Stages of International Economic Integration

(ii) No member country can manipulate exchange rates to insulate its economy from shocks in other member countries.

(iii) A change in foreign market signal will be directly transmitted to each member country, necessitating adjustments in real variables (such as unemployment and output). A member country no longer retains the ability to neutralize external disturbances.

1. stimulate growth and employment
2. eliminate the costs of converting between currencies
3. greater stability of the new currency, relative to dollar and yen
4. management of a single monetary policy (A national monetary policy is no longer an option)

Phase B: within 1 year: Monetary Union is effectively launched with the irrevocable fixing of parities.

Phase C: within 3 years after Phase B, the transition completed with the introduction of notes and coins.

1. Preferential trade agreements have been made with all EFTA countries. Its members included 7 countries: Austria, Sweden, Norway, Liechtenstein, Switzerland, Iceland, and Finland. After the enlargement of EU in 1995, EFTA just consists of Iceland, Norway, Liechtenstein and Switzerland.

EFTA members signed an agreement with the EU in 1992 to create European Economic Area. EEA guarantees four freedoms of traffic of the EU (of products, services, persons and capital). The European Economic Area include 19 countries and 380 million people.

Switzerland rejected the EEA.

2. Mediterranean Policy: preferential agreements in 1972 were reached with Morocco, Tunisia, Algeria, Egypt, Lebanon, and Israel.

Barcelona Conference (Nov 27-28, 1995)

to promote peace and stability, and to establish a Euro-Mediterranean Partnership between 15 Member States of the European Union and 12 Mediterranean countries. The Med 12 are:

Algeria, Morocco, Tunisia, Egypt, Israel, Jordan, Lebanon, Palestinian autonomous territories, Syria, Turkey, Cyprus, and Malta. (The last three will join EU in May 2004)

(i) achieve the status Eastern and Central Europe now enjoys with Europe. (ii) establish an FTA by 2010 + Central and Eastern Europe.

3. In 1975, Lome Convention: preferential trade arrangements with 58 countries of Africa, the Caribbean and Pacific Region (ACP), which were former colonies of France, Belgium, and England.
4. Newly free countries of Eastern and Central Europe are looking for membership and accession to EC markets. Remark: US is concerned with the trade diversion effect of the CAP and EC's preferential trade arrangements with Mediterranean countries. Members of the former Soviet Union, such as Belarus, Ukrain, and Russia do not show much interest. If it occurs at all, integration with these former communist countries is decades away.
5. Asia-Europe Meetings (ASEM) http://europa.eu.int/comm/external_relations/asem/intro/

ASEM = cooperation to bring together the 15 EU Member States + 10 Asian nations (Brunei, China, Indonesia, Japan, South Korea, Malaysia, the Phillipines, Singapore, Thailand, and Vietnam) created in 1996 (Bangkok).  

Tariff preferences have trade creation effect and trade diversion effect.

The two red traingles represent the positive welfare gains from the trade creation effect.

(i) A, B are members of a CU 
(ii) C is not

Assume (i) horizontal foreign supply curve

(ii) C (nonmember) is more efficient than B (member)

Figure 4, Trade Diversion 

Under the free trade situation, the England imports the product from Australia.

After joining the customs union, the tariff inclusive price of imports from Australia rises, but the price of imports from France remains the same. Accordingly,

England now imports from France, rather than from Australia.

(i) the most obvious dynamic consequence of a CU is market extension. Efficient producers enjoy free access to national markets of all member countries. Obviously, inefficient producers lose even the national market and are forced to exit from the market.

Before forming a CU, however, access to foreign markets was hindered or blocked by trade restrictions. CU enables firms to achieve economies of scale.

An efficient firm not only survives but also has access to all markets within a customs union, but inefficient firms lose even the little markets they had before. (The Parable of Talents: For everyone who has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him, Matthew 25:29)

Figure 4. 
 

(ii) Increased Competition

LT goal: economic growth through increased international specialization, economies of scale and expanded trade 

These goals are sought by many LDCs. The Treaty of Rome has become the model for a global movement toward economic integration.

European Free Trade Association

Only four countries: Iceland, Lichtenstein, Norway, and Switzerland.

Information about EFTA

Current members include Iceland, Lichtenstein, Norway and Switzerland. Largest partner in trade in services of EU.

They are likely to be absorbed by EU eventually.

North Africa is becoming a key supplier of energy. Airbus and Suguitomo Electric are moving into this region (FDI). This region is an alternative to Eastern European countries that absorb Europe's FDI.

Initially, integration in Latin America took two parallel forms. (1) Latin American Integration Association, and (2) Central American Common Market. Subsequently, the Andean Common Market has been added.

The motivation for closer integration among these countries: (a) the success of EC, and (b) slow economic growth and social modernization in this continent.

Efforts to integrate Asian economists have been hampered by three obstacles:

(a) Racial and language diversity of Asian countries. Asian races are more populous and diverse than European races. Diverse languages: tonal Chinese language, Ural-Altai language group (Manchu, Mongolian, Japanese, Korean, etc.),

(b) Japanese occupation of Asian countries in World War II, and

(c) Two large economies, China and India, have no urgent need to intergrate with other economies.

Despite these obstacles, bilateral FTA fervor is sweeping Asia.

Association of South East Asian Nations (ASEAN) (the most successful)

(i) established in 1967

(ii) 6 countries: Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. + New Zealand

then Vietnam, Laos, and Miyamar joined.

(iii) currently transforming into AFTA (ASEAN Free Trade Area)

(iv) GNP= $300 billion, intra-ASEAN trade rose to $68 billion in 1995.

(v) plans to expand. two proposals, Tokyo centered Asian trade alliance, and Asia-Pacific economic zone, excluding US and Japan.

China-ASEAN FTA (CAFTA) came into effect on January 1, 2010. In terms of population, it is the largest FTA (1.9 billion). In terms of GDP, it is the third largest, EU, NAFTA, CAFTA.