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3-1b Pros and Cons of Regional Integration
customs union
a group of free-trade member countries that have adopted a common external tariff with nonmember countries
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common market or single market
a market formed when member countries of a customs union remove all barriers to allow the movement of capital and labor within the customs union
economic and monetary union
a union formed when members of a common market agree to implement common social programs (on education, employee benefits and retraining, health care, etc.) and coordinated macroeconomic policies (such as fiscal and monetary policies) that would lead to the creation of a single regional currency and a regional apex central bank
political union
the union created when member countries of an economic and monetary union work closely with one another to arrive at common defense and foreign policies and behave as a single country
County flags of some World Trade Organization members.
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tariffs, imports will primarily enter the free-trade area through the country that has the lowest external tariffs and trade restrictions, thereby causing other free-trade member countries to lose import business. This may eventually lead to the creation of a customs union, in which all free-trade member countries would need to adopt a common external tariff with nonmember countries. Third, within the member countries of the customs union, investment (hence business and job opportunities) will flow to countries that have the highest labor productivity and low capital cost. This, in turn, may encourage the removal of barriers to allow free movement of capital and labor within the customs union, thereby creating a common market or single market. Fourth, within the common market, the free movement of labor and capital may encourage member states to implement common social programs (on education, employee benefits and retraining, health care, retirement programs, etc.) and coordinated macroeconomic policies (e.g., similar fiscal and monetary policies) that could lead to the creation of a single regional currency and an economic and monetary union. Finally, because member countries of the economic and monetary union will work closely with each other on all major business and economic issues, the urge to have common defense and foreign policies may lead to the creation of a political union (i.e., a group of countries that will behave as a single country).
The benefits and costs of regional integration crucially depend upon the level of integration the countries in the group achieve. These countries have a variety of motives for participating in the union: creation of greater business opportunities, global competitiveness,
increased value for consumers (better choice, price, and service), shared values, peace within the region, common security against possible external threats, and more. While the countries’ motives may be similar (though not identical), the degree of success of the integrated group will depend upon how well it implements the agreed-upon economic policies. The effect of regional integration will depend on the net impact of the benefits and costs.
The benefits of regional integration include:
• Creating a larger pool of consumers with growing incomes and similar cultures, tastes, and social values. • Encouraging economies of scale in production, increasing the region’s level of global competitiveness, and enhancing economic growth through investment flows. • Freeing the flow of capital, labor, and technology to the most productive areas in the region. • Increasing cooperation, peace, and security among countries in the region. • Encouraging member states to enhance their level of social welfare to match that of the most progressive states. The costs of regional integration include:
• Undermining the most-favored-nation status rule (the lowest tariff applicable to one member must be extended to all members), an essential principle of the WTO. • Imposing laws and regulations that are uniform and that at times do not take into account national economic, cultural, and social differences. • Eliminating jobs and increasing unemployment in protected industries. • Losing sovereignty, national independence, and identity. • Reducing the powers of the national government. • Increasing the probability of rising crime associated with illegal drugs and terrorism because of the ease of cross-border labor movements.
R eality Che C k lO-1
Will increased regional integration help or hurt the citizens of your country? Defend your position.
The removal of tariff and nontariff barriers across national borders can enable small and medium-sized firms to consolidate, specialize, and gain economies of scale in production that will help them achieve competitiveness on a regional and global scale. The World Bank’s (2009) World Development Report (WDR), titled “Reshaping Economic Geography,”3 analyzes trade and regional economic integration through the lens of economic geography (i.e., market size, location, and openness to trade). The WDR concludes that positive changes within these three categories are essential for successful regional integration. Hence, the policy instruments needed for successful integration include: institutions that unify the markets, infrastructure that efficiently connects these markets, and lower economic barriers to facilitate trade. Such a strategy will enable firms in regional trading blocs to increase their supply of goods and services by taking advantage
LO-2
Identify how economic geography helps explain, promote, and segment regional integration blocs.
economic geography
the study of principles that govern the efficient spatial allocation of economic resources and the resulting consequences
