Session

05

Regional Economic Integration

BUS 3345: International Business Management

Intended Learning Outcomes

At the end of this session, you should be able to:

 Identify different levels of regional
economic integration
 Identify the economic and political argument
for and against regional economic integration
 Discuss the implication for business from the
regional economic integration agreements
 Regional Economic Integration

Agreement among the 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.
(Hill, 2014)
Creating a single market with regional
economic integration

Good for consumers

Can be a challenge for some

producers/businesses

Regional trade blocs may compete

against each other – by creating
economic fortresses (Hill, 2014)
Different parties
involved/interested/benefited
Business organizations
Government
Cabinet, ministries

WTO
Government Institutes
Departments/Boards, other Consumers
institutes

Other parties
Politicians and other activists
Levels of Economic Integration

Political
Economic Union
Union
Common
Market
Customs
Union

Free
Trade
Area
(Hill, 2014)
Levels of Economic Integration (Cont.)
Free trade Customs Common Economic Political union
area union market union
All barriers to No trade barriers No barriers to Free flow of A central
trade of goods between member trade between products and political
and services are countries. member production apparatus
removed. countries. factors. coordinates the
No Common Common Common economic,
discriminatory external trade external trade external trade social,
tariffs, quotas, policy. policy. policy. and foreign
subsidies, or Labor and Common policy of the
administrative capital are free monetary and member states
impediments are to move. fiscal policy.
allowed or Significant Common
distort. degree of currency,
Each country is harmony and harmonization of
allowed to cooperation on members’ tax
determine its fiscal, monetary, rates
own trade and employment
policies with policies.
regard to
nonmembers.
The role of World Trade Organization's
(WTO) in RTAs

https://www.youtube.com/embed/UZRp2sQjjL4
RTAs Currently in force

Source: http://rtais.wto.org/UI/charts.aspx#
The Case for Regional Integration
The Economic Case for Integration
Economic theories suggest that free trade and
investment (FDIs) is a positive-sum game, in
which all participating countries stand to gain.

Many governments have accepted part or all of the

case for intervention.

It is easier to establish a free trade and investment

regime among a limited number of adjacent countries
than among the world community.
(Hill, 2014)
The Case for Regional Integration
The Political Case for Integration
 Linking neighboring economies and
making them increasingly dependent on
each other creates incentives for political
cooperation between the neighboring
states and reduces the potential for
violent conflict.

 By grouping their economies, the

countries can enhance their political
weight in the world.

(Hill, 2014)
The Case for Regional Integration
Impediments to Integration
 While a nation as a whole may benefit significantly
from a regional free trade agreement, certain groups
may lose.

 Concerns over national sovereignty.

Concerns about national sovereignty arise
because close economic integration demands
that countries give up some degree of control
over such key issues as monetary policy, fiscal
policy (e.g., tax policy), and trade policy.

(Hill, 2014)
 Integration is not easily achieved or sustained.
Although integration brings benefits to the majority,
it is never without costs for the minority. Concerns
over national sovereignty often slow or stop
integration attempts.
Regional Economic Integrations :
Sri Lanka’s membership…different views
The criticism The India-Sri Lanka
leveled against China / Sri Lanka Free Trade
Rubber Rice Agreement which is Agreement (FTA)
not in existence any longer was shows that a bilateral
whether Sri Lanka received a fair FTA between a small
price for its rubber exported and a large country
to China and whether it was paying can be designed in a
the right price for the rice imported way to achieve a 'win-
from them. win' situation for both
countries.
Source: https://apbsrilanka.com/wp-
content/uploads/2021/01/2011_23rd_conv_a_7_Parama_Dharmawarde
na.pdf Source:: https://www.adb.org/ (2014)
 The Case against Regional Integration
The benefits of regional integration are determined by the
extent of trade creation, as opposed to trade diversion.
Trade Diversion Trade Creation
occurs when low- occurs when high-
cost foreign cost domestic
suppliers outside a producers are
free trade area replaced by low-cost
replace higher- foreign producers
cost suppliers within a free trade
within a free trade area.
area.
A regional free trade agreement will benefit the world only if the
amount of trade it creates exceeds the amount it diverts.
(Hill, 2014)
Regional Economic
Integrations…some examples
 The European Union (EU)
 North American Free Trade Agreement (NAFTA)
 Association of South East Asian Nations (ASEAN)
 Andean Pact
 Mercosur
 ISFTA
 EFTA
 Association of Southeast Asian Nations
 Asia-Pacific Economic Cooperation
Regional Economic Integrations :
Sri Lanka’s membership
• Asia Pacific Trade Agreement (APTA)
• Asia Pacific Trade Agreement (APTA) - Accession of
China
• Global System of Trade Preferences among Developing
Countries (GSTP)
• India - Sri Lanka Free Trade Agreement (ISLFTA)
• Pakistan - Sri Lanka Free Trade Agreement (PSLFTA)
• South Asian Free Trade Agreement (SAFTA)
• South Asian Free Trade Agreement (SAFTA) -
Accession of Afghanistan
• South Asian Preferential Trade Arrangement (SAPTA)
For self-learning…

Read about European Union and its evolution.

Read about the RTAs where Sri Lanka is a member of.

 The role of the government in getting
full benefits from regional integrations
Negotiation, evaluations, and signing the agreement
• Ensuring the right composition of the negotiating team.
• Ensuring the participation of all sectors affected in the
negotiating team.
• Including experienced negotiators against the strong
opposition.
• Including unbiased members who appear to be free of any
personal bias towards negotiating country.
• Ensuring forcing is not happened by the powerful country on
draft proposal on the weak country.

(Dharmawardene, 2011)
The role of the government in getting
full benefits from regional integrations
After signing agreements:

Educating the existing and potential importers and

exporters of the advantages that they can derive by
making use of such agreements.
Give sufficient knowledge regarding access provided
and benefits available to exporters and importers.
(By the government institutes like Department of Commerce or other
government authorities or chambers of commerce)

(Dharmawardene, 2011)
Regional economic integration and international
business management…
implications for managers
Opportunities
• Markets that were formerly protected from foreign competition
are increasingly open.
open to foreign competitions in the form of exports and direct investment
• Lower cost of doing business in a single market
Free movements of goods across borders, harmonized product standards, and
simplified tax regimes makes it possible to realized potentially significant cost
economies by centralizing production
• Culture and competitive practices may limit the ability of
companies to realize cost economies by centralizing production
in key locations and producing standardized product for a single
multiple-country market

(Hill, 2014)
 Regional economic integration and international
business management…
implications for managers…contd
Threats
• The business environment within each grouping will become more
competitive
the lowering of barriers to trade and investment between countries is
likely to lead to increase price competition throughout the region
• The long term improvement in the competitive position of many
firms within the area will transform firms in the region to reduce
their cost structure by rationalizing the production by turning them
to efficient global competitors. This may be a threat to non-region
businesses.
• Non-region firms may face the threat of being shut out of the single
market by the creation of a ‘trade fortress’.
• The policy making body within the region will intervene and impose
conditions on companies proposing mergers and acquisitions by
limiting the ability of firms to pursue the corporate strategy of their
choice. (Hill, 2014)
References

Dharmawardene, P. (2011). FREE TRADE AGREEMENTS -

ARE WE ON THE RIGHT TRACK Parama Dharmawardene.
23rd Anniversary Convention, 89–97.

Hill, C. W. L. (2014). Competing in the global markets. In

McGraw-Hill Irwin (9th ed.).
Questions and Clarifications