Chapter 9: Regional Economic Integration

What is Regional Economic Integration

• Regional Economic Integration can be described as an agreement between multiple countries found in a certain geographic area.
• An agreement that states to reduce tariffs or eliminate them altogether so that goods, services and factors of production can flow freely between countries.

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What are the levels of Regional Economic Integration

• Free Trade Area: eliminates all kinds barriers related to trade among members. For example: @@NAFTA also known as The North Atlantic Free Trade Agreement.@@ @@This free trade area contains member countries such as the USA, Canada and Mexico.@@
• Customs Union: not only eliminates barriers to trade between members but adopts an external trade policy. @@For example, the European Union (EU) is a classic example of a customs union.@@
• Common Market: there is free flow of goods and services and an external trade policy for members. @@For Example, the European Economic Community is referred to as a common market.@@
• Economic Union: This union has free flow of factors of production, external trade policy as well as a common currency, tax rate and fiscal and monetary policy amongst members.
• Political Union: Advanced form of integration where there is a common government that governs the social, economic and foreign policy of member states.

Why should countries Integrate their Economies?

• The benefits countries gain from free trade.
• Exploit the benefits that are achieved through investment and regional economic integration.
• Regional Economic Integration helps link countries together which reinforces cooperation and dependency on one another.
• Minimizes chances of violence and conflict.
• Provides countries with political power when they deal with other countries.

What limits efforts at Integration?

• Countries may lose their national sovereignty due to regional economic integration.

• Regional Economic Integration is beneficial when the trade it creates surpasses the trade it diverts.

• @@Trade Creation: this occurs when high cost domestic producers are replaced by low cost producers within the regional integration free trade area.@@

• @@Trade Diversion: This occurs when there are high cost suppliers within the free trade area and those are replaced by domestic suppliers that are much cheaper.@@

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What is the Status of Regional Economic Integration in EU?

There are 2 trade blocs in Europe

1. European Union, that currently has 27 members.
2. The European free trade area, this has @@4 members.@@

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What is the European Union?

• European Union is the result of the two world wars that had a lasting impact on Europe.
• After the two world wars countries wanted lasting peace where they could trade smoothly and have their own political power.
• In the year 1987 the Single European Act (SEA) established the European communities and a single market was created by 1992.
• There are 4 main institutions in the EU, these include:

1. The European Commission.
2. The European Parliament.
3. The European Council.
4. The Court of Justice.

The Maastricht Treaty

• This treaty was the @@turning point for Europe@@.

• It not only helped @@create the EU but also emphasized on having a single currency.@@

• This ultimately created the second largest currency after the US dollar.

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What is the status of Regional Economic Integration in America?

• One of the most popular Regional Integrations is America is NAFTA. An agreement between the US, Canada and Mexico.
• There are other integrations and trade agreements as well. Such as MERCOSUR, this is an agreement between the common markets of the South.

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What does Regional Economic Integration mean for managers?

Pros:

• [ ] Allows various countries to enter new markets.

• [ ] Allows countries to specialize in goods that they can efficiently produce.

• [ ] Factors of production can move freely.

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Cons:

• [ ] Decline in national sovereignty.
• [ ] Competitive business environment.
• [ ] ‘Trade Fortresses’ can be created in order shut countries out of the single market place.

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