central political apparatus
coordinates the economic, social, and foreign policy
of the member states is the answer.
Case for regional integration
• Economic case:
• Unrestricted free trade will allow countries to
specialize in production of goods and services that
they can produce most efficiently.
• Allowing free trade stimulates econmic growth
• FDI can transfer technological, marketing and
managerial know-how to host nations
• It is easier to establish a free trade regional
agreement among a free countries than with say
Case for regional integration
• Political case:
• Linking economies together and creating
dependencies forces them to resolve conflicts in an
• By grouping their economies, the regional countries
can enhance their political clout in the world
Impediments to integration
• Loss of sovereignty: giving up controls in fiscal and
monetary policy as well as tax rates
• Loss of jobs – in some sectors
o NAFTA – USA and Canada workers lost jobs in the textile and
other low-cost jobs
Case against regional integration
• Trade creation: occurs when high-cost domestic
producers are replaced by low-cost producers within
the free trade area.
• Trade diversion: occurs when low-cost external
suppliers are replaced by higher-cost suppliers
within the free trade area.
• Product of two political factors:
• Devastation of western Europe during two world
wars and desire for lasting peace
• European nations’ desire to hold their own on the
world’s political and economic stage
History of EU
• Forerunner of EU, the European Coal and Steel
Community was formed in 1951 by Belgium, France,
West Germany, Italy, Luxembourg and the Netherlands.
• Treaty of Rome (1957): The European Community was
established. - Provided for COMMON MARKET
• Grew in 1973 with additions of UK, Ireland and
• Greece joined in 1981.
• 1986- Spain and Portugal
• 450 million people today with GDO of 11 Trillion dollars
• European commission: proposes EU legislation,
implementing and monitoring compliance with EU
laws by member states.
• European parliament: has 732 members directly
elected by the population of the member states.;
mostly consultative rather than legislative body
• Court of justice: supreme appeals court for EU law
– consists of one judge from each country.
Benefits of EURO Currency
• Savings between trade – upto $45 billion a year
• Easier to compare prices across Europe – which will
increase competition as prices will be lowered to an
equilibrium and more suppliers will be competing
• European producers will be forced to look for ways
to reduce their costs.
• Increase range of investment options across EU
• Should give boost to development of a highly liquid
pan-European capital market.
Costs of Euro
• National countries lose authority over monetary
• Optimal Currency Area: similarities in the
underlying structure of economic activity make it
feasible to adopt a single currency and use a single
exchange rate as an instrument of macroeconomic
Regional Trade Unions
• NAFTA: USA, Canada, Mexico
• Andean Pact: Bolivia, Chile, Ecuador, Colombia and
Peru (now operates as a customs union including
Venezuela but minus Chile)
• MERCOSUR – originated with Brazil and Argentina
0 includes Paraguay and Uruguay.
• ASEAN: Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore,
Airbus vs. Boeing
• Airbus: Great Britain, Germany, France and Spain
• Gave subsidies to Airbus; also got state owned
airlines to purchase planes from Airbus.
• Received subsidies to tune of 13.5 billion dollars – in
form of below-market interest and tax breaks.
• Boeing accused by European commission of
receiving indirect subsidies (via military contracts
• 1996 Boeing and McDonnell Douglas merged
Military Industrial Complex
• Wars caused formation of MIC
o Germany, suffering from naval blockade that prevented nitrate
for bombs, turned to chemical warfare
o German chemicals industry, which had earlier emerged from
competition with British natural dyes, could make poison gas