Lecture 8
ECONOMIC INTEGRATION

1. Forms of economic integration

1. Free Trade Area
   • No tariffs on goods from member countries

   
   Source: https://www.rieti.go.jp/en/columns/a01_0501.html

2. Customs Union
   • No tariffs among members
   • Common external tariff toward non-members
     • Prevents trans-shipments by non-members

   
   Source: https://www.rieti.go.jp/en/columns/a01_0501.html

3. Common Market
   • No tariffs among members
   • Common external trade policy
   • No barriers to factor movements among members

4. Economic Union
   • All the features of a common market
   • Coordination of economic policies
   • Unification of economic institutions
   • Monetary union: If single currency is adopted

2. Benefits of integration

2.1 Static effects

1. Gains from exchange and specialization
   
   • Efficient allocation of resources
   • Exploit comparative advantage

2. Administrative savings
   • No need for customs; monitoring movement of goods

3. Improvement of terms-of-trade relative to the rest of the world (RoW)
   
   • A large trade group becomes a "large" country

4. Greater bargaining power in trade negotiations

2.2 Dynamic effects

1. Economies of scale
   • Larger "export" markets

2. More investment in member countries
   • Both internal and external sources
   • Reduction in risk and uncertainty

3. Increased factor mobility in common market
   • Greater economic efficiency
   • Higher factor incomes

3. Opposition to economic integration

1. Uneven distribution of benefits
   • Across member countries
   • Lobbying within countries for protection

2. Loss in control of economic decisions
   • National sovereignty

4. World Trade Organization (formerly GATT)

(Visit the WTO web site for detailed information about the trade body)

1. Main activities
   
   • Tariff bargaining
   • Bargaining on NTBs
   • Elimination of quantitative restrictions
   • Settlement of disputes

2. Main provisions
   
   • Non-discrimination MFN status for all member countries
   • Members must observe negotiated tariff concessions
   • Prohibits use of quantitative restrictions (quotas)
   • Special treatment for developing countries

3. Exemptions
   
   • Waiver of non-discrimination clause
     • Customs unions, FTAs
     • GSP by developed countries to grant favored treatment to developing countries
   • Escape clause (Safeguard provision)
     • If tariff reduction causes serious injury to domestic producers, member may withdraw tariff concession
     • Country must reach agreement with others