Regional economic integration

By regional economic integration, we mean agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. Over the past few years there has been a rapid increase in the number of regional trade arrangements. There are three types of regional integration arrangements (RIA): a free trade area (FTA), a customs area (CU), and a common market (CM). A free trade area (FTA) is an RIA formed by removing tariffs on trade among nations that are FTA members, without changing tariffs on imports from non-members. A customs union (CU) is an FTA where members tariff structures on the extra-CU trade are equalized. A common market (CM) permits free movement of factors, goods and services between states. World Trade Organization members are required to notify the WTO of any regional trade agreement in which they participate. The movement toward regional economic integration has been the most successful in Europe. The European Union is an economic and political union of 27 member states. The EU has developed a single market, and a single currency is used. Member states are discussing enlargements to include other European states. There are similar moves toward regional integration in other parts of the world. Canada, Mexico, and the United States have implemented the North American Free Trade Agreement (NAFTA). This is one step closer to complete removal of all barriers to the free flow of goods and services between the three countries. Argentina, Brazil, Uruguay and Paraguay are in the process of reducing barriers to the trade between themselves. This free trade area is known as MERCOSUR, and it is the first step in moving toward creation of a South American Free Trade Area (SAFTA). 21 Pacific Rim countries, including the NAFTA member states, Japan, and China, have been discussing a possible pan-Pacific free trade area with the support of the Asia Pacific Economic Cooperation forum (APEC). Arguments in favour of regional integration are relatively simple. Closer integration of neighbouring economies is seen as a first step in creating a larger regional market for trade and investment. This works as an incentive to greater efficiency, productivity gain and competitiveness. And that is due to lowering border barriers and reducing other costs and risks of trade and investment. Bilateral and sub-regional trading

arrangements represent development tools as they encourage greater market openness, and further structural adjustment. Integration is not an end in itself, but a process to support economic growth strategies and greater social equality. The desire for closer integration is related to a larger desire for opening to the outside world. Most of the members of these arrangements are hoping that being a part of the integration will enable them to connect with a growing range of partners and to access freer and open global environment for trade and investment. The rapid expansion of regional trade agreements raises fear that in the future the world will be divided into regional trade blocks which will compete against each other. In this scenario, free trade will exist within each block, but each block will protect its market from outside competition with high tariffs. Those who believe in unrestricted free trade are concerned about the idea of the EU and NAFTA turning into economic fortresses that keep out foreign producers with high tariff barriers. If this scenario really happens, the decline in trade may be greater than the benefits of free trade within blocks. The benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion. Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area. Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of trade it creates exceeds the amount it diverts.