Regional economic integration has enabled countries to spend resources on issues that are relevant to their stage of development and also encourage trade with other countries.
Four main types of regional economic integration are in use today:
Free trade area
The most basic form of economic cooperation where member countries remove barriers to trade among themselves but are free to determine trade policies with nonmember nations. The North American Free Trade Agreement (NAFTA) is an example of this economic cooperation.
Customs union
This type of association provides economic cooperation like a free-trade zone. Barriers to trade are removed between member countries. The primary difference from the free trade area is that members agree to treat trade with nonmember countries in a similar manner as is The Gulf Cooperation Council for example.
Common market
This type of trade organization allows for the creation of economically integrated markets between member countries. Not only trade barriers are removed, but also any restrictions on the movement of labor and capital between member countries. Like customs unions, there is a common trade policy for trade with nonmember nations. The primary advantage is the free movement of workers who no longer need a visa or work-permit to work in another member country of a common market. An example is the Common Market for Eastern and Southern Africa (COMESA).
Economic union
This trade organizing principle is the most complete for it not only integrates the member’s markets but also adopt common economic policies. An example is the European Union (EU) where not only economic standardization is achieved but free movement of goods, services, people and capital have access to the entire union.
Globalization has been the trend in the past decade as it has been an increase in trading blocs which at present are more than one hundred agreements in place and more in discussion. Trade blocs are basically a free-trade zone, or close to one, formed by one or more tax, tariff, and trade agreements between two or more countries. Some trading blocs have been more substantive than others in creating economic cooperation but there are pros and cons in the creation of regional agreements.
Opportunities for work and Investment
Trade agreements create more opportunities for countries to trade with one another without any border barriers to commerce and investment. Reduction or removal of tariffs, results in lower consumer prices in the bloc countries. Many studies have concluded that regional economic integration contributes in an important way to the relatively high growth rates in the less-developed countries. Removing restrictions on labor movement, economic integration can help expand job opportunities. Free trade also promotes regional understanding and economic parity can also facilitate closer political cooperation.
Inward Trade
A negative issue with a trade bloc might come from members trading almost exclusively with each other which might result in a less efficient or more expensive producer because it is in a member country. In this scenario less efficient companies can be protected within the bloc agreement acting as a trade barrier with countries outside of the trading bloc. In the labor market, sudden shifts in employment can tax the resources of member countries.
Diminished Sovereignty
With each new round of discussions and agreements within a regional bloc, nations may find that they have to give up more of their political and economic rights. This issue prompted Brexit which is turning out to be a nightmare for the British Government with no one knowing how it will all end up.
Regional Economic Integration and Cooperation
The expansion of the World Trade Organization (WTO) has caused smaller regional agreements to become obsolete. Some of the regional blocs have also created side agreements with other regional groups leading to a inter-web of trade agreements and economic understandings.
North America: NAFTA
The North American Free Trade Agreement (NAFTA) came into being during a period when free trade and trading blocs were popular and positively perceived. The goal of NAFTA has been to encourage trade between Canada, the United States, and Mexico. By reducing tariffs and trade barriers, the countries have created an atmosphere where companies are befitting from the transfer of goods. Over the first decade of the agreement, almost all tariffs between Mexico, Canada, and the United States have been phased out.
Current Challenges and Opportunities under NAFTA
Canadian and US consumers have benefited from the lower-cost Mexican agricultural products. Similarly, Canadian and US companies have sought to enter the expanding Mexican domestic market. Many Canadian and U.S. companies have chosen to locate their manufacturing or production facilities in Mexico rather than Asia, which was geographically far from their North American bases.
Forward Looking
NAFTA has added to the already-strong U.S. influence on Mexico’s corporate and business practices. In particular, competitiveness and efficiency have become higher priorities, although company owners and managers still like to surround themselves with people they know and to prepare their sons and sometimes their daughters to be their successors. U.S. influence is also pervasive in the products and services offered throughout Mexico.
Even before NAFTA production facilities known as maquiladoras have been a regular feature of Mexican border towns, especially along the Texas and New Mexico borders. U.S. multinational companies, such as John Deere, Zenith, Mattel, and Xerox, are among the more than 3,600 “maquiladoras” in northern Mexico. Billions of dollars’ worth of products—from televisions to clothes to auto parts—are assembled in “maquiladoras” and either sold domestically or then shipped back, tax free, to the United States for sale to U.S. consumers.
China Seeks to Create a Trading Bloc in the Pacific
After the U.S. failing to approve The Trans-Pacific Partnership, the largest regional trade accord in record, China might now fill the space. On June 29, 2010, China and Taiwan signed the Economic Cooperation Framework Agreement (ECFA), a preferential trade agreement between the two governments and it’s the most significant agreement since the two countries split at the end of the Chinese Civil War in 1949. It is estimated to grow beyond the current $110 billion bilateral trade between both sides. China already absorbed Hong Kong in 1999, after the hundred-year lease to Britain ended.
The Taiwanese Government declared that“An economically stronger Taiwan would not only gain clout with the mainland but also have more money to entice allies other than the 23 nations around the globe that currently recognize the island as an independent state. Beijing is hoping closer economic ties will draw Taiwan further into its orbit.”
The Final Impact of Trade Agreements for Business an Investment
Overall, globalization have benefited businesses by having more consistent criteria for investment and trade as well as reduced barriers to entry. Companies that choose to manufacture in a trade bloc find it more efficient and profitable to ship goods between member countries in the bloc without incurring tariffs or additional regulations.
Over the past recent decades, there has been an increase in bilateral and multilateral trade agreements. These agreements are often called a “spaghetti bowl” of bilateral and multilateral trade agreements, because they are a messy mix of crisscrossing strands, like a bowl of spaghetti of trading alliances. Businesses due diligence is to monitor and navigate these evolving trade agreements to make sure that don’t negatively impact their businesses models.
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