CHAPTER TEN

10 International
Economics

Economic Integration
Content
 Introduction
 Regional economic integration
 Customs Unions
 The Theory of the Second Best and Other Static
Welfare Effects of Customs Unions
 Dynamic Benefits from Customs Unions

 History of Attempts at Economic Integration

Introduction
 Economic integration refers to the commercial
policy of discriminatively reducing or
eliminating barriers only among the nations
joining together.
 Global economic integration & regional
economic integration
Introduction
 Global economic integration: efforts to reduce
trade and investment barriers around the globe
GATT/WTO
 Regional economic integration refers to
agreements between countries in a geographic
region to reduce tariff and non-tariff barriers to the
free flow of goods, services, and factors of
production between each other
 AFTA, ACFTA, NAFTA, EU, ….
 Over the last two decades, the number of regional
trade agreements has been on the rise
What is the WTO (global
integration)?
 is the only international organization dealing with the
global rules of trade between nations.
 its main function is to ensure that trade flows as
smoothly, predictably and freely as possible
 Is a forum for governments to negotiate trade
agreements
 is a rules- based, member –driven organization – all
decision are made by the member governments, and
the rules are the outcome of negotiations among
members.

5
History of WTO
 The WTO was replaced the GATT (1948), WHY?
 Before the WTO created:
 ITO took place – an intellectual precursor of the WTO
 But the ITO failure, WHY?

 It is created by Uruguay Round negotiations (1986-

94)
 The WTO is currently working on new negotiations
and agreements, known as the Doha Development
Agenda, started in 2001

6
The basic principles of the
GATT
 Non-discrimination (MFN clause-Article I)
 National Treatment (Article III)
 Reciprocity (Article XXWIII)
 Transparent and foreseeable tariffs (Article X)
 The impartial settlement of disputes (Article
XXVIII); and Enforcement

7
WTO vs. GATT
 GATT remained a “provisional” agreement and
organization whereas WTO commitments are
permanent
 GATT rules mainly applied to trade in goods whereas
the WTO covers other areas, such as services,
intellectual property, etc.
 GATT had contracting parties whereas the WTO has
members
 GATT was essentially a set of rules of the multilateral
treaty with no institutional foundation whereas the
WTO is a permanent institution with its own Secretariat

8
 GATT vs. WTO
 A country could essentially follow domestic legislation
even if it violated a provision of the GATT agreement
which is not allowed by the WTO
 In WTO, almost all the agreements are multilateral in
nature involving commitment of the entire membership
whereas a number of GATT provisions were plurilateral
and therefore selective
 The WTO also covers certain grey areas, such as
agriculture, textiles and clothing, not covered under the
GATT
 The dispute settlement system under the WTO is much
more efficient, speedy, and transparent unlike the GATT
system which was highly susceptible to blockages
9
WTO Objectives
 Raising standards of living
 Ensuring full employment
 Ensuring growth of real income and demand
 Expanding production and trade
 Sustainable development
 Protection of the environment

10
Functions of WTO
 To facilitate the implementation, administration, and
operation of trade agreements
 To provide a forum for trade negotiations among
member countries
 To deal with trade disputes among its member
countries
 To carry out periodic reviews of its members'
Trade policy review - Vietnam (2013,2021)
national trade policies Trade policy review - The US,...
 To assist developing countries in trade policy issues,
through technical assistance and training programs
S&D treatment provisions for Developing countries and Less developed countries
 To cooperate with other international organizations

11
Facts about WTO
 Intergovernmental Organization
 Location: Geneva, Switzerland
 Established: 1 January 1995 under the Marrakesh
Agreement, signed by 123 nations
 Created by: Uruguay Round negotiations (1986-1994)
 Membership (2020): 164 members (98% of world trade
value)
 Budget (2019): 197 million Swiss francs ($209 million)
 Secretariat staff: 625 (Director-General: Roberto
Azevêdo from Brazil)
 Website: www.wto.org

12
WTO members

Belarus
Algeria Uzbekistan
Libya Iran
Sudan Ethiopia
Somalia

13
 WTO – Members
1. Malaysia: 1/1/1995
2. Myanmar: 1/1/1995
3. Philippines : 1/1/1995
4. Thailand: 1/1/1995
5. Indonesia: 1/1/1995
6. Brunei Darussalam: 1/1/1995
7. Singapore: 1/1/1995
8. Laos: 2/2/2013
9. Cambodia: 13/10/2004 China: 11/12/2001
10. Vietnam:???
Cuba: 20/4/1995
? Do you think Vietnam joined the WTO too early, too late or on time? Why?
14
 WTO members’ contributions to the
consolidated budget - 2019
Member (in Swiss Francs with a minimum
2019 Contribution contribution
CHF of 0.015%)
2019 Contribution %
US 22,660,405 11.591%
China 19,737,680 10.096%
Japan 7,896,245 4.039%
Germany 13,882,455 7.101%
UK 7,446,595 3.809%
France 7,440,730 3.806%
Netherlands 5,745,745 2.939%
Hong Kong, China 5,427,080 2.776%
Italy 5,096,685 2.607%
Singapore 4,774,110 2.442%
Thailand 2,404,650 1.230%
Malaysia 1,966,730 1.006%
Viet Nam 1,401,735 0.717% 15
 Levels of Economic
Integration

 Trading bloc:  Trading blocs may

preferential take various forms:
economic 1. Free trade area
arrangement among 2. Customs union
a group of countries 3. Common market
4. Economic union
5. Political union

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The levels of Regional Economic Integration

AFTA
Regional Economic Integration

 Preferential trade arrangements

 Provide lower barriers to trade among
participating nations than on trade with non-
member nations.
 The loosest form of economic integration.
 Example:
 British Commonwealth Preference Scheme,
established in 1932 between the United
Kingdom and members of the British Empire.
Introduction – Preferential Trade
Arrangements (PTAs)

 Preferential trade arrangements

 GATT/WTO prohibits such agreements:
 A group of countries can lower barriers to others
in the group
 Bloc members do not raise their barriers against
non-members
Regional Economic Integration

 Free trade areas

 Removes all barriers to trade among members,
but each nation retains its own barriers to
trade with non-members.
 Examples:
 European Free Trade Association (EFTA), 1960,
between United Kingdom, Austria, Denmark,
Norway, Portugal, Sweden and Switzerland
 North American Free Trade Agreement (NAFTA),
1993, between the United States, Canada and
Mexico
Eg.
Vietnam, Thailand, and Philippines join ASEAN/AFTA
 Company A in Vietnam imports X from Bangladesh
(non-member of AFTA)
=> Vietnamese Gov. imposes 10% tariff on X imported from
Bangladesh
 Company B in Thailand imports X from Bangladesh
=> Thailand Gov. imposes 15% tariff on X imported from
Bangladesh.
 Company C in Philippines imports X from Bangladesh
 Philipp. Gov. imposes 20% tariff on X imported from Bang.
Vietnam
 Rules of Origin (ROO)

 Not all products traded in an FTA are accorded

the tariff preference.

 An FTA extends preferential tariffs ONLY to

products originating from the country/area.
 A good is considered to be originating if it meets
the origin criteria (on) stipulated in the Rules
of Origin (ROO) chapter of an FTA.
 Rules of Origin (ROO)

 ROO apply mostly to FTAs like AFTA, ACFTA, CPTPP,

EVFTA, UKVFTA,…
 ROO will determine which products are considered
originating.
 ROOs help to determine the “nationality” of a good.

 ROOs vary from FTAs to FTAs

 AFTA/ACFTA
 Not less than 40% of its content originates from
any Party/member
ROO

Where is beef originally from?

ROO

Where is wine originally from?

ROO
 Preferential ROO:
 Application of EPA (Economic Partnership
Agreement)/ FTA tariff rates
 Application of GSP (Generalized System of
Preferences) tariff rates
 Non – preferential ROO (application of
WTO tariff rates, trade statistics, etc.
ROO
 ATIGA (ASEAN Trade In Goods Agreement)
 A Regional Value Content (RVC) of not less than
40% of the Free on Board (FOB) value.
 AIFTA
 the AIFTA content is not less than 35 % of the
FOB value
=> Visit: Handbook on Rules of Origin for Preferential Certificates of Origin (2017)
https://www.customs.gov.sg/-/media/cus/files/business/exporting-goods/cert-of-
origin/handbook-on-rules-of-origin-for-preferential-certificates-of-origin-ttsb-apr-2016.pdf
Regional Value Content (RVC)
 Qualifying Value Content (QVC)/ Regional
Value Content (RVC)

 Goods are considered as originating if a

certain value (%) is added through the
production undertaken in the territory of a
party/country, and the value added exceeds
the prescribed threshold (%).
 RVC - %
 RVC of good can be calculated on the basis of
the following method:

FOB: Free On Board value of the good;

VNM: value of the non-originating materials.
(normally: The value of the non-originating materials shall be the CIF value at the time of
importation of the material)
CIF: value of goods imported, the cost of freight and insurance up to the
port or place of entry into the country of importation
Japan-Australia EPA: the value added in the country of manufacture (Qualifying
Value Content) is not less than 40% and the last process of production has been
performed in the exporting party
Eg. FTAs – Vietnam and Japan
 AJEPA (ASEAN Japan Economic Partnership
Agreement)- 2008
 VJEPA (Vietnam Japan Economic Partnership
Agreement) - 2008
 CPTPP (The Comprehensive and
Progressive Agreement for Trans-Pacific
Partnership) – 2018
Eg.
Eg. FTAs – Vietnam and Japan
Eg. On 10 March, 2020, company A in Vietnam
exports USD 20,000 to Japan
• VJEPA: Japan’s gov. imposes 2% import tariff
on seafood imported from Vietnam
• AJEPA (ASEAN Japan Economic partnership
Agreement):...1%................
• CPTPP: ………………………..3%.........
 Regional Economic Integration

 Customs union
 Removes all barriers to trade among members
and harmonizes trade policies toward the rest
of the world.
 Examples:
 Benelux (Belgium, the Netherlands, and Luxumberg,
1948)
 EU, or European Common Market, 1957, between West
Germany, France, Italy, Belgium, the Netherlands, and
Luxembourg.
 The Customs Union of Belarus, Kazakhstan and Russia,
2010.
ASEAN Economic Community (was formed in 2015, 10 ASEAN members) is not a customs union?
 Regional Economic Integration

 Customs union (FTA+)

 EU is a CU
 The EU also has CU agreement with Turkey, Andorra
and San Marino
 EU adopt a common external tariff (CET) on imports
from non-members countries
 The tariff imposed on imports from South Korean TV
screens will be the same in the Germany as in any other
EU country
 Preferential tariff rates apply to preferential of free trade
agreements that EU has entered into with third countries
or groupings of third countries
Regional Economic Integration

 Common market
 Removes all barriers to trade among members,
harmonizes trade policies toward the rest of
the world, and allows free movement of labor
and capital among member nations.
 Examples:
 EU achieved common market status in 1993.
 MERCOSUR (between Brazil, Argentina,
Paraguay, and Uruguay)
CM is a Custom Union + allows free movement
of labor and capital among member nations
Regional Economic Integration

 EU is a Common Market
 EU is a single market/internal market:
 Most trade barriers are removed
 Free movement of goods, capital, services and
labour
 Membership of the single market requires
regulatory alignment for EU members
 No police or customs checks at borders
between most EU countries
AEC currently is not a common market?
Regional Economic Integration

 Economic union
 Removes all barriers to trade among members,
harmonizes trade policies towards the rest of
the world, allows free movement of labor and
capital among member nations, and unifies
monetary and fiscal policies of members.
 Examples:
 EU
 Benelux, formed after World War II between Belgium,
the Netherlands and Luxembourg
EU is a common market + unifies monetary and fiscal
policies of members = An Economic Union
 Regional Economic Integration

 Political union - independent states are

combined into a single union
 This requires that a central political apparatus
coordinate economic, social, and foreign policy for
member states
 The EU is headed toward at least partial political
union, and the United States is an example of
even closer political union
Duty free zones (free economic zones)

 Duty free zones: Areas established to attract

foreign investments by allowing raw materials
and intermediate products duty free.

 Special economic zones:

 Is defined as “a specifically delineated duty free
enclave and shall be deemed to be foreign
territory for the purposes of trade operation and
duties and tariffs”
What is a SEZ?

 Is one or more areas of a country where the tariffs

and quotas are eliminated and bureaucratic
requirements are lowered so that more companies
are attracted to the area. The companies establishing
in the area also get extra incentives for doing
business

 Are an acknowledgement of the potential of export-

led development strategy in accelerating economic
growth
Main objectives of the SEZ
 Generation of additional economic activity
 Promotion of exports of goods and services
 Promotion of investment from domestic and
foreign sources
 Creation of employment opportunities
 Development of infrastructure facilities
The theory of Customs Union
 Jacob Viner, 1950
 Discusses the benefits and cost of regional
economic integration from two perspectives:
 Static effects: Short –term effects
 Dynamic effects: Long-term effects

 Combined, these static and dynamic effects

determine the overall welfare gains or losses
associated with the formation of a regional
trading agreement
Trade-Creating Customs Unions

 Trade creation occurs when domestic

production in a member nation is replaced by
lower-cost imports from another member
nation.
 Leads to increased welfare for members as
nations specialize in comparative advantages.
 Leads to increased welfare for non-members as
increased real income spills over into
increased imports from rest of the world.
FIGURE 10-1 A Trade-Creating Customs Union.
Trade-Diverting Customs Unions

 Trade diversion occurs when lower-cost

imports from non-members are replaced by
higher cost imports from members.
 By itself, trade diversion lowers welfare as it
shifts resources away from comparative
advantages.
 Trade diverting customs union also results in
trade creation. Change in welfare depends on
relative magnitude of creation and diversion.
FIGURE 10-2 A Trade-Diverting Customs Union.
The Theory of the Second Best and Other
Static Welfare Effects of Customs Unions

 It was once believed that any movement toward

freer trade would increase welfare, so formation
of a customs union would necessarily result in
increased welfare for members and non-
members.
 In 1950, Viner showed that formation of a
customs union could increase or reduce welfare,
depending on the circumstances under which it
takes place.
The Theory of the Second Best and Other
Static Welfare Effects of Customs Unions

 Theory of the Second Best

If all conditions required to maximize welfare
cannot be satisfied, trying to satisfy as many
conditions as possible does not necessarily or
usually lead to the second-best position.
The Theory of the Second Best and Other
Static Welfare Effects of Customs Unions

 Conditions More Likely to Lead to Increased

Welfare
1. Higher pre-union trade barriers of member
nations.
2. Lower customs union’s trade barriers with
non-members.
3. Greater number of nations forming customs
union, and the larger their size.
The Theory of the Second Best and Other
Static Welfare Effects of Customs Unions

 Conditions More Likely to Lead to Increased

Welfare
4. More competitive rather than complementary
economies of member nations.
5. Closer geographical proximity of member
nations.
6. Greater pre-union trade and economic
relationship among potential member nations.
The Theory of the Second Best and Other
Static Welfare Effects of Customs Unions

 Other Static Effects of Customs Unions

1. Administration savings from elimination of
customs officers, border patrols, and others.
2. Reduction in demand for imports from and
supply of exports to rest of the world will
likely lead to improvement in collective terms
of trade of member nations.
3. By acting as a single unit, customs union will
likely have more bargaining power than
members separately.
Dynamic Benefits from Customs Unions

 Dynamic Benefits of Customs Unions

1. Increased competition, leading to greater
efficiencies and technological improvements.
2. Economies of scale from the enlarged market.
3. Stimulus of investment to take advantage of
enlarged market, and to meet increased
competition.
4. Better utilization of community resources as labor
and capital move freely (assumes common
market).
EVFTA- EU – Vietnam Free
Trade Agreement
 The EVFTA is a new generation FTA between
Vietnam and 27 EU member countries
 On 26 June 2018, the EVFTA was divided into 2
agreements: EVFTA and EVIPA
 In June 2019, EVFTA was signed
 On August 1, 2020 EVFTA officially came into effect
 The EVFTA is the first comprehensive and ambitious
trade and investment agreements that the EU has
ever concluded with a developing countries in Asia
EVFTA - Trade Liberalization
 Trade liberalization:
 99% of tariffs both value and number of tariff
lines
 After 7 years for EU
 Vietnam 10 years

 Coverage at entry into force:

 71% of value of Vietnamese exports/84%
tariff lines
 65% value of EU exports/49% tariff lines
Source: https://www.slideshare.net/olmas66/investment-and-trade-opportunities-after-the-eu-vietnam-free-trade-
agreement-and-eu-vietnam-investment-protection-agreement
CPTPP & Vietnam
 CPTPP: The Comprehensive and Progressive
Agreement for Trans-Pacific Partnership
 On March 2018, the CPTPP was finally signed
in Chile, and entered into force on December
30, 2018
 The CPTPP:
 11 members
 495 million people
 13.5% of the world total economic output
 15.2% total world trade turnover
CPTPP
CPTPP & Vietnam
 Vietnam:
 CPTPP will lead to an increase of 1.32% in
Vietnam’s GDP
 With CPTPP, VN is expected to gain export
benefits by 4.2%
 Help VN reform domestic institutions,
create transparent and open investment
and business environment
AEC
AEC
 Population: 620 million (9% of world population),
60% under the age of 35
 3.3 % of world GDP
 AEC’s merchandise exports: US$1.2 trillion (52% of
total ASEAN GDP and 7% of global exports)
 If ASEAN were one economy, it would be the 7th
largest in the world (4th largest by 2050 if growth
trends continue)
 AEC Milestones

ASEAN ASEAN Bali Concord II Vientiane

Birth of Free Trade Vision (ASEAN Plan of ASEAN Bali Concord III
ASEAN Area 2020 Community) Action Charter (RCEP/AFEED)

1967 1977 1992 1995 1997 1998 2003 2004 2007 2008 2009 2011 2015

ASEAN ASEAN
Preferential Framework ASEAN Hanoi Roadmap for AEC
Trading Agreement Investment Plan of AEC an ASEAN
Agreement on Services Agreement Action Blueprint Community

61
AEC Blueprint: Adopted Nov 2007

ASEAN ECONOMIC COMMUNITY

STRATEGIC SCHEDULE OF THE AEC BLUEPRINT (2008-2015)
1. Single Market 2. Competitive 3. Equitable 4. Integration into
& Production Base Economic Region Economic Global Economy
Development
• Free flow of goods • Competition policy • Coherent approach
• Free flow of • Consumer • SME development towards external
services protection Initiative for ASEAN economic relations
• Free flow of • Intellectual property Integration • Enhanced
investment rights participation in
• Freer flow of capital • Infrastructure global supply
• Free flow of skilled development networks
labour • Taxation
• Priority Integration • E-Commerce
Sectors
• Food, agriculture
and forestry

HUMAN RESOURCE DEVELOPMENT RESEARCH & DEVELOPMENT

62
AEC Community Building
Mandate
Establish ASEAN as:

63
Trade in Goods Liberalisation

ASEAN-6
99.65% tariff lines eliminated
CLMV
Almost 98% tariff lines reduced to 0-5%

64 64
 Regional Comprehensive
Economic Partnership (RCEP)

Integration of the ASEAN economy into the global economy continues by enhancing
ASEAN+1 FTAs, and establishment of RCEP and ASEAN-HK FTA

Regional Comprehensive
Economic Partnership

AFTA ACFTA AKFTA AJCEP AIFTA AANZFTA AHKFTA

ASEAN’s
other
external
economic
partners

65
History of Attempts at Economic Integration

 The European Union (EU)

 1958 – established common external tariff
 1968 – Achieved free trade in industrial goods
within EU, and common price for agricultural
goods
 1970 – Reduced restrictions on movement of
labor and capital
 1993 – Removed all remaining restrictions on
flow of goods, services and resources, becoming
largest trade bloc in the world
History of Attempts at Economic Integration

 The European Free Trade Association (EFTA)

 1960 – formed by “outer seven” nations: United
Kingdom, Austria, Denmark, Norway, Portugal,
Sweden and Switzerland
 1967 – Achieved free trade in industrial goods
 1991 – Membership evolved to include Austria,
Finland, Iceland, Liechtenstein, Norway, Sweden,
and Switzerland
 1994 – Joined EU to form European Economic
Area (EEA)
History of Attempts at Economic Integration

 The North American Free Trade Agreement

(NAFTA)
 1994 – formed by United States, Canada and
Mexico, to eventually lead to free trade in
goods and services over entire North
American area.
 Also phased out many other barriers to trade and
reduced barriers to cross-border investments
among the three member nations./.
Q&A