Regional Integration

Question 1

Regional Economic Integration

Answer 1

best be defined as an agreement between groups of 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 between each other.

Question 2

Advantages Of Economic Integration

Answer 2

Trade Creation:
Greater Consensus:
Political Cooperation:
Employment Opportunities:

Question 3

Trade Creation:

Answer 3

§ Member countries have
□ (a) wider selection of goods and services not previously available;
□ (b) acquire goods and services at a lower cost after trade barriers due to lowered tariffs or removal of tariffs
□ (c) encourage more trade between member countries the balance of money spend from cheaper goods and services, can be used to buy more products and services

Question 4

Greater Consensus:

Answer 4

§ Unlike WTO with high membership (147 countries), easier to gain consensus amongst small memberships in regional integration

Question 5

○ Political Cooperation:

Answer 5

§ A group of nation can have significantly greater political influence than each nation would have individually.
§ This integration is an essential strategy to address the effects of conflicts and political instability that may affect the region.
§ Useful tool to handle the social and economic challenges associated with globalization

Question 6

Employment Opportunities:

Answer 6

§ As economic integration encourage trade liberation and lead to
□ market expansion,
□ more investment into the country and
□ greater diffusion of technology,
□ it create more employment opportunities for people to move from one country to another to find jobs or to earn higher pay.
§ For example, industries requiring mostly unskilled labor tends to shift production to low wage countries within a regional cooperation

Question 7

Disadvantages Of Economic Integration

Answer 7

Creation Of Trading Blocs:
Trade Diversion:
National Sovereignty:

Question 8

Creation Of Trading Blocs

Answer 8

It can also increase trade barriers against non-member countries

Question 9

Trade Diversion:

Answer 9

§ Because of trade barriers, trade is diverted from a non-member country to a member country despite the inefficiency in cost.
§ For example, a country has to stop trading with a low cost manufacture in a non-member country and trade with a manufacturer in a member country which has a higher cost.

Question 10

○ National Sovereignty:

Answer 10

§ Requires member countries to give up some degree of control over key policies like trade, monetary and fiscal policies.
§ The higher the level of integration, the greater the degree of controls that needs to be given up particularly in the case of a political union economic integration which requires nations to give up a high degree of sovereignty.

Question 11

Optimal currency areas

- Micro-economic:

Answer 11

• Transaction costs, risk

* Price comparability => single market

Question 12

Optimal currency areas

Macro-economic:

Answer 12

○ Common reserve
		○ Impossible trilogy (see failure of Exchange Rate Mechanism 1992): 
			§ Free capital mobility
			§ Fixed exchange rate
			§ Independent monetary policy

Question 13

Optimal currency areas

Political:

Answer 13

○ France: multilateralism instead of German impositions
○ Spill-overs towards ‘ever closer union’
Monetarist discipline over undisciplined countries

Question 14

Optimal currency areas

Mundell-McKinnon-Kenen criteria of ‘optimal currency area’ not met

Answer 14

○ Mobility of factors of production (esp. labour)
○ Similarly diversified economies
○ Mutual trade

Question 15

Optimal currency areas

Macro-economic counterarguments

Answer 15

• Financial policy and exchange rate policy have different functions and are
BOTH necessary to each country (Fleming-Corden)
Keynesian argument: common currency needs common fiscal policy

Question 16

Relevance for Business?

Answer 16

• Free trade? What tariffs apply?
  
  • Regionalisation of the world economy: distance factors
  • Regulation standardisation
  • Crises with big economic impact
  • Migrant workers?