Unit 05 Economic Integration
- 1. ECONOMIC INTEGRATION FOR BORDERLESS TRADE Unit-5 INTERNATIONAL BUSINESS ENVIRONMENT 1 VIPULKUMAR N M Assistant Professor, Department of Commerce, Kristu Jayanti College, Bengaluru
- 2. ECONOMIC INTEGRATION Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the level of welfare, while leading to an increase of economic productivity of the states. Economic integration is an economic arrangement between different regions, marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, and to increase trade between the countries taking part in the agreement. 2
- 3. ADVANTAGES OF ECONOMIC INTEGRATION Trade Creation: 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 Greater Consensus: Unlike WTO with huge membership (147 countries), easier to gain consensus amongst small memberships in regional integration Political Cooperation: 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 Employment Opportunities: 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 3
- 4. DISADVANTAGES OF ECONOMIC INTEGRATION Creation Of Trading Blocs: It can also increase trade barriers against non-member countries. Trade Diversion: 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. National Sovereignty: 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. 4
- 5. Stages/ Kinds of Economic Integration 5
- 6. Preferential Trade Area Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc. Agreements may be made between two countries (bi-lateral), or several countries (multi-lateral). 6
- 7. Free Trade Area Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. The North America Free Trade Agreement (NAFTA) is an example of such a free trade area, and includes the USA, Canada, and Mexico. 7
- 8. Customs Union A customs union involves the removal of tariff barriers between members, together with the acceptance of a common (unified) external tariff against non-members. Countries that export to the customs union only need to make a single payment (duty), once the goods have passed through the border. Once inside the union goods can move freely without additional tariffs. Tariff revenue is then shared between members, with the country that collects the duty retaining a small share. 8
- 9. Common Market A common (or single) market is the most significant step towards full economic integration. In the case of Europe, the single market is officially referred to a the 'internal market'. The key feature of a common market is the extension of free trade from just tangible goods, to include all economic resources. This means that all barriers are eliminated to allow the free movement of goods, services, capital, and labour. In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding product standards, monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP). 9
- 10. Full Economic Union Economic union is a term applied to a trading bloc that has both a common market between members, and a common trade policy towards non-members, although members are free to pursue independent macro-economic policies. The European Union (EU) is the best known Economic union, and came into force on November 1st 1993, following the signing of the Maastricht Treaty (formally called the Treaty on European Union.) 10
- 11. Monetary Union Monetary union is the first major step towards macro-economic integration, and enables economies to converge even more closely. Monetary union involves scrapping individual currencies, and adopting a single, shared currency, such as the Euro for the Euro-17 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean. This means that there is a common exchange rate, a common monetary policy, including interest rates and the regulation of the quantity of money, and a single central bank, such as the European Central Bank or the East Caribbean Central Bank. 11
- 12. Fiscal Union A fiscal union is an agreement to harmonise tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses. The majority of EU states agreed a fiscal compact in early 2012, which is a less binding version of a full fiscal union. 12
- 13. Economic and Monetary Union Economic and Monetary Union (EMU) is a key stage towards compete integration, and involves a single economic market, a common trade policy, a single currency and a common monetary policy. 13
- 14. Complete Economic Integration Complete economic integration involves a single economic market, a common trade policy, a single currency, a common monetary policy, together with a single fiscal policy, including common tax and benefit rates – in short, complete harmonisation of all policies, rates, and economic trade rules. 14
- 15. European Union The European Union is a unique economic and political union between 28 European countries that together cover much of the continent. The EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict. The result was the European Economic Community (EEC), created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Since then, a huge single market has been created and continues to develop towards its full potential. 15
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- 17. From economic to political union What began as a purely economic union has evolved into an organization spanning policy areas, from climate, environment and health to external relations and security, justice and migration. A name change from the European Economic Community (EEC) to the European Union (EU) in 1993 reflected this. The EU is based on the rule of law: everything it does is founded on treaties, voluntarily and democratically agreed by its member countries. The EU is also governed by the principle of representative democracy, with citizens directly represented at Union level in the European Parliament and Member States represented in the European Council and the Council of the EU. 17
- 18. Mobility, growth, stability and a single currency The EU has delivered more than half a century of peace, stability and prosperity, helped raise living standards and launched a single European currency: the euro. In 2012, the EU was awarded the Nobel Peace Prize for advancing the causes of peace, reconciliation, democracy and human rights in Europe. Thanks to the abolition of border controls between EU countries, people can travel freely throughout most of the continent. And it has become much easier to live, work and travel abroad in Europe. The single or 'internal' market is the EU's main economic engine, enabling most goods, services, money and people to move freely. Another key objective is to develop this huge resource also in other areas like energy, knowledge and capital markets to ensure that Europeans can draw the maximum benefit from it. 18
- 19. Human rights and equality One of the EU's main goals is to promote human rights both internally and around world. Human dignity, freedom, democracy, equality, the rule of law and respect for human rights: these are the core values of the EU. Since the Lisbon Treaty's entry in force in 2009, the EU's Charter of Fundamental Rights brings all these rights together in a single document. The EU's institutions are legally bound to uphold them, as are EU governments whenever they apply EU law. Transparent and democratic institutions The enlarged EU remains focused on making its governing institutions more transparent and democratic. More powers have been given to the directly elected European Parliament, while national parliaments play a greater role, working the European institutions. In turn, European citizens have an ever-increasing number of channels for taking part in the political process. 19
- 20. Countries The EU was not always as big as it is today. When European countries started to cooperate economically in 1951, only Belgium, Germany, France, Italy, Luxembourg and the Netherlands participated. Over time, more and more countries decided to join. The Union reached its current size of 28 member countries with the accession of Croatia on 1 July 2013. Brexit was the withdrawal of the United Kingdom from the European Union and the European Atomic Energy Community on 31 January 2020 GMT. The UK is the only country to formally leave the EU, after 47 years of having been a member state of the EU and its predecessor, the European Communities, since 1 January 1973 20
- 21. 21 The 27 member countries of the EU Austria Italy Belgium Latvia Bulgaria Lithuania Croatia Luxembourg Cyprus Malta Czech Republic Netherlands Denmark Poland Estonia Portugal Finland Romania France Slovakia Germany Slovenia Greece Spain Hungary Sweden Ireland United Kingdom
- 22. Countries using the euro The euro (€) is the official currency of 19 out of 28 EU member countries. These countries are collectively known as the Eurozone. The euro is the most tangible proof of European integration – the common currency in 19 out of 28 EU countries and used by some 338.6 million people day. The benefits of the common currency are immediately obvious to anyone travelling abroad or shopping online on websites based in another EU country. EU monetary cooperation The Economic and Monetary Union involves the coordination of economic and fiscal policies, a common monetary policy and the euro as the common currency. The euro was launched on 1 January 1999 as a virtual currency for cash-less payments and accounting purposes. Banknotes and coins were introduced on 1 January 2002. 22
- 23. Which countries use the euro? The euro (€) is the official currency of 19 out of 28 EU member countries. These countries Eurozone Countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain are collectively known as the Eurozone. 23
- 24. The Economic and Financial Crisis The economic crisis has prompted intense and sustained action by the EU's national governments, the European Central Bank and the Commission since it erupted worldwide in 2008. All have been working closely together to support growth and employment, protect savings, maintain a flow of affordable credit for businesses and households, ensure financial stability, and put in place a better governance system for the future. https://youtu.be/9eufLQ3sew0 24
- 25. SAARC 25
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- 27. Established 1985 Membership Eight States―Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Six observers—China, Japan, European Union, Republic of Korea, United States, Iran The idea of regional cooperation in South Asia was first raised in November 1980. After the foreign secretaries of the seven founding countries—Bangladesh, Bhutan, India, Maldives, Pakistan, and Sri Lanka—met for the first time in Colombo in April 1981. This was followed a few months later by a meeting of the Committee of the Whole, which identified five broad areas for regional cooperation. The foreign ministers, at their first meeting in New Delhi in August 1983, adopted the Declaration on South Asian Association for Regional Cooperation (SAARC) and launched the Integrated Program of Action (IPA) in the five agreed areas of cooperation: agriculture; rural development; telecommunications; meteorology; and health and population activities. Later, transport; postal services; scientific and technological cooperation; and sports, arts, and culture added to the IPA. Afghanistan became the newest member of SAARC at the 13th annual summit in 2005. China and Japan were granted observer status at the same. 27
- 28. The South Asian Association for Regional Cooperation (SAARC) comprises Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. SAARC is a manifestation of the determination of the peoples of South Asia to work together towards finding solutions to their common problems in a spirit of friendship, trust and understanding and to create an order based on mutual respect, equity and shared benefits. The main goal of the Association is to accelerate the process of economic and social development in member states, through joint action in the agreed areas of cooperation 28
- 29. EVOLUTION The idea of regional cooperation in South Asia was first mooted in November 1980. After consultations, the Foreign Secretaries of the seven countries met for the first time in Colombo, in April 1981. This was followed, a few months later, by the meeting of the Committee of the Whole, which identified five broad areas for regional cooperation. The Foreign Ministers, at their first meeting in New Delhi, in August 1983, formally launched the Integrated Programme of Action (IPA) through the adoption of the Declaration on South Asian Regional Cooperation (SARC). At the First Summit held in Dhaka on 7-8 December 1985, the Charter establishing the South Asian Association for Regional Cooperation (SAARC) was adopted. 29
- 30. OBJECTIVES The objectives, principles and general provisions, as mentioned in the SAARC Charter, are as follows : - To promote the welfare of the peoples of South Asia and to improve their quality of life; - To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potentials; - To promote and strengthen collective self-reliance among the countries of South Asia; - To contribute to mutual trust, understanding and appreciation of one another's problems; - To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; - To strengthen cooperation with other developing countries; - To strengthen cooperation among themselves in international forums on matters of common interests; and - To cooperate with international and regional organizations with similar aims and purposes. 30
- 31. PRINCIPLES - Cooperation within the framework of the Association is based on respect for the principles of sovereign equality, territorial integrity, political independence, non-interference in the internal affairs of other states and mutual benefit. - Such cooperation is to complement and not to substitute bilateral or multilateral cooperation. - Such cooperation should be consistent with bilateral and multilateral obligations of the member states. - Decisions at all levels in SAARC are taken on the basis of unanimity. - Bilateral and contentious issues are excluded from its deliberations. 31
- 32. Organization Structure of SAARC The SAARC comprises five layers of organizational structure: 1. Council: At the top, there is the Council represented by the heads of the government of the member countries. The council the apex policy making body. It meets once in 2 years time. 2. Council of Minister: It is to assist the council. It is represented by the foreign minister of the member countries. Its functions include: 1. Formulation of policies 2. Review of functioning 3. Deciding new areas of cooperation 4. Chalk our additional mechanism 5. Decide about general issues of common of interest of the SAARC member. 3. Standing Committee: It is comprised by the foreign secretariat of the member government. Its major functions are: 1. To monitor and co-ordinate the programmes 2. To determine inter-sectored priorities 3. To mobilise cooperation within and outside the region 32
- 33. 4. Programming Committee: It consist of the senior official of the member governments. Its functions include: 1. Scrutinizing the budget of the secretarials 2. Finalizing the annual schedule 3. External activities assigned by the standing committee 4. Analyses the respects of the technical committee. 5. Technical Committee: It consist of the represented of the member nations. Its function are: 1. To formulate project and programmer 2. To monitor and execute the projects 3. To submit reports. 33
- 34. The Technical Committee convers the areas such as: Agriculture, Communication, Environment, Rural Development, Health and Population, Science and Technology, Tourism and Transport. 6. Secretarial: The SAARC secretarials is located in Nepal. Its function include: 1. Coordination, execution and monitoring of SAARC activities 2. Servicing the SAARC meetings 3. Work as communication link between the SAARC and other international forum. The secretarials is headed by the secretary-General appointed by the Council of Ministers. These are 7 Director (One from each member nation) and the general service staff. 34
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- 36. BRICS BRICS is the acronym for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa. Originally the first four were grouped as "BRIC" (or "the BRICs"), before the induction of South Africa in 2010. The BRICS members are all leading developing or newly industrialized countries. As of 2015, the five BRICS countries represent over 3.6 billion people, or half of the world population; all five members are in the top 25 of the world by population, and four are in the top 10. 36
- 37. History The term "BRIC" was coined in 2001 by then-chairman of Goldman Sachs Asset Management, Jim O'Neill, in his publication Building Better Global Economic BRICs. The foreign ministers of the initial four BRIC states (Brazil, Russia, India, and China) met in New York City in September 2006 at the margins of the General Debate of the UN General Assembly, beginning a series of high-level meetings. A full-scale diplomatic meeting was held in Yekaterinburg, Russia, on 16 June 2009. 37
- 38. BRICS - Objectives, Summits, Need and Disparities About BRICS – BRICS is a acronym for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa – Originally called as BRIC as South Africa was not included till 2010. – The term "BRICS" was coined in 2001 by then-chairman of Goldman Sachs Asset Management, Jim O'Neill – Common characteristics are large, fast-growing economies all developing or newly industrialized countries. 38
- 39. Importance of BRICS – As of 2014, the five BRICS countries represent almost 3 billion people, or approximately 40% of the world population. – The five nations have a combined nominal GDP of US$16.039 trillion, equivalent to approximately 20% of the gross world product, – They have an estimated US$4 trillion in combined foreign reserves. 39
- 40. Summits 1. Yekaterinburg Summit (2009) Consensus on improving the global economic situation and reforming financial institutions. BRIC nations announced the need for a new global reserve currency, which would have to be "diversified, stable and predictable“ 2. Brasilia Summit (2010) South Africa officially became a member nation. Iran and nuclear weapons, development, the furtherance of the BRIC as an international body, the global economic situation at the time, reform of financial institutions, the financial G20, and cooperation and issues related to global governance. 3. Sanya Summit (2011) Economics, anti-terror law under UN auspices, United Nations Security Council reform, decision to cease mutual trade payments in U.S. dollars and instead henceforth give credits to one another in their national currencies alone. 40
- 41. 4. New Delhi summit (2012) A proposal to create a joint BRICS development bank that would finance investments in developing nations 5. Durban Summit (2013) Negotiations for setting up the bank. 6. Fortaleza Summit (2014) Creation of two financial institutions: the New Development Bank (NDB) to finance infrastructure and “sustainable development” projects, with $50 billion in capital to start with, and the $100 billion Contingent Reserve Arrangement (CRA), to tide over members in financial difficulties. 41
- 42. 7. Ufa Summit (2015) The 7th BRICS summit was the seventh annual diplomatic summit of the head of states or government of the BRICS member states. It was held in the Russian city of Ufa in Bashkortostan on 8–9 July 2015 8. The 2016 BRICS summit was the eighth annual BRICS summit, an international relations conference attended by the heads of country or heads of government of the five member countries Brazil, Russia, India, China and South Africa. The summit was held from 15 to 16 October 2016 at the Taj Exotica hotel in Benaulim, Goa, India. 42
- 43. Disparities with BRICS 1. The dominance of China in BRICS is problem for others. The Chinese economy is now not only the second largest in the world but also larger than the economies of all the BRICS together. 2. China's political aspiration creates a challenges that has made it difficult for it to make consensus. 3. China’s manipulation of its currency has resulted in significant problems for the manufacturing sectors of other emerging powers. Central banks of other countries have registered protest against undervalued yuan 4. There is doubt if BRICS can emerge as a unified political force. 5. BRICS is a loose grouping of countries that share interests in particular areas but that play by different rules. It is not a formal international alliance. 6. It maintains a low profile on security issues. BRICS will never attempt to make the group into a traditional security framework. 7. With the exception of the NDB and the CRA, the BRICS framework has not proven very efficient or substantive. 8. The BRICS have little in common. The Chinese economy is 28 times the size of South Africa’s. Income per person in India is one-tenth that in Russia. 9. Brazil, India, South Africa are democratic countries while Russia, China are authoritarian regimes 10. Russia, Brazil and South Africa export different commodities, while China exports manufactured goods and India exports services. 43
- 44. BRICS Bank Structure - New Development Bank will have an initial subscribed capital of $50 billion which will be raised to $100 billion. - The five members will have an equal share for each in the bank, so no one member dominates the institution. - Headquarters – Shanghai - Bank will have African Regional Center in South Africa - India will assume the first presidency of the bank. - Chairman of Board of governance will be Russian - The emergency reserve fund - which was announced as a "Contingency Reserve Arrangement" will also have $100bn and will help developing nations avoid short-term liquidity pressures. - It will have $41 billion from China, $5 billion from South Africa and $ 18 billion from remaining nations. 44
- 45. Need of a BRICS bank 1. Global financial institutions like IMF and world bank are dominated by U.S and western countries 2. IMF and world bank follows different voting power based on quota system. Though China is second largest economy after U.S it has fewer voting rights. 3. The financial institution created by BRICS will reduce the importance of US dollar as a global currency and eventually it will increase importance of Yuan 4. IMF cash assistance program is conditional. If a country's foreign policy clashes with US then it will be difficult to obtain a loan. 5. It will provide resources for infrastructure development of developing countries. 45
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