Economic Integration Economic Integration 12 Free Trade Area

Economic Integration

Economic Integration (1/2) Ø Free Trade Area ØAll barriers to trade among members removed. ØEach country can determine own trade policies toward nonmembers. Ø Customs Union ØEliminates barriers among members and has a common external trade policy. Ø Common Market ØEliminates barriers among members, has a common external trade policy, and allows factors of production to move freely between members.

Economic Integration (2/2) ØEconomic Union ØNo barriers (include goods, services, and factors) among members, common external policy, common monetary and fiscal policy, harmonized tax rates and common currency. ØPolitical Union ØHas a coordinating bureaucracy accountable to all citizens.

Case for Regional Integration Economic Ø Allow countries to specialize in products they produce efficiently. Ø Easier to gain agreement than GATT/WTO. Ø Role of FDI is enhanced. Ø Exploit gains from free flow of goods and services and investment. Political Ø Creates incentive for political cooperation. ØReduces potential for violent confrontation. Ø Enhanced clout to deal with ‘superpowers’.

Impediments to Integration ØAlthough a nation may benefit, groups within a nation may be hurt. ØConcerns about national sovereignty. ØDebate: ØTrade creation. ØTrade diversion.