International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

1. The world economy

Part I

Policy

Classical
2. Opportunity costs
3. Comparative advantage

Economic
geography
International
business
Growth theory

New trade
9. Imperfect competition
10. Intra-industry trade

11. Strategic trade policy

New interactions
14. Geographical economics
15. Multinationals
16. New goods, growth, and
development

Part II

8. Trade policy

12. Int. trade organizations

13. Economic integration
17. Applied trade policy
modeling

18. Concluding remarks

Part III

Industrial
organization

Neo-classical
4. Production structure
5. Factor prices
6. Production volume
7. Factor abundance

Part IV

Explanations for trade

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Introduction
Objectives / key terms
Preferential trade agreement

Free trade area / customs union

Trade-creation / trade-diversion

Regionalism / multilateralism

European Union (EU)

EU enlargement

Jacob Viner (1892 - 1970)

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Types of regional economic integration

Preferential trade agreement (PTA); ACP countries
Free trade area (FTA); EFTA, NAFTA
Customs union; EEC
Common market; EU
Economic union; EMU

Charles van Marrewijk

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Neo-classical theory of economic integration

decrease producer surplus
price
net gain

demand

increase consumer surplus

decrease government revenue
supply

Trade creation
pC+t
pB+t

tariff
tariff

pC
pB

imports before customs union

imports after customs union
q0

q1

q3

q4

quantity

International Trade & the World Economy;

Charles van Marrewijk

Neo-classical theory of economic integration

price

decrease producer surplus

-/-

demand

net gain; possible loss

increase consumer surplus
decrease government revenue

supply

Trade diversion
pB+t

tariff

pC+t

tariff

pB
pC

imports before customs union

imports after customs union
q0

q1

q3

q4

quantity

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Regional trade agreements

COMESA
countries

Egypt

Sudan

Ethiopia

Uganda Kenya
Zaire

Angola
Zambia
Namibia

Zimbabwe

Madagascar

International Trade & the World Economy;

Regional trade agreements

ASEAN countries

Myanmar

Viet Nam
Lao PDR
Thailand
Philippines
Cambodia

Malaysia

Malaysia

Indonesia
Indonesia
Indonesia

Indonesia

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Regional trade
agreements

Canada

United States

Mexico

Venezuela
Colombia

Peru
Brazil

RTAs in America
NAFTA
CARICOM
CACM
ANDEAN
MERCOSUR

(3)
(13)
(5)
(5)
(4)

Bolivia

Argentina

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Regionalism and the new trade theory

Using a Dixit-Stiglitz type model with the world consisting of many
provinces which may form b trading blocs, welfare is non-monotonic

Normalized total welfare

t = 0.3
0.95

t = 0.5

0.9

t = 0.7

0.85
0

10

Number of trading blocs

15

20

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Europe and the European Union

Table 13.2 Overview of European Union economic integration
1951

ECSC

European Coal and Steel Community

Membership Belgium, France, Luxembourg, Netherlands, Italy & W. Germany

1957

EURATOM

European Atomic Energy Community

1957

EEC

European Economic Community

1967

EC

European Communities; combining ECSC, EEC, and EURATOM

1973

Membership + United Kingdom, Ireland, and Denmark

1981

Membership + Greece

1986

Membership + Spain and Portugal

1990

Membership + East Germany (re-unification of West and East Germany)

1993

EU

1995

Membership + Finland, Austria, and Sweden

1999

EMU

European Union
Economic and Monetary Union

International Trade & the World Economy;

Charles van Marrewijk

Europe and the European Union

Establishing a common market (EEC treaty) with four freedoms:
Free movement of goods (Cassis-de-Dijon case, 1979).
Free movement of persons
Free movement of services
Free movement of capital
The main institutions of the European Union are:
The Council of the European Union
The European Commission;
The European Parliament;
The European Court of Justice
The European Central Bank (ECB)

International Trade & the World Economy;

Europe and the

European Union

Charles van Marrewijk

RTAs in Europe
EU
(15)
EFTA
(3)
CEFTA (7)

iceland

finland
sweden

Green circle:

norway

estonia

$
$
$

former EFTA

latvia

lithuania

denmark
ireland
united kingdom

Red star:

poland

netherlands
germany
belgium

potential EU member

czech republic
france

switzerland

austria

romania

$E

portugal

slovakia

hungary

slovenia
E
italy

$
$
E

bulgaria
spain
greece

malta

turkey

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Future enlargement of the European Union

b. size (1000 km 2)

a. population (m illions)

germany

turkey

turkey

france

united kingdom

spain

france

sweden

italy

germany

spain

finland

poland

poland

romania

italy

netherlands

united kingdom

greece

romania

20

40

60

80

200

400

600

800

International Trade & the World Economy;

Charles van Marrewijk

Future enlargement of the European Union

c. GDP (billion PPS)

d. GDP/cap (PPS)

germany

luxembourg

united kingdom

denmark

france

netherlands

italy

ireland

spain

belgium

turkey

austria

netherlands

germany

poland

finland

belgium

united kingdom

sweden

sweden

500

1000

1500 2000

20,000

40,000

International Trade & the World Economy;

CHAPTER 13; ECONOMIC INTEGRATION

Introduction
Types of regional economic integration
Neo-classical theory of economic integration
Regional trade agreements
Regionalism and the new trade theory
Europe and the European Union
Future enlargement of the European Union
Conclusions

Charles van Marrewijk

International Trade & the World Economy;

Charles van Marrewijk

Conclusions
There are many regional trade agreements (RTAs) in the world.
We also distinguish FTAs, customs union, common market,
economic union.
RTAs in general increase welfare through trade creation, but the
discriminatory nature of an RTA may make the net welfare effect
negative.
Increased popularity of Regionalism rather than Multilateralism
may be bad for the world economy.
EU is most succesful and powerful economic integration scheme;
many CEE countries want to join; EUs political decision process
needs to be revised.