4.4 Economic Integration
Understanding Economic Integration
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Definition:
Economic integration refers to the unification of economic policies between different states through the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies.
Types of Economic Integration (in order of increasing integration)
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Preferential Trade Agreement (PTA):
A treaty between two or more countries to lower tariffs on specific goods.
Example: MERCOSUR (Argentina, Brazil, Paraguay, Uruguay) signed a PTA with the EU in 2019 to reduce tariffs on agricultural products. -
Free Trade Area (FTA):
A region where a group of countries agree to reduce or eliminate trade barriers amongst themselves but maintain independent external policies.
Example: North American Free Trade Agreement (NAFTA), now the US-Mexico-Canada Agreement (USMCA), facilitates free trade between the U.S., Canada, and Mexico. -
Customs Union:
A group of countries that removes trade barriers among themselves and adopts a common external tariff against non-members.
Example: The Southern African Customs Union (SACU), which includes South Africa, Namibia, Botswana, Lesotho, and Eswatini. -
4. Common Market:
A customs union that allows the free movement of goods, services, capital, and labor among member states.
Example: The European Economic Area (EEA), which includes EU countries and other European nations such as Norway. -
5. Economic Union:
A form of integration where member countries not only have free trade, a common external tariff, and free movement of labor but also harmonize fiscal and monetary policies.
Example: The European Union (EU), which has a single market and a monetary union for the Eurozone. -
6. Complete Economic Integration:
The final stage, where member states fully unify their economies, share common fiscal and monetary policies, and often use a single currency.
Example: The Eurozone within the EU is the closest example of complete economic integration with the euro as the common currency.
Types of Trading Blocs
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1. Free Trade Areas (FTA):
A region where member countries reduce or eliminate trade barriers.
Example: USMCA, which replaced NAFTA in 2020, promotes tariff-free trade in North America. -
2. Customs Unions:
An arrangement in which member countries adopt a common external tariff against non-member states.
Example: The East African Community (EAC), including Kenya, Tanzania, and Uganda, is a customs union aiming to strengthen economic ties.
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3. Common Markets:
Members of a common market allow for free movement of factors of production such as labor and capital.
Example: The European Union (EU) is an example of a common market that allows free movement of labor, goods, and services across member states. -
4. Economic Unions:
An economic union is an advanced level of economic integration where member countries harmonize their monetary and fiscal policies.
Example: The Eurozone, part of the EU, is an economic union where member states share a single currency, the euro, and coordinate monetary policy through the European Central Bank.
The World Trade Organization (WTO)
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Role of the WTO:
The World Trade Organization (WTO) is an international organization that regulates global trade and ensures trade flows as smoothly, predictably, and freely as possible.
Functions of the WTO
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Trade Negotiation: Facilitates negotiations among member countries to reduce trade barriers.
Example: The Doha Round of negotiations (started in 2001) focused on improving trade prospects for developing countries, although it remains inconclusive. -
Dispute Resolution: Resolves trade disputes between member countries.
Example: In 2019, the WTO ruled in favor of the EU in its dispute with the U.S. over illegal subsidies to aircraft manufacturer Boeing. -
Capacity Building: Provides technical assistance and training to developing countries to enhance their participation in global trade.
Example: The WTO's technical assistance programs help countries like Kenya and Bangladesh improve their trade negotiations and compliance with trade standards. -
Trade Policy Monitoring: Reviews and evaluates members' trade policies to ensure they are in line with global trade rules.
Example: WTO conducts periodic reviews of major economies, such as the U.S. and China, to assess their adherence to global trade norms.
Principles of the WTO
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Non-Discrimination:
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Most Favored Nation (MFN): Each member must treat every other member equally.
Example: If the U.S. lowers tariffs for one WTO member, it must extend the same treatment to all members. -
National Treatment: Foreign goods must be treated the same as domestic goods once they enter a country’s market.
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Trade Liberalization:
The WTO encourages countries to reduce trade barriers to promote global trade and economic growth. -
Predictability:
WTO agreements aim to create a stable and transparent trading environment, encouraging investment and reducing trade volatility. -
Development and Economic Reform:
Special consideration is given to developing countries. The WTO allows more flexibility for these nations in implementing trade rules.
Real-World Examples in Economic Integration
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Brexit (2016):
The UK's decision to leave the European Union illustrates the complex consequences of reversing economic integration. It led to disruptions in trade, changes in regulatory frameworks, and uncertainty for businesses operating across the UK and the EU. -
African Continental Free Trade Area (AfCFTA):
Launched in 2021, AfCFTA is a free trade area that aims to create a single market for goods and services across Africa, boosting intra-African trade by reducing tariffs on 90% of goods. It is the largest free trade area by number of countries, covering 54 African states. -
RCEP (Regional Comprehensive Economic Partnership):
Signed in 2020, RCEP is a free trade agreement between ASEAN members and major economies like China, Japan, South Korea, Australia, and New Zealand. It covers nearly 30% of global GDP, making it the world’s largest trade bloc. -
Mercosur:
This South American trading bloc, consisting of Argentina, Brazil, Paraguay, and Uruguay, aims to promote free trade and fluid movement of goods, people, and currency. The EU-Mercosur trade deal, agreed in 2019, seeks to lower tariffs between both regions.