BCom International Economic Groupings Notes Study Material
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International Economic Groupings Notes Study Material
MEANING OF ECONOMIC GROUPINGS
Economic grouping can be viewed as one of the major instruments for promoting international trade activities among countries through removal of barriers to mutual trade in goods and services by means of liberated trade areas, customs unions and other preferential trade arrangements. In other words, economic groupings are trade and/or development agreements to liberalize trade among the group of countries and are being effectively used as an instrument to gain market access among the signatory countries. Such agreements also take place for distribution of production of capacities to avoid or reduce competition. It implies the most desirable structure of inter-regional economy through the formation of a customs union or union of a free trade within the region and deliberately introducing all desirable elements of co-ordination and unification.
When two or more countries come together to form a regional trade grouping, that will have two types of effects. The first is the trade creating effect. which will increase the national income in the participating countries. The second will be the trade diversion effect, meaning a resulting change in the direction of trade activities in favour of the member countries and against the non-members. Such agreements are against the basic principle of economics that a country should produce those products in which it has comparative cost advantage and import those products in which one has comparative cost disadvantage. Such agreements are also against the theory of multinational trade which is being preached by all the international organizations like GATT, UNCTAD, World Bank, IMF, WTO etc. It is believed that such groupings may provide benefit to signatory countries for the time being but is against the larger interest of world community. However, they have not been banned by WTO.
FORMS OF ECONOMIC GROUPINGS
Regional economic groupings aim at creating a larger economic unit from smaller national economies. For this purpose, they aim to remove trade barriers and establish closer co-ordination and co-operation among the countries involved. Depending upon the level of integration, regional economic groupings may be classified into six major groups as follows:
- Preferential trade areas
- Free trade areas
- Customs unions
- Common markets
- Monetary unions
- Economic unions
- Preferential Trade Areas: A preferential trade area is the weakest form of economic grouping. The member countries reduce customs tariffs in some product categories. They apply a preferential treatment to some groups of goods from the member countries as compared to the rest of the world. Higher tariffs would remain in place for all remaining product categories.
- Free Trade Areas: In free trade areas, participants aim mainly to expand trade activities among themselves. For this purpose, they eliminate customs tariffs on the products they produce themselves. However, they maintain their own external tariff on imports from third parties. For this reason, free trade areas are criticized on the ground that import products from third countries may penetrate into the grouping through the customs of the Member State with the lowest tariff and may then be re-exported to the other participants. In order to prevent such trade, free trade areas generally develop very elaborate rules of origin.(BCom International Economic Groupings Notes Study Material)
- Customs Unions: A customs union, on the other hand, is a higher form of free trade area, and eliminates the deficiency mentioned above. In a customs union, the participants not only agree to abolish or reduce tariffs between themselves, they also set a common external tariff policy against third parties. In this manner, the member countries, on the one hand, secure the free or privileged flow of tradable goods amongst themselves, and on the other hand, they form a discriminatory trade bloc against the non-member countries. In this case, the main concern becomes the co-ordination of the trade policies amongst the member countries instead of developing elaborate rules of origin.
- Common Markets: A common market allows a free flow of not only the goods but also the services and the factors of production such as capital, labour, entrepreneurship, etc., across countries. It also establishes a common external tariff policy against third parties. However, such a scheme necessitates the co-ordination of commercial and industrial policies. Citizens of a common market can work and invest in any member country without any restriction.
- Monetary Unions: A monetary union establishes a central monetary authority, which will determine monetary policy for all the participating countries. That authority issues a common currency to be circulated among the member countries. The EU members have concentrated their efforts on reaching that stage of integration. In this context, they introduced the single European currency (the Euro) on 1st January, 1999. At this stage, the Euro is being as a unit of account in bank operations. The Euro notes and coins will be circulated together with the national currencies starting from 1st January, 2002. The Euro will completely replace the national currencies after 1st July, 2002.
- Economic Unions: In an economic union, the participants will maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labour. Additionally, they also agree to harmonize their national economic policies, and act as a single economic unit. The European Union (EU) is also a very good example of such an integration scheme. In the EU, the integration efforts extended even to the harmonization of social policies.
SOME REGIONAL ECONOMIC GROUPINGS
In the world, there are around 150 regional economic groupings. Now we will discuss about some important International Economic Groupings are given as below:
- Association of South-East Asian Nations (ASEAN): It was established at the meeting of the Foreign Ministers of the five founding Member States, Indonesia, Malaysia, Philippines, Singapore and Thailand, with the signing of the Bangkok Declaration on 8th August, 1967. Brunei Darussalam joined the ASEAN on 8th January, 1984 and Vietnam on 28th July, 1995.
The Bangkok Declaration united the ASEAN Member Countries in a joint effort to promote economic co-operation and the welfare of the people in the region. The Bangkok Declaration set out guidelines for ASEAN’s activities and defined the aims of the organization. The main objectives of the Association are the following:
(a) To accelerate economic growth, social progress and cultural development in the region through joint endeavors in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of South East Asian Nations;
(b) To promote regional peace and stability through abiding respect for justice and the rule of law or the relationship among countries of the region and adherence to the principles of the United Nations Charter;
(c) To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields;
(d) To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres;
(e) To collaborate more effectively for the greater utilization of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples;
(f) To promote South-East Asian studies; and
(g) To maintain close and beneficial co-operation and existing international and regional organizations with similar aims and purposes, and explore all avenues for even closer co-operation among themselves.
- Gulf Co-operation Council (GCC): Six Gulf States signed the Charter of the Gulf Co-operation Council (GCC) on 25th May, 1981: Bahrain, Kuwait Oman, Qatar, Saudi Arabia and the United Arab Emirates. The GCC basically aims to secure stability in the region through economic and political co-operation, and co-ordination of commercial, monetary, financial and economic policies. It intends to create an economic common market in the region by through the free movement of goods, services and factors of production.
The objectives of the Gulf Co-operation Council are:
(a) To maintain co-ordination, integration and interconnection between Member States in all fields in order to achieve unity between them;
(b) To deepen and strengthen relations, links and scopes of co-operation prevailing between their peoples in various fields;
(c) To formulate similar regulations in various fields including, economic and financial affairs, agriculture, industry, commerce, customs and communications, education and culture, social and health affairs, information and tourism, and legislative and administrative affairs;
(d) To stimulate scientific and technological progress in various fields, and to establish scientific research centres and implement common projects;
(e) To encourage co-operation by the private sector;
(f) To consolidate economic activities among member countries in agriculture, commerce, industry, mining and general investment.
The GCC aims to achieve unified customs policies, rules, regulations and procedures amongst the members. Especially, in the field of petroleum industry, it aims to co-ordinate the policies in all phases of production, refining, marketing, pricing, etc., and to develop production and use of natural gas and alternative sources of energy. Furthermore, it desires to realize equal treatment and non-discrimination of the nationals of the Member States in employment, right of establishment, property and capital transfers.
- East Asian Economic Caucus (EAEC): Malaysia proposed the formation of an East Asian Economic Caucus (EAEC) in 1990 amongst Brunei, China, Hongkong, Indonesia, Japan, Republic of Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Its objectives were to expand regional co-operation, to co-ordinate positions of the Member States on economic issues of interest to the region and to represent members’ view in multilateral negotiating forums.
The ASEAN would be at the core of the EAEC together with the other countries in the region. The proposal on the establishment of the EAEC was put on the agenda of the ASEAN Summit Meeting in Singapore in January 1992. However, the ASEAN leaders agreed to suspend it and decided to launch the ASEAN Free Trade Area (AFTA) instead.
- Economic Co-operation Organization (ECO): The ECO replaced the earlier organization of Regional Co-operation for Development (RCD), established by Iran, Pakistan and Turkey in Ankara on 21st July, 1964. The RCD existed until 1979. Then it was re-established under its present name in January 1985. The basic Charter of the Organization, known as the Treaty of Izmir, was amended by the Ministerial Conference in Islamabad, Pakistan, in June 1990. The ECO became operational on 11th January, 1991. After the collapse of the Soviet Union, Afghanistan, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan joined the Organization in November 1992. The Treaty of Izmir was revised and signed at the Extraordinary Meeting of the ECO Council of Ministers in Izmir, Turkey on 14th September, 1996,
The objectives of the Organization are:
(a) To expand mutual trade and promote conditions for sustained economic growth in the region;
(b) To take measures towards progressive removal of barriers within ECO region and expansion of intra- and inter-regional trade;
(c) To pursue increased economic co-operation in order to secure greater role and contribution of ECO region to the growth of world trade and removal of iniquitous trading policies resulting in adverse terms of trade for the developing countries, particularly to the Member States;
(d) To provide gradual and smooth integration of the economies of the Member States with the world economy;
(e) To promote active regional collaboration and mutual assistance in economic, social, cultural, technical and scientific fields;
(f) To accelerate development of transport and communications infrastructures linking the Member States with each other and with the outside world;
(g) To promote integration of public and private sector activities with emphasis on economic liberalization and privatization towards increased participation of the private sector in the regional economic development through joint ventures and investments;
(h) To develop joint programmes for human resource development in ECO region;
(i) To intensify mobilization and utilization of the ECO region’s natural resources, in particular energy resources;
(j) To enhance efforts for effective utilization of the agricultural and industrial potentials of the ECO region;
(k) To develop regional co-operation to eradicate drug abuse: and
(l) To facilitate co-operation in the fields of ecological and environmental protection within the region.
- South Asian Association for Regional Co-operation (SAARC): The South Asian Association for Regional Co-operation (SAARC) was established at the First Meeting of the Heads of State and Government in Dhaka, Bangladesh, on 8th December, 1985, amongst Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka.
The objectives of the SAARC are as follows:
(a) To promote the welfare of the peoples of South Asia and to improve their quality of life;
(b) 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 realise their full potentials;
(c) To promote and strengthen collective self-reliance among the countries of South Asia;
(d) To contribute to mutual trust, understanding and appreciation of one another’s problems;
(e) To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields;
(f) To strengthen co-operation with other developing countries;
(g) To strengthen co-operation among themselves in international forums on matters of common interests; and
(h) To co-operate with international and regional organizations with similar aims and purposes. The SAARC countries are committed to step-by-step trade liberalization in such a manner that all countries in the region share the benefits of trade expansion equitably.(International Economic Groupings Study Material)
- The European Union (EU): The biggest and most powerful and advance trade group is European Union (EU). It has 15 member countries namely Austria, Belgium, Luxemburg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherland, Portugal, Spain, Sweden and United Kingdom. In European Union ten more countries namely Cyprus, Czech Republic, Estonia, Hungry, Latvia, Malta, Poland, Slovak Republic, Slovenia and Lithuania have association from May 1, 2004 and now there are 25 members in European Union. The accession of these countries is not expected to increase sharply the share of trade between the EU (15) countries and these countries because goods of these ten countries enjoyed duty-free imports since 1994.
The EU is a kind of super-government in economic affairs and in relation of the community. It has regulated by a principal administrative body of European Union is European Economic Council. The council is assisted in its work by the European Commission. This consists of 20 commissioners.
Objectives of the EU : The principal objective of the EU are the elimination of all obstacles to the free movement of goods, services, capital and labour between the member countries and the establishment of common policies in the spheres of agriculture and transport and a common external commercial policy. This grouping has big influence on the economies of other countries and the outside world that does not enjoy equal tariffs. Some other objectives are:
(i) the promotion of peace and the well-being of the Union’s citizens;
(ii) an area of freedom, security and justice without internal frontiers;
(iii) sustainable development based on balanced economic growth and social justice;
(iv) a social market economy-highly competitive and aiming at full employment and social progress;
(v) a free single market.
The Union shall also combat social exclusion and discrimination and promote social justice and protection, equality between women and men, solidarity between generations and the protection of children’s rights.
- European Free Trade Association (EFTA): European Free Trade Association (EFTA), group of four countries-Iceland, Liechtenstein, Norway and Switzerland -organized to remove barriers to trade in industrial goods among themselves, but with each nation maintaining its own commercial policy toward countries outside the group. Headquarters are in Geneva, Switzerland.
It is a free trade organization that operates parallel to, and is linked to the European Union (EU). EFTA was established on 3rd May, 1960 as a trade bloc-alternative for European States. Currently, Iceland, Norway, Switzerland and Liechtenstein are members of EFTA and among which only Norway and Switzerland are funding members. The governing body of EFTA supervises the activities of the member countries and act as the “Guardian of Treaties” for the member countries of EFTA. Today’s EFTA members are Iceland, Liechtenstein, Norway and Switzerland.
- South Asian Free Trade Area (SAFTA): SAFTA has come into force since January 1, 2006 replacing South Asian Preferential Trade Agreements (SAPTA) which was operative among SAARC countries since December 7, 1995. For SAFTA India, Pakistan and Sri Lanka are categorized as Non-Least Developed Contracting States (NLDCS) and Bangladesh, Bhutan, Maldives and Nepal are categorized as Least Developed Contracting States (LDCS). Afghanistan which became the eighth member of SAARC on 3-4th April, 2007 in New Delhi SAARC submit, also becomes a party of SAFTA agreement as an LDCS member.(International Economic Groupings Notes Study Material)
The main objectives of SAFTA were to provide greater market access to its neighboring Least Developed Countries and reduced tariffs to zero percent.
It provides a safeguard measures in case of a surge in imports of products covered under SAFTA agreement. The agreement also provides for compensation of revenue to LDCs, with suffer from loss of custom revenue due to the implementation of the trade liberalization programme. The technical assistance will also provide to LDCs in agreed areas like market development and promotion, improvement of legal systems and administration, custom procedures and trade facilitation, product certification, training of human resource, institutional upgradation, data management etc.
- South Asia Preferential Trade Agreements (SAPTA): South Asia Preferential Trade Agreements (SAPTA) was drawn up in 1995 providing for bilateral reduction in tariff and non-tariff-barriers on the specified commodities on the regional basis but special treatment has been given to the Least Developed member of the group. India, Pakistan, Sri Lanka. Bangladesh, Bhutan, Maldives and Nepal were members of SAPTA. The achievements of SAPTA are significant to expand trade among member countries but they are short to expectations underlying their formation because of difference in attitude of members.
- Oil Producing Exporting Countries (OPEC): The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.
These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007). From December 1992 until October 2007, Ecuador suspended its membership. Gabon terminated its membership in 1995. Indonesia suspended its membership effective Jan 2009. Currently, the Organization has a total of 12 Member Countries.
In 2014 OPEC comprised twelve members: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.(BCom International Economic Groupings Notes Study Material)
This union of Oil Producing Exporting Countries has decided the quality of oil to be produced by each member country and the price at which it should be sold. This arrangement has been very successful to raise oil prices but it is working against the interest of oil consuming countries spread around globe. Oil price fixing has strained economies of many countries including India in a number of ways. When oil price is raised the imports bill goes up adversely effecting balance of payment position. It also results in raising the cost of production of most of the products adversely and has been major cause of inflation in many countries.
GAINS FROM INTERNATIONAL ECONOMIC GROUPINGS
- Trade Diversion and Trade Creation: When countries form a regional economic grouping, two types of effect may arise: trade diversion and trade creation. Trade diversion is the resulting shift in the direction of trade in favour of the member countries and against third parties. On the other hand, trade creation will induce economic activity in the region and give an impetus to income creation.(International Economic Groupings Notes Study Material)
- Enlargement the Volume of Demand: Formation of a regional economic grouping will, first of all, enlarge the volume of demand for commodities produced in the region. As a result, when any investment decision is to be taken, entrepreneurs will consider the whole region and invest in large-scale production units.(International Economic Groupings Notes Study Material)
- Increase Efficiency and Competitiveness: This fact it will have two effects. First, it may increase efficiency and competitiveness through economies of scale in production of goods already being produced in the region. Secondly, it may also make possible the production of new commodities within the region. These two results are the direct effects of economic groupings. These will bring about more income creation within the region.
- New Business Opportunities: Due to the expansion of the market, trade and income creation will result in increased exports, increased trade exchanges, more investment, more output, higher rate of employment, new business opportunities, new goods produced in the region.
- Favourable Balance of Payments: Foreign trade structure and production possibilities will change. Expanded exports will improve the balance of payments, and that, in turn, may decrease the debt burden on the economies.
- Economic Growth: A greater market may induce foreign capital from third parties. Structural changes will improve the quality and quantity of the products in the region. Specialization and better division of labour would increase production, productivity and economic growth. Larger markets for commodities and factors of production will give an impetus to technological changes. The overall benefits will be reflected on the increased output, income and welfare of the people.(BCom International Economic Groupings Notes Study Material)
- 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 labour tends to shift production to low wage countries within a regional cooperation.
DISADVANTAGES OF INTERNATIONAL ECONOMIC GROUPINGS
Disadvantages of International Economic Groupings are as under:
- Creation of Trading Blocs: It can also increase trade barriers against non-member countries. These groups are resisting the development of free multilateral trade and investment. Those who are not members of the group are subject to discrimination in all the groups without exception.
- 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.(BCom International Economic Groupings Notes Study Material)
- National Autonomy: It 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.
- Political Will: Many groups have failed to achieve their objectives because of their political will of leader members. ASEAN, SAARC and many other groups could not succeed because of political tension and differences in the thinking of member countries which developed after their formation.
International Economic Groupings Notes Study Material
BCom International Economic Groupings Notes Study Material
BCom International Economic Groupings Notes Study Material