CONCEPT OF ECONOMIC INTEGRATION

The term economic integration has been interpreted in different ways. Some authors include social integration in this concept, others subsume different forms of international cooperation under this heading, and the argument has also been advanced that the mere existence of trade relations between independent national economics is sign of economic integration.

However, the term is commonly used to refer to the type of arrangement that removes artificial trade barriers, like tariffs, between the integrating economies. The structure of regional agreements varies hugely, but all have one thing in common- the objective of reducing barriers to trade between member countries. At their simplest, they merely remove tariffs on intrabloc trade in goods, but many go beyond that to cover non-tariff barriers and to extend liberalization to trade and investment. At their deepest, they have the objective of economic union, and they involve the construction of shared executive, judicial, and legislative institutions.

Bela Balassa defines economic integration as a process and as a state of affairs. Regarded as a process, it encompasses measures designed to abolish discrimination between economic units belonging to different national states: viewed as a state of affairs, it can be represented by the absence of various forms of discrimination between national economies.

In interpreting his definition, Balassa draws a distinction between integration and cooperation. The difference is qualitative as well as quantitative. Whereas cooperation includes actions aimed at lessening discrimination, the process of

economic integration comprises measures that entail the suppression of some forms of discrimination. For example, international agreements on trade policies belong to the area of international cooperation, while rte removal of trade barriers is an act of economic integration. The main characteristic of economic integration is, thus, the abolition of discrimination within an area.

OBJECTIVES

Economic integration schemes have several objectives. The motivation to form trading blocs may vary from region to region and from country to country. Nevertheless, as Shiells suggests, the following motivation seem to play a key role in the formation of trading blocs.

1. To obtain economic benefits from achieving a more efficient production structure by exploiting economies of scale through spreading fixed costs over larger regional markets, increased economic growth from foreign direct investment, learning from experience etc. 2. To pursue non-economic objectives such as strengthening political ties and managing migration flows. 3. To ensure increased security of market access for smaller countries by forming regional trading blocs with larger countries. 4. To improve members collective bargaining strength in multilateral trade negotiations or to protest against the slow pace of trade negotiations. 5. To promote regional infant industries which cannot be viable without a protected regional market.

6. Finally, to prevent further damage to their trading strength due to further trade diversion from third countries. Levels of Economic Integration There are five levels of economic integration .These extend from simple economic trade arrangements to full political integration characterized by a single government. The following examines each of these levels beginning with the simplest. Free Trade Area A free trade area is an economic integration arrangements in which barriers to trade (such as tariffs) among member countries are removed. Under this arrangement each participant will seek to gain by specializing in the production of those goods and services for which it has a comparative advantage and importing those goods and services for which it has a comparative disadvantage. One of the best known free trade arrangements is the North American Free Trade Agreement (NAFTA), a free trade area currently consisting of Canada, the US, and Mexico. The US and Canada created this free trade area with the United States Canadian Free Trade Agreement of 1989 and the arrangement has now been expanded to include Mexico. While trade diversion can occur under free trade arrangements, NAFTA has generated a great amount of trade creation. Infact, trade between the three members of NAFTA is now in the range of $1 trillion annually. Customs Union A Customs Union is a form of economic integration in which all tariffs between member countries are eliminated and a common trade policy towards non-member countries is established. This policy often results in a uniform external tariff

structure. Under this arrangement, a company outside the union will face the same tariff an exports to any member currency receiving the goods. Under a customs union, member countries cede some of the control of their economic policies to the group at large. None of the regional integration groups in existence today has been formed for the purpose of creating a customs union; instead many of them have sought greater integration in the form of a common market or economic union. However, because of the difficulty of attaining this high degree of integration, some countries have effectively settled for a customs union. The Andean Pact, which will be discussed shortly, us an example. Common Interest A common market is a form of economic integration characterized by (a) No barriers to trade among member nations, (b) A common external trade policy, and (c) Mobility of factors of production among member countries. A common markets allows reallocation of production resources. Such as capitals, labour, and technology, based on the theory of comparative advantage.While this may be economically disadvantageous to industries or specific business in some member countries. The best example of a successful common market is the EU although this group has progressed beyond a common market and is now focusing on political integration. Economic Union An economic union is a deep form of economic integration and is characterized by free movement of goods, services, and factors of production between member countries and full integration of economic policies. An economic union

(1) Unifier monetary and fiscal policy among the member nations, (2) Has a common currency ( or a permanently fixed exchange rate among currencies), and (3) Employs the same fare rates and structures for all members. Additionally, most of all nationl economic policies of the individual countries are ceded to the group at large. While there are no true economic unions in the worlds, the creation of a single currency, the euro, certainly moves the EU in this direction.

Political Union A political union goes beyond full economic integration, in which all economic policies are unified, and has a single government. This represents total economic integration, and it occurs only when countries give up their national powers to leadership under a single government. One successful is the US, which combined independent states into a political union. The unification of West and East Germany in 1991 has also created a political union; the two nations now have one government and one set of overall economic policies. And the EU is on its way towards becoming a political union. The European Parliament , for example, is directly elected by citizens of the EU Countries and its Council of Ministers, which is the decision making body of the EU, is made up of government ministers from each EU currency.

Free Trade Area Custom Union

Free Trade Among Members Free Trade Common Among Members External Commercial Policy

Common Market

Free Trade Common Among Members External Commercial Policy

Free Factor Mobility within Market Free Factor Harmonised Mobility within Market Free Factor Harmonised Supernational Mobility within Market Economic the Policies Organisational Structure Economic the Policies the

Economic Union

Free Trade Common Among Members External Commercial Policy

Economic

Free Trade Common External Commercial Policy

Integration Among Members

REASONS FOR ECONOMIC INTEGRATION

The recent periods has witnessed qualitative as well as quantitative changes in the regional integration schemes. According to a report by the World Bank, the following factors are responsible for the changes in the integration schemes:

1. Need for Effective Integration: The recognition of the fact that effective integration requires more than reducing tariffs and quotas. Many other barriers have the effect of segmenting markets and impending the free flow of goods, services, ideas and investments and wideranging policy measures are needed to remove these barriers. This type of integration was actively pursued by Single Market Program of the European Union(EU) and elements of this program are now finding their way into the debate in other regional agreements.

2. Need to Broaden Closed Regionalism: The second factor is the move from closed regionalism to a more open model. In the 1960s and 1970s, the blocs formed between the developing countries were based on import-substituting development and agreements with high external trade barriers were implemented. The new wave of regional agreements are more outward looking and more committed to boosting rather than controlling international commerce.

3. Advent of Trade Block: The third factor is the advent of trade blocs in which regional agreements between developed and developing countries which is designed to boost the economy of all

the member countries. The most important example being the North American Free Trade Area (NAFTA) formed in 1994. EU has linked with the countries Turkey in Eastern Europe. Therefore, it is likely that some of the existing regional groupings will become more integrated and new regional integration schemes will come into being. The Advantages of Economic Integration: Economic integration can be defined as a kind of arrangement where countries get in agreement to coordinate and manage their fiscal, trade, and monetary policies in order to be mutually benefited by them. There are many degrees of economic integration, but the most preferred and popular one is free trade. In economic integration no country pays customs duty within the integrated area, so it results in lower prices both for the distributors and the consumers. The ultimate aim of economic integration is to increase trade across the world. There are many other advantages associated with this concept. Some of these are: 1. Trade creation: Trade creation occurs when consumption shifts from a high cost producer to a low cost producer. Economic integration increases specialization by removing trade barriers and by encouraging specialization, it enables a shift in production from high cost to low cost countries. If, for example, Uganda is the most efficient producer of sugar in the East African region, after joining the EAC Rwanda consumers start accessing cheaper Uganda sugar that they were not accessing before the economic integration.

2. Attracting Foreign Direct Investment (FDI): Investors are attracted by large markets. Small and fragmental national markets are usually not sufficient to attract huge investments. Economic integration makes the region a huge market which foreign investors find attractive.

3. 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 labor tends to shift production to low wage countries within a regional cooperation.

4.Improved political co-operation: Countries entering economic integration form groups and have greater political influence as compared to influence created by a single nation. Integration is a vital strategy for addressing the effects of political instability and human conflicts that might affect a region.

5. Improves standard of living: Economic integration increases the variety of products available to consumers in member states. Removal of trade barriers enables consumers to have a variety of commodities from which to choose. Local consumers are no longer restricted to

consuming local products. Increased variety and consumer choice improve peoples standard of living.

6. Member countries enjoy economies of scale: Economic integration enables member countries to expand the scale of production and enjoy economies of scale because of the expanded market. For example, a factory in Rwanda gets access to markets in Uganda and Tanzania and so it enjoys economies of scale.

7. Economic integration improves bargaining power: A group of countries acting together improves their bargaining power in trade agreements with other countries and trade blocs. A common policy and common stand enables the group of countries to integrate to achieve more than they would if the individual countries bargain individually.

8. Economic integration Reduces problems of exchange rates: Economic integration enables member countries to use the same currency through out the region. This eliminates the need for converting currencies for cross border trade. For example, when the East African countries decide to use the same currency, a trader in Kenya can use the same currency in Uganda, Rwanda, Tanzania, and Burundi. This speeds up trade and because there is one currency acceptable throughout the region, exchange of goods and services is made easier.

9. Integration encourages specialization: The knowledge that a country will be able to freely export surplus output to its trading partners encourages specialization which greatly improves the efficiency and quality of output produced.

10. Lower costs of research and joint utilities: When countries integrate, they are able to undertake very costly projects that they would not have afforded individually. This enables them to undertake costly research, develop better and modern infrastructures and services.

11. No duplication in resource use: In the absence of integration, countries end up duplicating industries and infrastructure because they want to be self-reliant. With economic integration, there is no wasteful duplication. Countries develop and use common infrastructure and services. For example, if the entire member countries can be adequately served by one hydroelectric power dam, the other countries will have to use the funds to set up something else other than having to put up their own hydro power plants yet they can get power from the other countries.

12. Increases competition: With many firms from the member countries competing for the market without restrictions, firms are forced to improve on quality and sell at lower prices. Firms

must devise the most efficient methods of production so as to favorably compete. Integration therefore promotes efficiency. 13. Peace and security: Economic integration promotes peace and security within the region. A country will find it difficult to wage war against a fellow member state. There are also many structures aimed at resolving conflicts amicably without resorting to war.

14.Beneficial for financial markets: Economic integration is extremely beneficial for financial markets as it eases firm to borrow finances at low rate if interest. This is because capital liquidity of larger capital market increases and the resultant diversification effect reduces the risks associated with high investment.

Disadvantages of Economic Integration: There are many problems or difficulties in the formation of a customs union or free trade area by developing countries. They are enumerated as under:

1. Trade diversion: Trade diversion occurs when consumption shifts from a low cost producer outside trading bloc. E.g. assume the efficient producer of beef in the world is New Zealand a country that is not a member of the East African Community. Before joining the EAC, Rwanda, for example, was free to import beef from any country of the world at her own set tariffs. By joining the EAC, Rwanda is bound by

external tariffs and policies. Consequently, Rwanda may have to import beef from Uganda at a higher cost than it would have imported the beef from New Zealand. By joining the EAC therefore, Rwandas trade is diverted from a cheaper source New Zealand to a higher cost source Uganda. That is trade diversion.

2. Loss of revenue: Economic integration involves the reduction and eventual elimination of tariffs. Tariffs are one major source of revenue for governments especially in the developing countries. Economic integration would therefore mean that the country would lose all the revenue it used to collect on imported commodities from member countries. This has consequences for the countrys budget, expenditure and programmes.

3. Production of similar products limits trade: In some cases, member states of an economic group produce the same or similar goods. Because of this, there is a limit on what can be exported. For example, it is difficult for any country in East Africa to export tea to another country in East Africa because almost all the countries produce tea.

4. Retaliation by other trading blocs: It can also increase trade barriers against non-member countries. Other countries may retaliate and also impose restrictions on the exports. formation of rival trade blocs. This may lead to

5. Unemployment: Economic integration may result in unemployment. Firms will be relocated to the more cost effective locations within the bloc and as such may lead to unemployment in those countries where the firms move.

6. Uneven distribution of benefits: Benefits may not be equally shared: sometimes, some countries may benefit more from economic integration than others. Countries that are more developed and produce more, gain at the expense of the less developed countries within the integrated area. Unfair distribution of gains may result this is due to the free movement of goods among member states, which may be in one direction.

7. Loss of economic sovereignty: Economic integration makes a country lose its sovereignty since it loses powers to make certain decisions. For example, a country will have to adopt a common tariff policy and therefore its independence in determining what tariffs to charge commodities from other countries.

8. Problem of administration: Administrative costs and bureaucracy may also be a cost to economic integration. It may be costly i.e. the cost of staffing may be high since labour force of the union

can be transferred to far places, Running commissions and secretariats may be costly. Bureaucracy and long time decisions lags may not be favorably in a rapidly changing world where quick decisions are required.

9. Uneven development: Uneven development may occur. This is due to the uneven distribution of industries and other gains to trade thus unfavourable to some countries of the integration.

10. Geographical Distances: The developing countries often lack in geographical proximity to each other. Nearness to each other is essential for forming an economic union to be successful. Even if there is geographical proximity among them, they lack in good transport, communications, infrastructural and other facilities for intra-regional trade.

European Union The European Union (EU) is an economic and political union of 27 independent member states which are located primarily Europe. The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by six countries in 1958. In the intervening years the EU has grown in size by the accession of new member states, and in power by the addition of policy areas to its remit. The Maastricht Treaty established the European Union under its current name in 1993. The last amendment to the constitutional basis of the EU, the Treaty of Liston, came into force in 2009. The EU operates through a hybrid system of supranational independent institutions and intergovernmental made decisions negotiated by the member states. Important institutions of EU include the European Commision, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank. The European Parliament is elected every five years by citizens. EU policy aims to ensure the free movement of people, goods, service, and capital, enacts legislation in justice and home affairs, and maintains common policies on trade, agriculture, fisheries and regional development. Through the Common Foreign and Security Policy the EU has developed a limited role in external relations and defense. Permanent diplomatic missions have been established around the world and the EU is represented at the United Nations, the WTO, the G8 and G-20. With a combined population of over 500 million inhabitants, or 7.3% of the world population, the EU generated a nominal GDP of 16,242 billion US dollars in 2010, which represents an estimated 20% of global GDP when measured in terms of purchasing power parity.

Member States The European Union is composed of 27 sovereign Member States : Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. The Unions membership has grown from the original six founding states Belgium, France,(then west) Germany, Italy, Luxembourg and the Netherlands to the present day 27 by successive enlargements as countries acceded to the treaties and by doing so, pooled their sovereignty in exchange for representation in the institutions. To join the EU a country must meet the Copenhagen criteria, defined at 1993 Copenhagen European Council. These require a stable democracy that respects human rights and the rule of law; a functioning market economy capable of competition within the EU; and the acceptance of the obligations of membership, including EU law. Evaluation of a countrys fulfillment of the criteria is the responsibility of the European Council. No member state has ever left the Union, although Greenland (an autonomous province of Denmark) withdrew in 1985. The Lisbon Treaty now provides a clause dealing with how a member leaves the EU. There are five official candidate countries, Croatia, Iceland, Macedonia, Montenegro and Turkey. Albania, Bosnia, and Herzegovina and Serbia are officially recognized as potential candidates. Kosovo as also listed as a potential candidate but the European Commission does not list it as an independent country because not all member states recognize it as an independent country separate from Serbia. Four Western European countries that are not EU members have partly

committed to the EUs economy and regulations; Iceland ( a candidate country for EU membership), Liechtenstein and Norway, which are a part of the single market through the European Economic Area, and Switzerland, which has similar ties through bilateral treaties. The relationships of the European microstates, Andorra, Monaco, San Marino and the Vatican include the use of the euro and other areas of cooperation.

BENEFITS OF EU 1. One great advantage is the replacement of the different policy and regulatory environments of the newly joined members by the that of the uniform policy and regulatory environment of the union and the reduction in transaction costs. 2. It is also likely that there would be expansion of the market benefiting from the enlargements of the Union. 3. Further, the availability of new ports in the enlarged EU could reduce transaction costs. 4. The harmonization of the tariff structures of the new members with that of the EU will increase the import duty of some countries above the preaccession levels and reduce those of others. On the whole, the average weighted tariff of these countries will significantly come down to the benefit of the exporters to these markets. 5. It is expected that the removal of quota restrictions for textiles and clothing from January 2005 may also work to Indias advantage, since it will reduce the protection presently available to ACs exports in the EU market. 6. The enlarged EU may also spur joint ventures with Indian companies looking forward to setting up manufacturing bases in the low cost ACs.

CHALLENGES 1. Many Indian products will have to face a stiffer competition in the EU from the new members. 2. The low labour cost in these nations could encourage EU firms to establish manufacturing bases these or sources from there which can affect Indian exports to EU and give rise to new competition from these firms in other markets. 3. It is feared that the relative competitive advantage of many of Indias exports to the EU(15) may be affected by the enlargement of EU, as countries like Poland and Czech Republic compete with India in selling textiles and apparel, footwear and leather, chemical compounds, iron and steel, automotive parts etc. in the EU(15) market. According to one estimate, India and Poland compete in EU market for 46 of the top 100 exports from India to the EU. Exports of textiles may be adversely affected with low cost production in Central and Eastern European countries [CEECs] eating into Indias EU(15) markets. 4. As the AC are labour abundant and low income countries, India may also face stiffer competition on account of temporary movement of its natural persons to EU and business process outsourcing by EU to India.

SAARC The South Asian Association for Regional Cooperation (SAARC) is an organization of South Asian nations, founded in December 1985 and dedicated to economic, technological, social, and cultural development emphasizing collective self-reliance. Its seven founding members are Bangaladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan joined the organization in 2005. Meetings of heads of state are usually scheduled annully; meetings of foreign secretaries annually. It is headquartered in Kathmandu, Nepal. The 16 stated areas of cooperation are agriculture and rural, biotechnology, culture, energy, environment, economy and trade, finance, funding mechanism, human resource development, poverty alleviation, people to people contact, security aspects, social development, science and technology; communications, tourism. HISTORY The concept of SAARC was first adopted by Bangalesh during 1977, under the administration of President Ziaur Rahman. In the late 1970s, SAARC nations agreed upon the creation of a trade bloc consisting of South Asian countries. The idea of regional cooperation in South Asia was again mooted in May 1980. The foreign secretaries of the seven countries met for the first time in Colombo in April 1985, identified five broad areas for regional cooperation. New areas of cooperation were added in the following years

OBJECTIVES The objectives of the association as defined in the charter are: To promote the welfare of the people of South Asia and to improve their quality of life; 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 realize their full potential; To promote and strengthen collective self reliance among the countries of South Asia; To contribute to natural trust, understanding and appreciation of one anothers problem; To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; To strengthen cooperation with other developing countries; To strengthen cooperation among themselves in international forums on matters of common interest ; and To cooperate with international and regional organizations with similar aims and purposes.

SAARC Youth Award The SAARC Youth Award is awarded to outstanding individuals from the SAARC region. The award is notable due to the recognition it gives to the Award winner in the SAARC region. The award is based on specific themes which apply to each year. The award recognizes and promotes the commitment and talent of the youth who give back to the world at large through various initiatves such as Inventions, Protection of the Environment and Disaster relief. The recipients who receives this award are ones who have dedicated their lives to their individual causes to improve situations in their own cuntries as well as paving a path for the SAARC region to follow. The committee for the SAARC Youth Award selects the best candidate based on his/her merits and their decision is final. Previous Winners 1997 : Outstanding Social Service in Community welfare Mr. Md. Sukur Salek ( Bangladesh) 1998 : New Inventions and Discoveries Dr. Najmul Hasnain Shah ( Pakistan) 2001 : Creative Photograhpy : South Asian Diversity Mr Mushfiqul Alam ( Bangladesh) 2002 : Outstanding contribution to protect the Environment Dr. Masil Khan ( Pakistan) 2003 : Invention in the Field of Traditional Medicine Mr. Hassan Sher ( Pakistan ) 2004 : Outstanding contribution to raising awareness for TB and / or HIV / AIDS Mr. Ajij Prasad Poudyal ( Nepal )

2006 : Promotion of Tourism in South Asia Mr. Syed Zafar Abbas Naqvi ( Pakistan ) 2008 : From Himalayan glaciers to verdant Plains to coral reefs Protecting the Environment in South Asia Ms. Uswatta Liyanaye Deepani Samantha ( Sri Lanka ) 2009 : Outstanding contribution to humanitarian works in the aftermath of Natural Disasters Dr. Ravikant Singh ( India ) 2010 : Outstanding contribution for the Protection of Environment and mitigation of Climate Change Ms. Anoka Primrose Abeyrathe ( Sri Lanka )

PROBLEMS

There are a number of problems which confront the SAARC.

1. Border disputes, ethnic issues and religions, political outlook and affiliations, etc. cause mutual distrust among some of the members of the Association and these prevent emotional closeness and, as a consequence, adversely affect the pursuit of cooperation. 2. One important problem that limits the scope of economic cooperation is that the economies of the member countries are similar rather than dissimilar. In other words, complementarity, an important contributor to the success of economic integration, is limited. 3. As the member countries have been emphasizing very much of the promotion of exports to the hard currency areas, intra-regional trade has been relatively neglected.

4. Some of the member countries are important exporters of same type of products and are, therefore, competitors in the international market. For example, this is true of India and Bangladesh with respect to jute, and India and Sri Lanka with respect to tea. Similarly, textiles and clothing are very important export items of some of the members. 5. Due to the differences in the levels of development of economic strength, there is a feeling that the relatively advanced member countries would be the major beneficiaries of the cooperation and the least developed among them may not benefit much. As a matter of fact, the least developed members could enormously benefit from others, particularly from India, if proper schemes of cooperation are pursued. 6. Due to foreign exchange problems, these countries, generally, tend to restrict imports and this comes in the way of intra-regional trade too. Further, revenue consideration may discourage governments the abolition/reduction of tariffs even on intra-regional trade. 7. Underdevelopment of transport, communications, payment and clearing arrangements, institutional inadequacies etc. also hinder expansion of economic relations.

NAFTA

The United States signed its first free trade agreement (FTA) with Israel in the mid-1980s, followed by a FTA with Canada in 1988 and the North American Free Trade Agreement (NAFTA) in 1994 which was later widened with the inclusion of Mexico (1994), making North America a giant free trade area. NAFTA is a large trading bloc with a combined population and total GNP greater than the 15-member EU (but lower than the expanded EU). However, NAFTA could further expand substantially by adding more countries in the future. NAFTA is, in fact, perceived to expand by pulling together North Central and South America.

FEATURES

The NAFTA seeks to eliminate all tariffs on products moving among the three countries and end other barriers to services and investment capital within North America. NAFTA covers the following areas:

1. Market access- tariff and non-tariff barriers, rules of origin, governmental procurement. 2. Trade rules- safeguards, subsidies, countervailing and antidumping duties, health and safety standards. 3. Services- provides from the same safeguards for trade in services (consulting, engineering software, etc.) that exist for trade in goods.

4. Investment- establishes investment rules governing minority interests, portfolio investment, real property and majority-owned or controlled investments from the NAFTA countries; in addition, NAFTA coverage extends to investments made by any company incorporated in a NAFTA country, regardless of country of origin. 5. Intellectual property- all three countries pledge to provide adequate and efficient protection and enforcement of intellectual property rights, while ensuring that enforcement measures do not themselves become barriers to legitimate trade. 6. Dispute settlement- provides a dispute settlement process that will be followed instead of countries taking unilateral action against an offending party.

A very significant feature of the NAFTA is that, while most free trade agreements have provisions only for the trade liberalization, it includes labour standards and environmental standards. The inclusion of the labour standards resulted from the pressure of the labour lobby which feared that the US and Canada would lose a jobs to Mexico as a result of Mexicos cheaper wages, poor working conditions, and lax environmental

enforcement. Similarly, the inclusion of the environmental standards resulted from the pressure of the environmental lobby which pushed for an upgrade of environmental standards in Mexico and the strengthening of compliance.

IMPACT OF NAFTA

NAFTA has achieved substantial trade liberalization. The trade between the US and Canada and the US and Mexico is substantial and has been rising fast. The two-way trading relationship between the United States and Canada is the largest in the world. Mexico replaced Japan as the second-largest market for US exports, while remaining as the third most important supplier to the US market after Canada and Japan. However, although the Canada-Mexico trade has been increasing fast after the Agreement, they are still marginal trading partners with each other.

Doubts are, however, raised about the impact of the NAFTA on employment in the US. The American companies would immensely benefit by shifting production to Mexico where labour is substantially cheap as compared to the US. It was pointed out that what NAFTA would help achieve is a free movement of American capital to Mexico- a superior alternative from the US viewpoint, when compared to the free movement of Mexican labour to the US. Environmentalists have also expressed concerned about the US moving high pollution industries to Mexico which has less stringent environment protection laws.

There have been divergent views on the potential benefits and harmful effects of NAFTA and its members. Many feared that there would be an exodus of jobs to the substantially low-wage Mexico from the US and Canada, while the other school maintained that there would be substantial job creation in the US and Canada because of the huge increase in demand for US and Canadian goods and services in Mexico following the trade liberalization. Many Mexicans feared competition from the US firms would seriously damage the Mexican industry and

economy, while many others maintained that liberalization and competition will increase the competitiveness of the Mexican industry.

The real impact of NAFTA on US employment is not clear. Although there are job losses to the US due to NAFTA, some estimate indicate significant net job creation in the US. This is corroborated by the relatively low unemployment rates prevailing in the US after the formation of the free trade area.

Foreign

investment

in

Mexico

has

risen

substantially

since

the

Agreement.Companies from outside NAFTA have been making large investment in Mexico to gain a free entry to the huge NAFTA market. NAFTA has been resulting in a lot of trade diversion.

The NAFTA comprising Mexico also could cause difficulties for exports of the developing countries to the US and Canada as Mexico, a developing country, by virtue of a being member of the NAFTA would get a considerable edge over other nations in selling in the US and Canada.

Trade effects of NAFTA: trade creation and trade diversion

Trade Flow U.S. import from Canada U.S. import from Mexico Canadian import from US

Trade Expansion Trade Diversion Creation $1074186 334912 63656 $689997 50138 25212 163943 27651 27099 $384189 284774 38444 3321 50036 902

Canadian import from Mexico 167264 Mexican import from US Mexican import from Canada 77687 28001

ASEAN The Association f South East Asian Nations (ASEAN) was formed by the Bangkok declaration 1967 by five countries, viz, Indonesia, Malaysia, the Philippines, Singapore and Thailand with a view to accelerate economic progress. The region accounts the highest share of the worlds natural rubber, palm oil and tin, it is also an important producer of sugar, coffee, timber, petroleum, nickel, bauxite, tungsten and coal.

The ASEAN free trade area was created in 1992 by the six nations mentioned above. Between 1995 and 1999 Vietnam, Laos, PDR, Myanmar and Cambodia acceded to AFTA taking the membership to ten.

AFTA reduced intra-regional tariffs of Common Effective Preferential Tariffs (CEPT) rates to a range of 0-5%. The agreement also calls for elimination of all custom duties by 2010. AFTA includes preferential liberalization of services and investments, harmonization to tariff nomenclature, intellectual property

cooperation, and harmonization of products standards and mutual recognition of conformity. Under AFTA, ASEANs established members have cut tariff on most goods traded within the region to between 0-5%.

Despite the realization of AFTA the share of intra-regional trade has not increased significantly. There are a number of reasons for this: 1. Within ASEAN 66% of the tariff lines have the same CEPT rates. 2. Many products with strong potential for intra-regional, trade are also politically sensitive and have had their liberalization delayed by a number of members.

The 10 nations of ASEAN will form an economic community by 2020. This unified market would have about 500 million people and estimated annual sales totaling US $720 billion.

CONCLUSION

The growth of regionalism poses a threat to multilateralism. A WTO Report observes: Regionalism can serve as a catalyst for further liberalization as the multilateral level. But the increasing number of regional agreements may also represent a threat to multilateral liberalization. A multiplicity of regional agreements will almost certainly engender a degree of trade diversion, and the application of numerous rules of origin and differing standards will make international trade more complex and costly. The growing number of overlapping bilateral and plurilateral agreements risks the transparency of trading rules, thus posing a threat to some of the fundamental principles of the WTO. Regional trading agreements may create vested interests determined to avoid any dilution of preferential margins implied by multilateral trade liberalization. Finally, increasing regionalism will tend to distract attention and energy from multilateral negotiations. The report points out that two ground rules of policy behavior could help to consolidate and build upon the benefits of regionalism and promote a more effective multilateral system. The first rule would be to refrain from engaging in regional commitments (on issues covered within the mandate of the WTO) which governments would be to consolidate the first rule by agreeing to a consultative system that would map and monitor the timing and conditions attached to the nondiscriminatory, multilateral application of commitments made in regional arrangements. Such arrangements might provide a more effective link between regionalism and multilateralism than exits today.