Regional Economic Integration

Regional Economic Integration Meaning

Regional Economic Integration emerges as countries economically integrate their diverse trading areas, often recognized as Regional Economic Cooperation, Regional Trade Areas, Regional Grouping and Regional Bloc. A trade bloc, also known as a regional trade bloc or regional grouping, constitutes an intergovernmental agreement within a regional intergovernmental organization, aiming to diminish regional trade barriers such as tariffs and non-tariff barriers among the participating states.

Regional groupings have emerged in the past two decades as major forces shaping the patterns of export marketing. Regional trade organisations cater to a specific world region which may include countries grouped by economic agreement, such as the European Union (EU); grouped by political ties, such as the countries of the former Soviet Union; or by geographic/cultural ties, such as North Africa. Regionalism is the political movement towards the creation or expansion of regional trade organisations or associations.

Regional economic integration in international business

Regional trade organisations (or associations) are one result of regionalism and may involve regional institutional integration – including political institutions. It can be further classified into various institutional models, yet it’s evident that these organizations seldom fit perfectly within predefined categories. This is particularly true when they evolve. Preferential Trading Arrangements (PTAs) are the regional trade organisations that extend preferential treatment to members. Conversely, ‘open regionalism’ materializes as a regional trade organization that attains economic cooperation without discrimination.

In terms of intra-regional trade relations, regional trade organisations promote closer economic and political ties between members and may reduce the tensions that inevitably arise by facilitating the development of a common consensus on areas of mutual concern and by fostering sensitivities, better relations and communication. Side payments, like directing resources to disadvantaged regions, can serve as tools to obtain agreement.

The package of negotiated welfare-improving policies increases welfare more effectively than what multilateral methods can achieve. The occurrence of free-riding due to highly dissimilar states of development or structures is also reduced. Involved parties in regionalism achieve a deeper internalization of benefits compared to alternative possibilities.

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levels of regional economic integration

Trading blocs take many forms, depending on the degree of cooperation and interrelationships,  resulting in diverse levels of regional economic integration among the countries involved. There are six levels of formal cooperation among member nations of these regional groupings, ranging from a preferential trade area to the ultimate level of integration and political union.

Levels of regional economic integration are given as follows:

1. Preferential Trading Agreement
2. Free Trade Area
3. Custom Union
4. Common Market
5. Economic Union
6. Political Union

Preferential Trading Agreement

A preferential trading agreement is the least stringent form of economic integration. Under this arrangement, a group of countries have a formal agreement to facilitate the exchange of goods and services on preferential terms. This requires that the tariffs be reduced between the countries or that special quotas allow preferential access to their products. An excellent example of a preferential trading agreement is the Lome Agreement among the Caribbean, African, and Pacific (ACP) nations and the European Union. Like many preferential trading agreements, this arrangement mainly covers agricultural products, the main exports of the ACP nations.

The EU also has several individual preferential trading agreements with other countries in the Middle East, Latin America, and elsewhere. APEC was formed in 1989 in response to the growing interdependence among the Asia-Pacific economies. Membership of this trading block consists of 18 countries. APEC is a much looser economic grouping but is unique for its members, the huge differences in their economies and stages of development, and the juxtaposition (placing side by side) of every system along the political spectrum.

Free Trade Area

A free trade area represents a lasting arrangement between neighbouring countries. It involves removing tariffs on goods traded among the members of the free trade area. The arrangement does not, in general, apply to agriculture, fishing, or services, but the practice varies from one agreement to another. Member countries have the autonomy to levy their external tariff on goods from outside the free trade area. Each member thus retains autonomy over trade with external nations, and there is little need for policies and formal institutions other than to maintain the internal tariff-free area.

A free-trade area has a higher level of integration compared to a loosely formed regional cooperative and involves a formal agreement among two or more countries to reduce or eliminate customs duties and non-tariff trade barriers among member nations. However, member countries are free to maintain individual tariff schedules for non-member countries. One basic problem with this arrangement is that a free-trade area can be avoided by non-member nations, which can export to the member nation having the lowest external tariff and then transport the goods to the destination member nation without paying the higher tax that would have been applicable if the goods had gone directly to the destination nation.

Free Trade Area Meaning

A free-trade area is not necessarily free of trade barriers, among its member nations. Although it is an attempt by the treaty to develop freer trade among the member countries, trade disputes and restrictions often arise within the framework of this treaty. The North American Free Trade Agreement (NAFTA), a free-trade agreement between Canada, the United States, and Mexico, provides for the elimination of all tariffs on industrial products traded among these three nations within ten years from the date of implementation of the NAFTA. The European Free Trade Association (EFTA) is another well-known free trade group from Norway, Iceland, Switzerland, Austria, Finland, and Sweden. The associate member countries are Iceland, Great Britain, Finland and Denmark.

The Southern Common Market or South American trading block (MERCOSUR, 1995) is a free-trade area consisting of Brazil, Argentina, Uruguay, and Paraguay, with an automatic schedule for the lowering of internal trade barriers and the ultimate objective of establishing a customs union. Bolivia and Chile also became associate members in 1996 and 1997, respectively.

Customs Union

Like members of a free trade area, members of a customs union remove barriers to trade in goods and services among themselves. In addition, the customs union establishes a unified trade policy about countries that are not part of the union. Typically, this forms a standard external tariff, whereby imports from non-members are subject to the same tax when sold to any member country. Tariff revenues are then shared among partners according to a specified formula.

The free-trade area concept may gradually fade away in the future due to its inherent weaknesses, although it may continue to be an attractive stepping stone to a higher level of integration. When the members of a free-trade area incorporate common external tariffs into the provisions of their free-trade agreement, then the free-trade area becomes a customs union.

Therefore, members of a customs union not only have reduced or eliminated tariffs among themselves but they also enforce a shared external tariff on non-member countries. This prevents non-member nations from exporting initially to a member country that has a low external tariff with the goal of sending the exports on to a member nation that has a higher external tariff. The ASEAN is a good example of a currently functional customs union whose eventual goal is the formation of a common market.

Common Market

Similar to the Customs Union, a common market has no barriers to trade among its member states and has a common external trade policy. In addition, the expected market removes restrictions on the movement of factors of production (capital, labour, and technology) across boundaries. Thus, restrictions on emigration, immigration, and cross-border investments have been eliminated. When production factors are freely transferable, labour, capital, and technology may be employed in their most productive uses.

As cooperation increases among the member nations of a customs union, they can form a common market. This common market effectively eliminates all tariffs and barriers to trade among its members, adopts a common set of external tariffs on non-members, and removes all restrictions on the flow of capital and labour among member nations. The 1957 Treaty of Rome that created the European Economic Community had the ultimate goal of creating a common market goal that was substantially achieved by the early 1990s in Western Europe, known as the European Community (Austria, Denmark, Belgium, France, Ireland, Germany, Luxembourg, Italy, the Netherlands, Spain, Portugal, and the United Kingdom). German banks are now permitted to establish branches in Italy, while Portuguese workers have the opportunity to reside and be gainfully employed in Luxembourg.

Similarly, South American Countries, led by the MERCOSUR and the Andean Group, are actively seeking to establish a unified market encompassing over 300 million consumers.

Economic Union

This represents the full integration of the economies of two or more member countries. In addition to eliminating internal trade barriers, adopting standard external trade policies, and abolishing restrictions on the mobility of the factors of production among members, an economic union requires its members to coordinate their economic policy including industrial policy, fiscal policy, taxation, monetary policy, and social welfare programmes to incorporate their economies into a single entity. The establishment of an economic union requires nations to surrender a large measure of their national sovereignty. Needless to say formation of an economic union is extremely difficult since member countries strongly desire to retain the power of the nation-state, and attempts to undermine the authority of the state will encounter opposition.

An economic and monetary union represents the highest level of integration among politically independent countries. In precise technical terms, a monetary union does not require the presence of a shared market, a free-trade area a customs union, or regional cooperation for development. However, it represents the logical progression following the establishment of a common market, because it requires the next higher level of cooperation among member nations.

In Europe, the Maastricht Treaty, which followed the Treaty of Rome, aimed to establish a political union and led to the transformation of the European Community into the European Union. This treaty introduced a monetary union as a stepping stone towards achieving a common currency and a central bank among member countries. The European Union (EU) consists of fifteen member countries: Austria, Belgium, Finland, Denmark, France, Greece, Germany, Ireland, Luxembourg, Italy, the Netherlands, Portugal, Sweden, Spain and the United Kingdom.

Political Union

Political integration often coincides with economic integration to a certain extent. However, political union entails a more structured and formal establishment of political connections among nations. A limited form of political union may exist when two or more countries have common policies and common decision-making bodies. In its fullest sense,  national unification encompasses the merging of nations that were previously distinct entities. The world’s best example of political union occurred when thirteen separate colonies operating under the Articles of Confederation grew into a new country – the USA (United States of America), India, as a country, emerged after the unification of numerous kingdoms. The unification of East and West Germany in 1990 is another example of total political union. Indeed, the formation of the Soviet Union itself brought political union among its various republics, though integration was less universally popular.

The culmination of the integration process is the establishment of a political union, which can be another name for a nation when such a union truly achieves the levels outlined herein through voluntary means. The foremost objective of the Maastricht Treaty is a political union. Currently, Britain remains the principal opponent of ceding any part of the sovereignty of the nation-state to any envisaged political union. Even the leading proponents of European integration Germany and France have reservations about a common defence and foreign policy.