TE2, September 8th, 2011
Chapter 8, continued:
The Case For Regional Integration: There are both economic and political arguments in favor of integration. Such integration is, however, difficult to achieve due to resistance from many groups within countries involved. Today we will begin to look at the cases for integration. We will take a look at the arguments against integration in the next class.
The Economic Case for Integration: The theoretical idea here is for an absence of barriers to the free flow of goods, services and factors of production between nations. Regional integration can be seen as an attempt to achieve more gains from such a free flow of goods and services than ...view middle of the document...
These economists feel that the benefits of economic integration are determined by the extent of trade creation as opposed to trade diversion. Lets define these two terms:
* Trace Creation: This is trade created within a free trade area due to the replacement of high cost domestic or external producers by low cost external producers. Within the free trade area.
* Trade Diversion: This occurs when lower cost external suppliers are replaced by higher cost suppliers within the free trade area.
According to some, a regional free trade agreement will benefit the world economy only if the amount of trade it creates exceeds the amount of trade it diverts. The author makes the argument that WTO rules should ensure that any free trade agreement does not result in trade diversion. Current WTO rules, however, do not cover some non-tariff barriers. The text states that in order for the WTO to effectively guard against trade diversion, the rules need to be modified so that the WTO’s scope also covers non-tariff barriers to trade. Otherwise, it is possible that we could see the emergence of regional trade blocs whose markets are protected from outside competition by high non-tariff barriers and trade diversion could outweigh trade creation.
These are the economic arguments against regional economic integration. Note that we discussed some of the political arguments in the previous class, specifically the fact that when economic integration begins to occur at a high enough level of integration to where a new bureaucracy is needed to manage the newly created economic bloc, it necessarily requires that its member states cede some of their sovereignty or decision making authority to the newly created bureaucracy. Many living in such nations of course oppose this for the obvious reasons. What may be good for the bloc as a whole may not necessarily benefit those living in a particular region or country.
Regional Economic Integration in Europe:
The European Union:
We look at the European Union as the first modern example of an attempt to create such a large-scale economic/political union. The United States originally contemplated becoming something similar in nature with the signing of the Articles of Confederation, a precursor to the U.S. Constitution. The Articles of Confederation would have provided for the individual states that make up the U.S. today a much higher degree of autonomy but was quickly scrapped in favor of a strong central government with the signing of the constitution and gave us what we now have today. It will be interesting to see just how far along this road to a political union the European Union ultimately goes. The text notes that the European Union was created due to two main political factors:
* The devastating impact upon Europe of having been at the center of two World Wars and the desire for an enduring peace. After having suffered the enormous devastation of two major wars on the continent in the space of 30...