A rchive Date
[ 15-02-2004 ]
Category
[ International Relations ]
sub-Categoy
[ Economics ]
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[http://www.mega.nu:8080/ampp/PEGB/chap12.htm
Economic Regionalism
Theme of the 1990s
Economic regionalism is rapidly becoming a "hot" theme of the 1990s, just as liberalisation was in the 1980s. NAFTA, APEC and ASEAN have become regular acronyms in the business media. This section will examine the main issues involved in economic regionalism. These include:
- What is the difference between regionalism and regionalisation?
- Which countries are forming regional groups, and why?
- What is the nature of the existing regional groups?.
- Is regionalism a complement or a threat to the multilateral trading system?.
- Is there an identifiable trend towards regionalisation?
- How does regionalism affect relations between states and firms?
Background
Economic regionalism may be a fashionable issue, but it is not a new one. Its modern origins are in the 19th century, with landmarks such as the establishment of the German Zollverein (customs union) in 1833 and the 1860 Cobden-Chevalier Treaty between Great Britain and France which allowed for free trade between the two nations. However, it was not until after World War II that a coherent theory developed alongside an increasing number of regional trade agreements.
Economic regionalism usually takes one of two forms. A free trade area is where two or more countries agree to allow domestically produced goods to flow freely between each other, but all customs posts are retained and tariff levels on imports from non-members can differ between countries.
The North America Free Trade Agreement is an example of this type of regionalism.
A customs union has a common external tariff and consequently no internal customs barriers. Some political ties must also exist as there is a need for common decision-making in setting the level of tariffs. The Mercosur pact between Argentina, Brazil, Paraguay and Uruguay which was inaugurated at the beginning of 1995 is a recent example of a customs union.
A deeper form of co-operation is a common market, which involves the free movement of factors of production (labour and capital) as well as goods. The CERTA between Australia and New Zealand incorporates some features of a common market, as it allows labour to move between the two countries.
The European Union is in the process of graduating from being a common market to an economic union, where there is harmonisation of fiscal and monetary policies. The EU may even become a political union, which is similar to an economic union, but also involves supranational decision-making on non-economic matters, such as foreign policy and defence.
Unsurprisingly, there are plenty of examples of the looser forms of co-operation, but true political union is a rarity. None of the steps is irreversible, as the break-up of the USSR demonstrated.
Regionalism and Regionalisation
Although the two terms are frequently used interchangeably, there is a distinct difference between them. Regionalism is a political process where a group of countries agree to reduce the barriers to trade between each other to lower levels than exist against the rest of the world. This may, or may not, lead to regionalisation, which is an economic process whereby the economies of a region become more closely entwined.
Thus, the European Union is an example of both regionalism (as shown by institutionalised co-operation between nations and the elimination of barriers on trade and investment flows) and regionalisation (members of the EU have shown a increased preference to trade with each other, rather than with non-EU countries).
There are also examples of regionalism occurring without regionalisation (such as the Andean Pact in 1969), while in North America the US and Canada experienced regionalisation for two decades before the signing of the 1988 Canada-US Free Trade Agreement.
Regional Groups in the 1990s
A report from the World Trade Organization in 1995 noted the existence of 109 free trade agreements signed since the establishment of the General Agreement on Tariffs and Trade (GATT) in 1948. Recognising that the likes of the Ghana-Upper Volta Trade Agreement of 1962 are of limited interest to actors in the world economy, the main regional groups in the 1990s are listed below.
Andean Pact
Members: Bolivia, Colombia, Ecuador, Peru and Venezuela
Features: Free trade agreement formed in 1969, but largely ineffective in promoting trade until revitalised in 1992.
Asia Pacific Economic Co-operation
Members: Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines, Singapore, Taiwan, Thailand, United States.
Features: Aiming to create a free trade area by 2020
Association of South East Asian Nations (Asean) Free Trade Area (AFTA).
Members: Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam
Features: Asean formed as a security body in 1967, with a free trade agreement inaugurated in 1993 aiming lifting restrictions on intra-regional trade over 15 years.
Cairns Group
Members: Australia, Argentina, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, Philippines, Thailand and Uruguay.
Features: Formed in 1986 as a negotiating bloc during the Uruguay Round for exporters of agricultural products.
Central European Free Trade Agreement
Members: Poland, Hungary, Czech Republic and Slovakia.
Features: Aims to liberalise trade flows by 2001.
Closer Economic Relations Agreement (CERTA)
Members: Australia and New Zealand
Features: Free trade in almost all goods and services, with some regulatory harmonisation.
European Union (EU)
Members: Austria, Belgium, Denmark, Finland, France, Italy, Ireland, Germany, Greece, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom.
Features: Customs union with liberal investment flows, regulatory harmonisation, free labour movement. Also foreign policy co-operation and strong central institutions. Target of monetary union by 1999.
Franc Zone
Members: France and 14 West and Central African countries
Features: Exchange rates tied to the French franc.
Gulf Co-operation Council
Members: Saudi Arabia, Kuwait, Qatar, Bahrain, the United Arab Emirates, and Oman
Features: Aiming to unify tariffs, with eventual free trade agreement.
Magreb Union
Members: Libya, Tunisia, Algeria, Morocco, and Mauritania.
Features: Aim of greater economic co-operation, including a customs union.
Mercado Comun de Cono Sur (Mercosur)
Members: Argentina, Brazil, Paraguay and Uruguay
Features: Customs union came into effect in 1995.
North American Free Trade Agreement (NAFTA)
Members: Canada, Mexico, United States.
Features: Free trade area came into effect in 1994.
Southern African Development Community (SADC)
Members: Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe
Features: Aims to promote free trade.
Long though this list is, it is by no means exhaustive.
The point is that by the middle of the 1990s, no major economy was not a member of at least one organisation attempting to promote economic integration and co-operation. Some were members of more than one regional group.
Although labelled "regional" groups, some free trade deals are not with countries in the same region. For example, the USA and Israel signed a free trade agreement in 1985, even before such a deal was reached with Canada. Similarly, under the Lomé Convention exports from developing countries of Africa, the Caribbean and Pacific are given preferential access to European markets.
That said, most free trade agreements are between geographic neighbours. While there are sound economic reasons for that (you are more likely to do your shopping in the local corner shop rather than one across town), there are also non-economic factors such as security. Note that many members of regional groups were at war with each other 50 or 60 years ago, or more recently in some cases. That is most graphically true in Europe and Asia, but Africa and Latin America have also seen repeated conflicts among neighbours.
This is important for international business. Apart from humanitarian aspects, war brings disruption to markets and even destruction of production facilities. If regional trade agreements are increasing co-operation between neighbours and thereby reducing the chance of military conflict, then risks are reduced. In any assessment of the risks attached to foreign investment, such a position is a clear positive.
Nature of Regional Groups
The degree of integration and co-operation varies between regional groups. At its least refined level a regional agreement will aim at promoting free trade in goods between its members (such as in APEC or Mercosur). The economic benefits may be positive, but in a world where average OECD tariffs on industrial imports will be just 3.8% after the Uruguay Round is implemented, they are not likely to be enormous. The potentially large gains are in areas such as textiles and agriculture, but unsurprisingly it has been these areas where trade liberalisation has been most strongly resisted by vested interests in regions with inefficient producers, such as the EU.
Liberalising trade is a relatively straightforward process and does not give rise to the need for strong institutions to co-ordinate the process. Countries give away little or no political power to a central body.
More ambitious objectives of regional groups include liberalising trade in services, investment flows and the movement of workers. Others seek more deep-rooted co-operation, such as harmonising regulations or having mutual recognition of standards. Europe has even gone as far as setting a target date to create a single, EU-wide currency. In general, the deeper the level of co-operation, the stronger must be the central institutions. For example, a powerful European Central Bank is needed if the EU is to have a single currency. Apart from the EU, the Australia-New Zealand CERTA and NAFTA both include agreements which take co-operation beyond simple trade issues.
Regionalism - Complement or Substitute for Multilateralism
This issue is discussed in detail in Chapter 14. Nevertheless, it is worth noting that there are two divergent views regarding the growing trend towards regionalism. The first is that it complements the multilateral liberalisation of the world economy which is overseen by the World Trade Organization. The second is that it threatens to undermine multilateralism and create three or more competing and conflictual regions, with dark parallels sometimes drawn with George Orwell?s 1984.
Evidence of Regionalisation
Bearing in mind the distinction between regionalism and regionalisation mentioned above, it is worth considering whether there is any evidence that the world is becoming more regionalised. There is not much doubt that the political process of regionalism is proceeding apace, simply as measured by the number of trade agreements being signed. As table 6.1 shows, the past five years have seen an unprecedented number of regional trade agreements being signed, with Europe at the forefront of the trend towards regionalism.
| Table 12.1. Number of Regional Trade Agreements (RTAs) Notified to GATT |
| Years Total Notifications Notifications Involving European countries |
| 1948-54 2 2 |
| 1955-59 3 2 |
| 1960-64 12 6 |
| 1965-69 9 3 |
| 1970-74 21 1 |
| 1975-79 19 3 |
| 1980-84 6 4 |
| 1985-89 5 3 |
| 1990-94 32 9 |
The evidence on regionalisation is less clear. Table 12.2 shows some basic data on trade flows with the three major regions of the world and appear to support the idea that regional integration has increased in recent years in Europe and Asia, while remaining fairly stable in North America.
However, there are serious inadequacies with this form of analysis. From the static point of view, the share of intra-regional trade (i.e. trade between members of the same region) will be affected by the number of countries in the region, as well as the relative openness of the economies (which tends to be inversely related to the size of the economy). As we are more interested in whether integration is increasing over time, as opposed to the degree of integration, this is not necessarily a problem, but of course the relative size of the countries within the region is also changing, due to differential rates of economic growth, as well as their share of world trade. For example, between 1970 and 1993, the economies of the industrialised world grew by an average 2.7%, with the European Community growing 2.4%, while non-Japan Asia grew 6.5% per annum.
| Table 12.2. Intra-Regional Trade as a Percentage of Total Trade |
| 1965 1970 1975 1980 1985 1990 1993 |
| East Asia a 23.2 27.4 27.5 35.0 37.1 41.1 44.5 |
| European Community b 47.0 51.2 50.6 51.8 52.8 58.0 53.5 |
| North America c 35.9 38.8 35.7 33.2 38.4 37.2 40.6 |
Source: International Monetary Fund, Direction of Trade Statistics.
a: East Asia includes Brunei, the People's Republic of China, Hong Kong, Indonesia, Republic of Korea, Japan, Malaysia, the Philippines, Singapore, Taiwan and Thailand.
b: The EC 12 pre-1995 enlargement, excluding the former German Democratic Republic.
c: Canada, Mexico and the United States of America. |
More sophisticated approaches use an intra-regional trade intensity index, which looks at the share of one country's exports to another as a proportion of that country?s overall share in world markets. The benefit of using trade intensities is that they correct for any bias which stems from differences in growth rates or in the size or openness of members. The results of one such study are shown in Table 6.3, where a figure above one indicates a positive bias. Now the evidence of an increasing trend towards regionalisation is much more doubtful.
So while there is definite evidence of regionalism as a political process, whether it is being accompanied by regionalisation is far less clear. Fears that the world is breaking down into a few self-contained economic areas does not seem to be supported by the facts.
| Table 12.3. Intra-Regional Trade Intensities |
| 1958 1968 1973 1979 1983 1990 |
| Western Europe a 1.38 1.51 1.541.57 1.72 1.60 |
| Asia b 3.15 2.84 2.88 2.77 2.41 2.31 |
| North America c 2.72 2.90 3.22 3.09 2.98 3.21 |
Source: K. Anderson and H. Norheim (1993) "History, Geography and Regional Economic Integration", in K. Anderson & R. Blackhurst, eds., Regionalism and the Global Trading System, Harvester Wheatsheaf, London.
a Includes Turkey and Yugoslavia.
b Includes Australia and New Zealand as well as the countries in Table 6.2 above.
c Canada, Mexico and the United States of America. |
Regionalism and the State-Firm Bargain
A recurring theme of this course is that the power relationship between the state and the multinational corporation has shifted in favour of the latter in recent years. One way of viewing regionalism is as an attempt by the state to redress the balance. If the state has lost power within its own borders, then is a regional group of countries stronger than the sum of its parts?
By having a centralised institution a stronger co-ordination of policies should be possible. Moreover, the ability of the MNC to play the incentives or regulatory structure of one state off against another in the same region will be constrained. In recent years "dowry chasing" has been an issue, where MNCs will offer their investment to the highest bidder in terms of the incentives available. Unless there is a powerful central organisation, there is always the potential for one state to benefit by offering a better regulatory or tax environment than its neighbours. Moreover, some of the geographic decisions of firms are no longer between countries in a region, but are global. A New York money centre bank can chose to do its data processing in Puerto Rico as easily as in New Jersey, but it could just as well chose India or Vietnam.
Summary
The direction that regionalism takes will play an important part in determining the structure of the world economy in the 21st century. A break-down of the world into a set of competing protectionist blocs might be an exciting topic for discussion, but when the productive and financial resources of nations are so closely tied together, not just within regions, but on a global scale, a trade war would be self-defeating.
Moreover, the gradual internationalisation of business implies that protectionist lobbies are shrinking, while the number of companies that need open borders is increasing.
A more appropriate question is what will be the form that regionalism takes? Will we see existing regions expanding their boundaries and incorporating an ever larger number of peripheral states. Alternatively, will regional groups focus more on the economic gains to be derived from eliminating the range of barriers which hamper trade and investment flows between existing members. For any MNC with a global production base, the answer will have a direct impact on the optimal arrangement of resources.
 World Fact Book (CIA)]
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