Lecture International trade and investment (2/e): Chapter 8 - John Gionea

Chapter 8
Regional economic integration

NAFTA

EU         
(25)  

MERCOSUR

 F T A A
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APEC

A F T A

Australia–
New Zealand

8–1


Lecture plan
• Why regionalism?
• Definition of regional economic integration
• Five levels of regional economic integration
– industrial free trade area; full free trade area;

customs union; common market; economic
union
• Trade effects of regional integration
• Regional groups: EU, NAFTA, AFTA, MERCOSUR
• Bilateral free trade agreements
• Is regionalism the path to globalism?
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8–2


Regional economic integration
• Agreements among countries in a
geographic region to reduce, and ultimately
remove, tariff and non-tariff barriers to the
free flow of goods, services and factors of
production among each other.
• It is estimated that currently there are about
220 regional trade arrangements!

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8–3

Regional trade arrangements
•

•

Exception to MFN (Most Favoured Nation)
rule in GATT/WTO; allows regional
agreements to provide higher preferential
treatment to members than to nonmembers.
Five levels of regional economic integration
– industrial free trade area
– full free trade area
– customs union
– common market
– economic union

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8–4


Regional economic integration
Free Trade Area (FTA)
• No tariffs and quotas among members
• National tariffs against non-members
• Partial (industrial) FTA and full FTA

Free Trade
Area

• Australia’s bilateral FTAs with New
Zealand, Singapore, USA, Thailand
• Pluri-lateral FTA: EFTA, NAFTA, AFTA
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8–5


Regional economic integration
customs union
No tariffs and quotas among members.
Common tariffs operate against non-members.
Customs Union
Free Trade
Area

Examples:

European Community EC (1968)
MERCOSUR (South American Union)

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8–6


Regional economic integration
common market
Abolition of restrictions on factor movements
Common Market
Customs Union
Free Trade
Area

Example:
The European
‘Single Market’ (1992)
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Perspective 2e by Gionea. Slides prepared by John Gionea..
© CopyrightAn
J. Asia-Pacific
Gionea

RMIT 2003

 

8–7


Regional economic integration

economic union
Economic Union
Common Market
Customs Union
Free Trade
Area

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Characterised by
• harmonisation
and unification of
economic policies
• common
currency
Example:
European Union

8–8


Trade effects of integration
• Trade creation
– trade up through lower-cost goods and
services (e.g. European Union: industrial
sector)
• Trade diversion

– less efficient producers inside the area
replace more efficient external
producers (e.g. EU: common agricultural
policy)
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8–9


Intra-regional trade under major regional
trade agreements, 2002, $US billion, %
Regional
Trade Agreements

Intra-regional
trade
($US billion)

Share of
World exports
(%)

EU (15)
NAFTA (3)
AFTA (10)
CEFTA (7)
MERCOSUR (4)

ANDEAN (5)

1,509
626
97
19
10
5

24.1
10.0
1.6
0.3
0.2
0.1

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8–10


Intra-exports as % of total merchandise
exports of selected regional trading
blocs
70
60
50

% of total 40
exports 30
20
10
0

EU

NAFTA

AFTA

Mercosur

1990

64.9

42.6

20.1

8.9

2002

61.6

56.5

24.0

11.5

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8–11


Intra-imports as % of total merchandise
imports of selected regional trading blocs
70.0
60.0
50.0
% of total 40.0
Imports 30.0
20.0
10.0
0.0

EU

NAFTA

ASEAN

Mercosur

1990

63.0

34.4

16.2

14.5

2002

61.9

38.1

23.6

17.0

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8–12


European economic integration

1957 European Communities (6): France, Western
Germany, Italy, Belgium, Luxemburg, Netherlands
1968

Customs union

1973

UK, Ireland, Denmark, Greece (1981), Spain and
Portugal (1986)

1992

European single market

1996

Austria, Finland, Sweden

2002

European Monetary Union (currently 12 members)

2004 10 new members: Cyprus, Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Slovak Republic and Slovenia (500 million people).
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8–13


North American Free Trade
Agreement (NAFTA)
US, Canada, Mexico
• Became law 1/1/1994
• Over 15 year period
– tariffs reduced (99% of goods traded)
– non-tariff barriers reduced
– investment opportunities increased
• Protects intellectual property
• Three-side agreements
– environmental protocols
– labour protocols
– snap-back provision
• Special treatment for many industries
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8–14


MERCOSUR (Southern Common
Market)
• Originated in 1988 as a free trade pact
between Brazil and Argentina

• Expanded in March 1990 to include
Paraguay and Uruguay
• Combined population of 200 million
• 1995: 5-year plan to move to full customs
union
• Objective: South American Free Trade Area
(SAFTA)
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8–15


The Free Trade Area of the Americas
(FTAA)
• Old plan of ex-US president George Bush, pursued
now by his son.
• FTAA = 34 nations (including NAFTA and
MERCOSUR members) with population of 880
million; world’s largest free trade area.
• The Quebec 34-country Summit of March 2001
agreed on an FTAA to be launched in 2005.
• President Bush obtained fast-track authority (now
renamed Trade Promotion Authority).

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8–16


ASEAN (10)
•
•

•

•
•
•

AFTA = ASEAN Free Trade Area; launched in 1992
Members: Singapore, Indonesia, Thailand, Malaysia,
Philippines, Brunei, Vietnam, Burma, Laos, Cambodia (550
million people).
On the Common Effective Preferential Tariff (CEPT) of AFTA,
the 6 founding members agreed (individually) to achieve a
minimum of 85% of the tariff lines on their inclusion lists in the
0-5 % range by 2000, covering 90% of intra-ASEAN trade.
They also brought forward from 2003 to 2002 the date of
implementation of the CEPT; few extensions (e.g cars).
ASEAN + 3 (China, Japan, South Korea).
ASEAN–China FTA: >1.7 billion people; GDP: US$1.65 trill.

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8–17


MFN simple mean tariffs 1999 vs CEP tariff
rates 1999, 2003, % in selected ASEAN
countries
MFN
1999

CEPT
1999 (%)

CEPT
2003 (%)

Indonesia

10.9

5.85

3.71

Malaysia

7.1

3.17

2.06

Philippines

10.0

4.45

2.06

Thailand

21.6

9.75

4.64

MFN = Most Favoured Nation: non-discrimination.
(All WTO signatories have MFN status.)
CEPT = Common Effective Preferential Tariff: a comprehensive timetable for
gradual phase out of intra-ASEAN tariffs on nominated goods.
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8–18

Automotive MFN tariffs in selected
ASEAN countries, %
Country

CKD* Tariff
(MFN)

CBU** Tariff
(MFN)

Malaysia

42–80

140–300

Thailand

33

80

35–50

65–80

10

30

42–80

140–300

Indonesia
Philippines
Malaysia

*CKD: Completely Knocked Down car kits
**CBU: Completely Built Units
*

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8–19


Three-way balance (E. Asia, EU, US)
output, trade with the ROW*, reserves
10,000

* ROW =
Rest of
the World

9,000
8,000

US$ Bln

7,000
6,000

East Asia
EU
US

5,000
4,000
3,000
2,000
1,000
0
Output(WBA)

Output(PPP)

Trade

Reserves

Based on Fred Bergsten’ s Economist article 
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An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

8–20


Why the push for East-Asian
integration?
• East Asian financial crisis
• Failures of WTO and APEC to make
headway on trade liberalisation
• Positive inspiration provided by European
integration (especially the euro)
• Broad disquiet with behaviour of both
the US and EU
Based on Bergsten, 2000. (See References.)
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8–21


Bilateral Free Trade Agreements (FTAs)
• Singapore’s free trade agreements with
– US, Japan, Australia, New Zealand,
Mexico
• Mexico-European Union
• Australia’s FTAs with
– New Zealand, Singapore, Thailand, USA

(under Australian Senate approval)
• Australian discussions for FTAs with China
and Malaysia

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8–22


The share of regional trading blocs in
Australia’s merchandise exports 1974,
1989, 2002
Regional Bloc

1974

1989

2002

European Union

16.5

14.4

12.4

NAFTA

12.4

12.5

11.5

ASEAN

8.0

9.6

12.2

MERCOSUR

0.2

0.5

0.6

New Zealand

6.6

5.4

6.6

SAARC

3.4

1.8

3.1

Source: adapted from DFAT, Direction of Trade Time Series,
1974 to 1994 and Composition of Trade, 2003
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8–23


Is regionalism a path to globalism?
Two key questions:
1. Does regional integration increase or
decrease global economic welfare?
2. Will regional trading blocs lead to global
trade more quickly than the multilateral
process?
Two views
• regional trading blocs = ‘stumbling’ blocs

• regional trading blocs = building blocs
Hopefully, the latter view will prevail.
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An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

8–24


References
• Bergsten, F. 2000, ‘Towards a tripartite
world’, The Economist,15 July.
• Gionea, J. 2003, International Trade and
Investment, McGraw-Hill, Sydney.
• Hill, C. 2003, International Business,
Competing in the Global Marketplace,
McGraw-Hill, New York.

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

8–25