BACC 121

Course Learning Outcomes

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At the end of the course, the Business
Administration Louisians are expected to:

T CO 1. Demonstrate their understanding of the

concepts of comparative advantage and
the gains from trade, by applying the
theories.
2. Demonstrate their understanding of the
determinants of the trade pattern between
countries and assess its effects on the
distribution of income between and within
these countries.
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3. Understand the political economy of trade
policy and the economic effects of

INTERNATIONAL different trade policy instruments.

4. Recognise the role of international trade

BUSINESS institutions to domestic and regional

markets.
AND TRADE
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Understand the effects of international

trade on economic development,
BACC 121 international politics/conflicts

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 For the only way in which a durable peace
can be created is by world-wide restoration
of economic activity and international trade.
James Forrestal

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MODULE THREE Regional Economic Integration:
Economic Geography of Regional Integration
OVERVIEW:

increase interdependence within a region and the rest of the world.

LEARNING OBJECTIVES:
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Regional integration is an ongoing process. Reasons for regional integration are economic, political,
or combination of both. Regional integration can bridge barriers between national borders, and
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 Explain regional economic integration, its evolution, and its benefits and costs.
 Identify how economic geography helps explain, promote, and segment regional integration
blocs.
 Identify the primary reasons why countries are now seeking to pursue regional integration
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at the expense of multilateral trade liberalization.

 Explain why the European Union is seen as the most advanced regional integration bloc.
 Describe how NAFTA has affected U.S.–Mexico bilateral trade in goods and services.
 Explain the importance of ASEAN and indicate why Asia may become the most important
free trade region for this century.
 Explain why regional integration in Latin America is challenging, and why there is potential
for a grouping like MERCOSUR to become more predominant.

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 MODULE OUTLINE:

I. What Is Regional Economic Integration?

Some countries prefer to work closely within a regional setting. Because the future of the
Doha Round of trade liberalization is uncertain, there has been a sharp increase in the number of
regional trade and integration agreements.
Regional Integration includes a multitude of economic and/or political steps.
 Stages of Regional Integration can take several forms, representing varying

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degrees of integration.
 Countries that create a free-trade area eliminate all barriers to trade among
themselves while keeping their external tariffs with non-members.


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In a customs union all free trade member countries will adopt a common
external tariff with nonmember countries.
Removal of barriers to allow free movement of capital and labor within the
customs union leads to a common market.
Within the common market, the implementation of common social programs
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and coordinated macroeconomic policies could lead to economic and
monetary union.
 Finally, the urge to have common defense and foreign policies may lead to
the creation of political union.
 Pros and Cons of Regional Integration depend upon the level of integration the
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countries in the group achieve.

 The benefits of regional integration include:
 Creating a larger pool of consumers with growing incomes and similar
culture and values.
 Encouraging economies of scale, increasing the region’s level of
competitiveness, and enhancing growth.
 Freeing the flow of capital, labor, and technology to the most
productive areas of economic activity.

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  Increasing cooperation, peace and security.
 Encouraging member states to enhance their social welfare.
 The costs of regional integration include:
 Undermining the almost global most-favored-nation status rule.
 Imposing laws and regulations that are not globally uniform.
 Eliminating jobs and increasing unemployment in protected
industries.
 Losing sovereignty, national independence, and identity.
 Reducing the powers of the national government.

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 Increasing the probability of rising crime associated with ease of
cross-border movements.

II. The Economic Geography of Regional Integration.

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The World Bank concludes that positive changes related to market size, location, and
openness to trade are essential for successful regional integration. Hence, the policy instruments
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needed for successful integration include institutions that unify the markets, infrastructure that
efficiently connects these markets, and lower economic barriers to facilitate trade.
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 Steps to Regional Integration. Regional integration is more than just cross-border
trade liberalization. The appropriate approach includes the following three
fundamentals:
o Start Small. Regional integration should have clear goals and initially address
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a narrow, well-defined area of cooperation in which the costs and benefits

are easily defined.
o Think Global. Regional integration should not create unconnected or isolated
countries. Instead, it should help countries gain access to world markets.
o Compensate the Least Fortunate. Regional integration will lead to a
concentration of economic activity in fewer places with increased efficiency
and competitiveness. It also means that some regions will gain more than

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 others. Explicit compensation programs may be required to ensure access to
social services and basic infrastructure in lagging areas.
 Major Classes and Characteristics of Regional Integration. In global trade
agreements, tariff and non-tariff barriers are reduced or eliminated using MFN rules.
Under regional trade agreements, tariff and non-tariff barriers are reduced only
among member countries. When the various regional integration blocs are analyzed
from an economic geography perspective, they fall under three general categories:
o Regional Blocs Close to World Markets. Market access is essential for
economic growth, and proximity to world markets is an asset for just-in-time

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production, exports of perishable goods, and tradable services.
o Remote Regions with Large Local Markets. Sizeable countries that are far
from large world markets can benefit by attracting industrial activities

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because of their large local market. If the country’s infrastructure is well
connected to world markets, this advantage is reinforced.
o Remote Regions with Small Local Markets. International integration is most
Tdifficult for countries in regions that are divided, far from world markets, and
lack the economic size of a large local economy. Regional integration is
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paramount for their growth and can be achieved through institutional
reform, increasing infrastructure investments to improve market access, and
incentives such as preferential access to world markets, liberalized rules of
origin, and skills development.
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III. Does Regional Integration Confound Global Trade?

Groups of countries have formed various kinds of economic cooperation agreements.

Economists are concerned that as a result of these negotiations, the prospects of creating a truly
open global economic system that benefits all countries may recede.

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 IV. The European Union (EU).
The EU, headquartered in Brussels, is the most highly evolved example of regional integration.
It is in the fourth stage of the integration process, and is moving toward political union with
common defense and foreign policy institutions.
 The origins of the EU can be traced back to the creation of the European Coal and Steel
Community (ECSC) in 1952. The objective of ECSC was to encourage member countries to
cooperate in steel production, preventing the member countries from warring with each
other.
 The second major step was the Treaty of Rome signed in 1957. It established the European

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Economic Community (EEC) that called for free trade among members as well as a common
external tariff for non-members.
 In 1992 the Maastricht Treaty was signed and the EEC became a full economic union or

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single market with free movement of labor among member countries.
The EU’s enlargement was mostly gradual, reaching 28 member countries by 2013.
Turkey. The fate of EU candidate country Turkey is uncertain. Geographically, about 5% of
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Turkey’s land mass is in Europe. Due to its low per-capita income level, significant EU
budgetary resources may be needed for Turkey’s infrastructure development. Some other
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issues of concern to existing members are the powerful role of the military within a nascent
democracy, a questionable human rights record, and a large and predominantly Muslim
population.
 The Euro. The Eurozone’s single currency was introduced on January 1, 1999. Its
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performance until the start of the European sovereign debt crisis in 2009 was remarkable.
The international role of the euro as a foreign exchange reserve currency is gaining ground.
After meeting strict fiscal and monetary criteria, 18 of 28 EU countries that formed the
Eurozone were allowed to use the euro as their currency. The European Central Bank (ECB),
based in Frankfurt, is the apex central bank for the Eurozone countries. It maintains
responsibility for the Eurozone’s monetary policy--maintaining annual Eurozone inflation at
below but close to 2%--and the stability of the euro.

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 IV. The North American Free Trade Agreement (NAFTA).
NAFTA is a comprehensive free-trade agreement among Canada, the United States, and
Mexico. It addresses issues ranging from protection of workers’ rights and the environment to
phased reduction of tariff and non-tariff barriers by 2009.
NAFTA has three major objectives:
o Expansion of trade in goods and services
o Protection of intellectual property rights
o Creation of institutions to address potential environmental and labor problems
Until 2004, the United States’ top two trade partners were Canada and Mexico.

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However, since that time, China has surpassed Mexico and has become the United
States’ second largest trade partner.

V. Association of South East Asian Nations (ASEAN).

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ASEAN, headquartered in Jakarta, was established in 1967. ASEAN’s current membership stands
at 10. As of 2013, the ASEAN region had a population of 625 million, a land area of 4.4 million
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square kilometers, and a combined GDP of $2.4 trillion.
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ASEAN’s two main objectives are:
 To accelerate economic growth, social progress, and cultural development
 To promote regional peace and stability through the rule of law
In 2003 ASEAN leaders agreed to establish an ASEAN Community based on three pillars:
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 ASEAN Security Community (ASC). ASC’s objective is to ensure that countries in the region
live in peace with one another. Since ASEAN’s establishment, tension has never escalated
into armed confrontation among ASEAN members.
 ASEAN Economic Community. The goal is to create a stable, prosperous, and highly
competitive economic region. The ASEAN Economic Community calls for the establishment
of a single market, but it does not call for the free movement of labor across member
countries.

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  ASEAN Sociocultural Community. The goal is to ensure that the ASEAN workforce is well
prepared to benefit from the economic integration. Programs are being put into place
through investments in basic and higher education, training, R&D, and raising the standard
of disadvantaged groups and the rural population through better health care and social
protection.
The Future of ASEAN. ASEAN’s Vision 2020 calls for aggressive outward-looking economic policies.
If all goes as planned, ASEAN inspired FTAs will create the world’s largest free trade area,
comprising much of Asia. A growing ASEAN concern is the economic ascendancy of China.

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VI. Regional Integration in Latin America.
The first step toward free trade in Latin America was taken with the signing of the Treaty of

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Montevideo in 1960, which created the Latin American Free Trade Association (LAFTA).
In 1969, the Andean Group was created in frustration due to the lack of progress in LAFTA.
The Treaty of Asuncion, signed in 1991, created the Southern Cone Common Market, or
MERCOSUR. The treaty called for progressive tariff reduction, the adoption of sectoral
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agreements, a common external tariff, and the ultimate creation of a common market.
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Much remains to materialize in MERCOSUR. The newest member to join Mercosur was
Venezuela in July 2012. Guyana and Surinam signed a framework agreement with Mercosur
in July 2013 to become associate states.
 Formal discussion to establish a Free Trade Area of the Americas (FTAA) began in 1994
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under the Clinton administration, but the outlook remains uncertain.

The Bush administration began free-trade talks with the five Central American countries and the
Dominican Republic. DR-CAFTA became effective in 2005.

Building International Business and Trade Skills

Engage, Explore and Explain Activity

Reflection Paper

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 Visit your local grocery supermarket and discover from where the various brands of premium
coffee beans come. Which trade agreement do you think makes that choice possible?

Elaborate and Evaluation Activity

Research Paper Word Format maximum of 5 pages.

Identify the ASEAN country that is considered to be the regional hub for multinational corporations
operating in Asia. How does that country’s per capita income compare with Philippines and why?

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V. References

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NO
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NO
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