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    An Introduction To International Economics: Chapter 7: Economic Integration

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    Justine Jireh Perez
    The document discusses different forms of economic integration between countries, including preferential trade arrangements, free trade areas, customs unions, common markets, and economic unions. It describes how customs unions can create trade but also divert it away from more efficient partners. The European Union started as the European Economic Community and transformed into a common market and economic union through several treaties. It has institutions like the European Parliament, Council, and Commission and has removed internal trade barriers and impediments to labor and capital movement among members.

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    An Introduction To International Economics: Chapter 7: Economic Integration

    Uploaded by

    Justine Jireh Perez
    67 views41 pages
    The document discusses different forms of economic integration between countries, including preferential trade arrangements, free trade areas, customs unions, common markets, and economic unions. It describes how customs unions can create trade but also divert it away from more efficient partners. The European Union started as the European Economic Community and transformed into a common market and economic union through several treaties. It has institutions like the European Parliament, Council, and Commission and has removed internal trade barriers and impediments to labor and capital movement among members.

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    The document discusses different forms of economic integration between countries, including preferential trade arrangements, free trade areas, customs unions, common markets, and economic unions. It describes how customs unions can create trade but also divert it away from more efficient partners. The European Union started as the European Economic Community and transformed into a common market and economic union through several treaties. It has institutions like the European Parliament, Council, and Commission and has removed internal trade barriers and impediments to labor and capital movement among members.

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    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    67 views41 pages

    An Introduction To International Economics: Chapter 7: Economic Integration

    Uploaded by

    Justine Jireh Perez
    The document discusses different forms of economic integration between countries, including preferential trade arrangements, free trade areas, customs unions, common markets, and economic unions. It describes how customs unions can create trade but also divert it away from more efficient partners. The European Union started as the European Economic Community and transformed into a common market and economic union through several treaties. It has institutions like the European Parliament, Council, and Commission and has removed internal trade barriers and impediments to labor and capital movement among members.

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    of 41

    An Introduction to International Economics

    Chapter 7: Economic Integration

    Dominick Salvatore John Wiley & Sons, Inc.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7-1

    Economic integration
    Economic integration refers the commercial policy of discriminately reducing or eliminating barriers to trade between a select group of countries.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7-2

    Forms of economic integration


    Preferential trade arrangements
    Provides lower barriers to trade among participating nations than on trade with nonparticipating nations. The loosest form of economic integration.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7-3

    Forms of economic integration


    Preferential trade arrangements Free trade areas
    Removes all barriers to trade among members, but each nation retains its own barriers on trade with non-members. The North American Free Trade Agreement (NAFTA) is a free trade area.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7-4

    Forms of economic integration


    Preferential trade arrangements Free trade areas Customs union
    Removes all barriers to trade among members and harmonizes trade policies toward the rest of the world.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7-5

    Forms of economic integration


    Preferential trade arrangements Free trade areas Customs union Common market
    Removes all barriers to trade among members, harmonizes trade policies toward the rest of the world, and allows free movement of labor and capital among member nations. The European Union (EU) is an example of a common market.
    Dale R. DeBoer University of Colorado, Colorado Springs 7-6

    Forms of economic integration


    Preferential trade arrangements Free trade areas Customs union Common market Economic union
    Removes all barriers to trade among members, harmonizes trade policies towards the rest of the world, allows free movement of labor and capital among member nations, and unifies monetary, fiscal, and tax policies of members.
    Dale R. DeBoer University of Colorado, Colorado Springs 7-7

    Forms of economic integration


    Preferential trade arrangements Free trade areas Customs union Common market Economic union Duty free zones
    Areas established to attract foreign investments by allowing raw materials and intermediate products in duty free.
    Dale R. DeBoer University of Colorado, Colorado Springs 7-8

    Trade creation and diversion


    Prior to entering a customs union a country faces the following trade options.
    Purchase from Mexico at a higher price or from Japan at a lower price Clearly the prefered choice is to purchase goods from Japan as the price is lower

    PMexico w/ tariff PJapan w/ tariff D Q

    Dale R. DeBoer University of Colorado, Colorado Springs

    7-9

    Trade creation and diversion


    If the country enters a customs union with Mexico, commodities from Mexico no longer pay the tariff.
    This lowers the price of goods from Mexico to potentially below the price of goods from Japan. This change makes Mexico the preferred provider of the commodity.
    Dale R. DeBoer University of Colorado, Colorado Springs

    PMexico w/ tariff PJapan w/ tariff PMexico w/o tariff D Q

    7 - 10

    Trade creation and diversion


    By Mexico becoming the preferred provider trade is created by the customs union.
    Imports were initially quantity A. After the customs union comes into effect, trade expands to quantity B.

    PJapan w/ tariff PMexico w/o tariff

    A B

    D Q

    In this way, a customs union may create international trade.


    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 11

    Trade creation and diversion


    The movement to increased international trade comes at the expense of Japan.
    Its former exports of quantity A fall to zero. Hence, the customs union diverts trade from the low cost provider of the good (Japan) to a higher cost provider (Mexico) that happens to part of the customs union.
    Dale R. DeBoer University of Colorado, Colorado Springs

    PJapan w/ tariff PMexico w/o tariff

    D Q

    7 - 12

    Trade deflection
    Free trade areas offer no barriers to flows of commodities internally but allow differential barriers to non-members. This may bias patterns of international trade as exporters will target their goods to the lowprotection member of the free trade area to gain entry to the entire free trade area.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 13

    Dynamic benefits from customs unions


    Increased competition
    Competitive pressures tend to spur more rapid innovation and growth External competition limits the ability of a domestic producer to exercise its monopoly power

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 14

    Dynamic benefits from customs unions


    Increased competition Economies of scale in production
    By being a member of a customs union, producers have access to larger markets that allow them produce on a larger scale and exploit any available economies of scale.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 15

    Dynamic benefits from customs unions


    Increased competition Economies of scale in production Stimulus to investment
    Production within a customs union may be sold within the customs union without tariffs. This advantage may induce investors outside the customs union to invest in production facilities within the customs union.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 16

    The European Union (EU)


    The EU developed from the European Economic Community that was initially established in 1958.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 17

    The European Union (EU)


    The EU developed from the European Economic Community that was initially established in 1958. The EU formally can into existence with passage of the Treaty of Maastricht in 1992.
    The Treaty of Maastricht also laid the foundation for the introduction of a unified European currency: the euro.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 18

    The European Union (EU)


    The EU developed from the European Economic Community that was initially established in 1958. The EU formally can into existence with passage of the Treaty of Maastricht in 1992. Currently the EU has 25 member nations with an approximate aggregate population of 450 million.
    WWW link to a map of the EU

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 19

    The European Union (EU)


    The EU formally can into existence with passage of the Treaty of Maastricht in 1992. Currently the EU has 25 member nations with an approximate aggregate population of 450 million. Institutions of the EU
    European Parliament
    EU legislative body

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 20

    The European Union (EU)


    The EU formally can into existence with passage of the Treaty of Maastricht in 1992. Currently the EU has 25 member nations with an approximate aggregate population of 450 million. Institutions of the EU
    European Parliament Council of the European Union
    Represents the governments of the member states to the EU government

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 21

    The European Union (EU)


    The EU formally can into existence with passage of the Treaty of Maastricht in 1992. Currently the EU has 25 member nations with an approximate aggregate population of 450 million. Institutions of the EU
    European Parliament Council of the European Union European Commission
    The executive branch of EU government

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 22

    The European Union (EU)


    Currently the EU has 25 member nations with an approximate aggregate population of 450 million. Institutions of the EU
    European Parliament Council of the European Union European Commission Court of Justice
    Judicial branch of EU government

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 23

    The European Union (EU)


    Currently the EU has 25 member nations with an approximate aggregate population of 450 million. Institutions of the EU
    European Parliament Council of the European Union European Commission Court of Justice Court of Auditors
    Budgeting authority of EU government

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 24

    The European Union (EU)


    Institutions of the EU
    European Parliament Council of the European Union European Commission Court of Justice Court of Auditors European Economic and Social Committee
    Consultative body of labor, social, and environmental issues that comments on the implications of legislative actions.
    Dale R. DeBoer University of Colorado, Colorado Springs 7 - 25

    The European Union (EU)


    Institutions of the EU
    Council of the European Union European Commission Court of Justice Court of Auditors European Economic and Social Committee Committee of the Regions European Central Bank
    Central bank of the EU

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 26

    The European Union (EU)


    Institutions of the EU
    European Commission Court of Justice Court of Auditors European Economic and Social Committee Committee of the Regions European Central Bank European Ombudsman
    Responsible for addressing citizen complaints about maladministration by any EU body
    Dale R. DeBoer University of Colorado, Colorado Springs 7 - 27

    The European Union (EU)


    Institutions of the EU Steps towards economic unification
    Internal tariffs and duties have been removed.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 28

    The European Union (EU)


    Institutions of the EU Steps towards economic unification
    Internal tariffs and duties have been removed. Impediments to the free movement of labor and capital have been removed.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 29

    The European Union (EU)


    Institutions of the EU Steps towards economic unification
    Internal tariffs and duties have been removed Impediments to the free movement of labor and capital have been removed. Corporate law practices have been harmonized.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 30

    The European Union (EU)


    Institutions of the EU Steps towards economic unification
    Internal tariffs and duties have been removed Impediments to the free movement of labor and capital have been removed. Corporate law practices have been harmonized. Environmental regulations have been harmonized.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 31

    The European Union (EU)


    Institutions of the EU Steps towards economic unification
    Internal tariffs and duties have been removed Impediments to the free movement of labor and capital have been removed. Corporate law practices have been harmonized. Environmental regulations have been harmonized. Labor standards have been harmonized.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 32

    The European Union (EU)


    Institutions of the EU Steps towards economic unification Further information on the EU
    EUROPA is in the Internet portal for the EU government
    WWW link

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 33

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 34

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994. Objectives of the NAFTA
    Eliminate barriers to trade between the US, Mexico, and Canada.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 35

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994. Objectives of the NAFTA
    Eliminate barriers to trade between the US, Mexico, and Canada. Improve intellectual property rights protections between the member nations.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 36

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994. Objectives of the NAFTA
    Eliminate barriers to trade between the US, Mexico, and Canada. Improve intellectual property rights protections between the member nations. Provide a dispute resolution mechanism for trade disputes under this agreement.

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 37

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994. Objectives of the NAFTA An extension of the NAFTA?
    The proposed Free Trade Area of the Americas (FTAA) if broadly modeled on the NAFTA. The FTAA is designed to generate a free trade area throughout the western hemisphere (excluding Cuba).

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 38

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994. Objectives of the NAFTA An extension of the NAFTA? Further information
    NAFTA Secretariat
    WWW link

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 39

    The NAFTA
    The North American Free Trade Agreement (NAFTA) came into force in 1994. Objectives of the NAFTA An extension of the NAFTA? Further information
    NAFTA Secretariat Official Site of the Free Trade Area of the Americas
    WWW link

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 40

    A further resource
    The Pros and Cons of Pursuing Free-Trade Agreements
    Congressional Budget Office (July 31, 2003)
    WWW link

    Dale R. DeBoer University of Colorado, Colorado Springs

    7 - 41

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