Integration Between Countries

Integration between countries is the order of the day. Firms in the initial stages of
internationalization, must be aware of the regional groups that encompasses countries
targeted for manufacturing locations or market opportunities. As firms proceeds towards
greater multinationalism, they need to change their organisational designs and operating
strategies to take advantage of regional trade blocks.

In 1950s an 1960s regional integration gained significant momentum. Integration also

called regional trading block, involves the organizing of individual countries into groups
that eventually abolish trade restrictions with members countries and also may engage in
other activities that promote their citizens welfare when we say integration it means
economic integration between nations, bordering sometimes on political integration too.

Levels of Integration

There are six levels of integrations

Preferential Trade agreement

A preferential is the loosest form of economic integration . Under this a group of

countries have a formal agreement to allow each other’s good and services to be traded
on preferential term. This requires that the tarrifs are reduced between countries or that
special quotas allow preferential access for their products.

Free trade area

A free trade area is usually a permanent arrangement between neighbouring countries. It

involves the complete removal of tariffs on goods traded among the members of the free
trade area. Member countries are freely to levy their own external tariff on goods from
outside the free trade area.

Custom unions

Like member of a free trade area, member of a customs union remove barriers to trade in
goods and services among themselves. In addition the custom union establishes a
common trade policy with respect to non-members. Typically this takes the form of a
common external tariff, whereby imports from non-members are subject to the same
tariff when sold to any member country.

Common Market

Like the union a common market has no barriers to trade among members and has a
common external trade policy. In addition the common market removes restrictions on
the movement of factors of production across border. Thus restriction on immigration,
emigration, and cross-border investment are abolished.
Economic Union

This represents full integration of the economies of two or more member countries. In
addition to eliminating internal trade barriers, adopting common external trade policies
and abolishing restrictions on the mobility of the factor of production among members,
an economic union requires its member to coordinate their economic policies (monetary
policies, fiscal policies, taxation and social welfare programme) so as to blend their
economies into single entities.

Political union

While some degree of political integration often accompanies economic integration,

political union implies more formal political links between countries. A limited for of
political union exist where two or more countries share common decision making bodies
and have common policies.

REGIONAL TRADING BLOKCS

The European Union

The European Economic Community now called the EU was formally established by the
treaty of Rome in 1957. EU has 25 members and some more are expected to join.
The EU has 450 million consumers and at 10 trillion euros will account for a fourth of the
world’s GNP. Besides the 25 nation EU has a huge territory of 3.9 million square
kilometers.
Some of the members of the EU
France, Italy, Germany, Great Britain, Belgium, Ireland, Malta, Poland, Romania, Czech
Republic.

The Objectives of the EU are.

- Elimination of customs duties among member states.
- Elimination of obstacles to the free flow of import and export of
goods and services among members nations
- Free movement of capital and people with in the block
- Common measures for consumer protection
- Acceptance of common agricultural policies, transport policies,
technical standards, health and safety regulations and educational
degrees
- Regional funds to encourage the economic development of
certain countries/regions.

EU’s Major Trading Partners

Exports – USA, Japan, China and India

Imports – USA, Japan, China, India
One of the major achievements of the EU has been the introduction of the single currency
for all the members’ countries. The single currency did come into effect from 1998, but
except in three countries Britain, Denmark and Sweden.

NAFTA (North American Free Trade Agreement)

NAFTA came into being on January 1, 1994 comprising United States, Canada and
Mexico. NAFTA is an American counterpart to the EU, but the latter aims to economic
and political integration whereas in the american integration the objective is purely
economic. NAFTA is more important because it encompasses the whole of NORTH
AMERICA and is the largest regional economic grouping in the world.
The members of NAFTA are Canada, Mexico and US where US is the largest trading
partner of both Canada and Mexico.

Key data of NAFTA members

Population millions 1998 GDP $Billion1997 GDP per capita 1997
Canada 30.7 658 21700
Mexico 98.6 695 7700
USA 270.3 8083 30,200

The objectives of NAFTA covers the following areas

- Trade rules: safeguards, subsidies, antidumping measures and

standard relating to safety and health.
- Provision to ensure trade in services (consulting, engineering,
software.
- Market access: Tariff and Non-tariff barriers, rules of origin,
government procurement.
- Establishing investment rules that will protect the interest of
investors.
- Intellectual properties : all three countries pledge tp provide
adequate and effective protection and enforcement of intellectual
property rights
- Dispute settlement: Provides a dispute settlement process that
will be followed instead of countries taking unilateral action
against any offending party.
Merchandise Trade Between the united states and Canada and USA and Mexico

Canada (1998) exports to 156.8

Imports from 175.8

Mexico exports to 78.4

Imports 95.5

Mercosur

It is the south American trading block, Known as Mercisur in spanish and Mercosul in
Portuguese, include Brazil, Argentina, Paraguay and Uruguay, two more countries chile
and bolivia are in the process of joining the trading block. Mercosur came into effect on
January 1, 1995.

The objectives three main objectives :

- Establishmnet of free trade blocks
- A common external tariff ( a custom union)
- Free movement of capital and services

Mercosur seems to be making good progress. Trade among the members grew from $ 4
billion in 1990 and to $ billion 1996. The combined GDP of the four member states grew
at the annual average rate 3.5 percent between 1990 and 1996, a performance that is
significantly better than the four attained during the 1980’s.

APEC ( Asia Pacific Economic cooperation)

APEC was formed in 1989 in response to the growing interdependence among the Asia-
paific economies, Membership of this trading blocks comprises 18 countries that account
for about half of the total world’s output, approximately half of the world’s merchandise
trade, and a combined GNP of $ 15 trillion

The APEC has the following specific objectives :

-To sustain the growth and development of the region

-To encourage the flow of goods and services, capitla and
technology.
- To develop and strengthen an open mutilateral trading sysyem
- To reduce barrier to trade in giids and services among
participants.
Some the member are Australia, Brunei, canada, china, hongkon, japan, new-zealand,
USA, thailand ect.
ASEAN ( Association of south-east Asian nations )

ASEAN is the most prominent regional grouping in Asia. Established with the support of
the USA in 1967, ASEAN includes most of the south east countries. The original five
members, Indonesia, Malaysia, Philippines, Singapore and Thailand, have been joined by
brunei, vietnam, myanmar and laos.

The objective of ASEAN is

- To reduce tariff on most of the goods

The significance of ASEAN lies in the fact that it encompasses almost the whole of the
South-East Asia, with a population of around 483 million in 1996.

SAARC

Economic integration has also taken place on the indian subcontinent, In 1985 seven
nations of the region India, Pakistan, Bhutan, Bangaldesh, Maldives, Nepal, Sri lanka
launched the South Asian Association for Regional Cooperation.

The seven countries committed themseleves to sovereign equality, territory integrity,

national independence, non-use of force and non-interference in the internal affairs of
other states and peaceful settlement of all disputes.

OCED (organization for economic cooperation and development)

OCED brings together the government of countries committed to democracy and market
economy from around the world to:-

- Support sustainable economic growth

- Boost employment
- Raise living standards
- Maintain financial stability
- Contribute to growth in world trade
OECD also shares expertise and exchange views with more than 70 other countries from
Brazil, China and Russia to the least developed countries inAfrica.

It comprises of 30 members
Some of them are

Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Korea,
UK, USA and Established in 1947.

Commodity Agreement

Till now we have discussed the integration of countries. It also useful how countries use
commodity agreement to stabilize the price of selected commodities.
The most widely known commodity agreement is the organization of petroleum
Exporting countries (OPEC).
It is a intergovernmental organization, created at the Baghdad conference on Sep 10-14 in
1960 by
Iran, Iraq, Kuwait, Saudi Arabia, VeneZula
The five founder members later joined by nine other members
Qater, Indinesia, Libyan Arab, UAE, Algeria, Nigeria, Ecuador, Gabon, Angola

The objective is to
- Coordinate and unify petroleum policies among members
countries in order to secure fair and stable price for petroleum
producers
- Regular supply of petroleum
- Fair return on capital to those investments in the industry.

Threats and opportunities of regional blocks

OPPORTUNITIES
- Elimination of trade barriers with in the region would encourage
the efficient firms to expand their business activities in all
countries with in the region

- Healthy competition with in region would help the less efficient

firms in acquiring competences in order to challenge the efficient
firms.

- The overall business performance in terms of productivity,

quality, price, delievery and customer service will improve.
THREATS
- The removal of trade barriers provides opportunities to the
efficient firms to enter the different markets with in the region
due to this the survival of less efficient firms will be effected.

- The resources of less efficient countries are exploited by the

firms from the advance countries of the region.

- The less developed countries become still poorer. Where as the

advance countries of the region becomes still richer.

- It discourages trade with non-members as trase with non—

members is subject to strict rules and trade barriers.
W.T.O

World trade organization was established on 1st January 1995. Government has
concluded.

Objectives of W.T.O

- Raising standard of living and incomes, promoting full

employment, expanding production and trade and optimum
utilization of world’s resources.
- Introduce sustainable development- a concept which envisages
that development and environment can go together.
- Taking positive steps to ensure that developing countries,
especially the least developed ones, secure a better share growth
in world trade.

Functions of WTO

WTO based in Geneva, Switzerland Its function are

- Administering and implementing the multilateral and plurilateral
trade agreements, which together make up the WTO.
- Acting as a forum for multilateral trade negotiations
- Seeking to resolve trade disputes.
- Overseeing national trade policies.
- Cooperating with other international institutions involved in
global economic policy maker.
- Maintaining trade related database.
- Acting as a watch dog of international trade, constantly
examining the trade regimes of individual members.
- Acting as a management consultant for world trade.
- Technical assistance and training for developed countries.

Structure of W.T.O
 Ministerial Director
Conference General

Secretariat

Dispute
General Trade policy
Settlement
Council Review Body
Body

Trade-
related
Committee on Committee on
Committee Council For Council For intellectual
trade and balance of
on Budget services goods property
development payments
Rights
Council

Principles of WTO

Transparency

WTO aims at achieving in world trade relations by obligating member to publish their
respective laws, regulation, judicial decisions and administrative ruling pertaining to the
classification or valuation of products for customs, rates of duty, taxes or other charges
affecting sale, distribution, transportation, insurance and warehousing with the objectives
of enabling governments and traders to become familiar with them. This helps exporters
plan their trade and safeguard them againts hassles.

MFN treatment

Trade needs to be conducted without discrimination. Any member country shall not
discriminate between its trading partner- all member countries are granted MFN status.
MFN means that every time a member country lowers a trade barrier or opens up a
market, it needs to extend the benefits to all trading partners.

National Treatment

This principle implies that imported and locally produced goods should be treated
equally.
Free Trade principle

Lowering trade barriers is the best way of promoting trade. Trade ensures optimum
utilization of resources. This principle implies that poorer countries prosper by taking
advantage of their assets in order to concentrate on what they can produce best. Bigger
markets, domestic as well as overseas, will help these countries produce more and reap
economies of scales.

Dismantling Trade Barriers

Physical restriction on the import and export of goods are prohibited under GATT.
However member countries can protect domestic industry through tariff.

Rule-based trading system

The WTO stands for rule based trading system. Towards this end the WTO sets and
enforces rules necessary for conducting world trade fairy.

Treatment for LDCs

The WTO recognizes the need for positive policies effort to help developing countries
reap the benefit of trade liberalization. There are specific provisions under all the WTO
agreements that stipulate trade concessions for developing and least developed countries,
concessions include waiver or deferral of obligations, transfer of technology and the like.

Competition principle

WTO system is designed to promote open and fair competition. Removal or reduction of
tariffs and subsidies will expose locally produced goods and services to imported ones.
The WTO also seeks to protect consumer interest by promoting competition among
trading members.

Environmental Protection

The last principle of WTO relates to the protection of environment. The preamble to the
WTO agreement refers to the objective of sustainable development and to the need tp
preserve the environment.

Main Highlights Of Uruguay Round

Expansion in the sphere of activities

The tradition concerned of GATT was limited to international trade in goods. The
Uruguay round however went beyond goods and services, technology, investment and
information.
Liberalization of trade in agriculture and textile goods

There were highly protective sector in developed as well as developing countries.

Farmers were patronized in various ways such as import of subsidies and export
subsidies. Similarly trade in textile was restricted by the multifiber agreement. The
Uruguay round successfully brought about liberalization of both these by dismantling the
MFA and reducing import barriers on agricultural goods.

Patent/TRIPS

One of the major areas of objection in India is about TIRPS agreement. The TRIPS
agreement includes seven areas of intellectual rights.
- Property rights
- Copy rights
- Trade mark
- Trade secrets
- Integrated circuits
- Geographical appeal
- Patents
-

Farmer Interest

Contrary to wrong propaganda in India leading to farmer respect. The Uruguay round
agreement regarding patenting of seeds does not prevent farmer from retaining seeds for
their own use or exchange of seeds. However it is noted that liberalization of agriculture
by developed nations would benefit developing countries more as there is no raprocity
on the part of developing countries to liberalize agricultural sector in their countries.

Custom unions and free trade areas

Article XXIV provides for the formation of custom and free trade areas. As per this
clause, nations of the world are allowed to form custom union and free trade zones.

Subsidies

Export subsidies to farmers to be cut 13.3% in developing countries and by 20% in

developed countries over a period of 6 years. Direct subsidy to be cut 36% over the same
period. All these are applicable provided the value of subsidies is more than 10% of the
value of the output.

Tariff cut

While developing countries have to cut tariff by 24% over the period of next 10 years, the
developed countries are committed to effect tariff cut by 36% over a period of 6 years. In
industrial countries tariff would be totally eliminated in several sectors like steel,
pharmaceuticals, wood and wood products.

TRIMS

Trade related investment measures introduced as a national treatment of foreign

investment and removal of quantitative restriction. It identifies five investment majors
which are inconsistent with GATT provision.

These are measures that imposed on the foreign investor and obligation to use local input.

To produce for exports as a condition to obtain imported imports

To balance foreign exchange outgo on importing inputs with foreign exchange earnings
through exports

And not to export more than a specified proportion of the local production.

Impact of WTO on Different sectors

AOA

√ WTO agreement of agricultural provide for reduction of domestic subsidies.

√ Reduction in export subsidies

√ Tariff Reduction

√ Bindy to provide market

√ Critics are of the opinion that farmer will be hit hard by the WTO regimes Indians
agriculture which is reeling under serious drought and fall in cash crop prices will
lies once the import curves are remove and free flow of food items are allowed in to
India. Fear also empresses as to what will happen to our vegetable oil, rice, rubber,
coconut and fruit if similar items are allow to be imported cheaply from countries

Pharmaceuticals

India is one of the most efficient pharmaceuticals industries in the world.

Pharamaceuticals firms griev in India mainly due to the absence of patent protection of
medical drugs in the country.
World wide India is a country of very low price for high quality medicines. But now the
rule of the game in the pharmaceuticals industries will change as India has committed to
the WTO on product patent.
Product patent rule and exclusive marketing right under WTO could effect a paradyshhift
in india’s pharama sector.

Information Technology

Under information technology agreement signed under the WTO, Indian hardware and
software companies can become major player in the value added arena.
Availability of high skilled IT personal and low cost of labour and operation would
allowed India to compete in the international market.

Textile

The WTO agreement on textile and clothing states that the multifibe agreement will
eventually be eliminated MFA at present group of major importers countires – U.S.A,
Canada, Austria, Finland, Norway- to apply restriction on import by the way of quota.
The phasing out of M>F>A will boost textile exports from India, it will also increase
investment in textile and joint ventures

Service Sector

As per WTO rule too obligation apply to all services. They are more favored nations
treatment and transparency by the way publication of all laws and regulations.
Under WTO regimes India will have to up its service sector to other WTO members
countries result being many overseas service provider enter in the country they are
reducing the chances of domestic enterprises.