REGIONAL ECONOMIC INTEGRATION

GROUP 6
CHIRAG KUMAR R – 18069
SAHANA BL– 18081
ANSHUMAN – 18094
Submitted to Dr. SUGANT R
PAVAN KUMAR K– 18105
SAINATH NOOKALA - 18117
 AGENDA:
We are focusing on the Regional Economic Integration and the articles we have chosen for the same are
about ASEAN Economic Community and its realities, key role, Stock Market analysis of ASEAN
countries comparing with global economy.
The trade agreements among various economies for better relationship between them and mutual growth
and estimating potential growth of the agreements.
Articles:
1.True ASEAN Economic community: Myths and Realities.
2. ASEAN economic Community: Playing key role in ASEAN economic integration.
3. The Emerging regional economic integration architecture in East Asia.
4. An Investigation of Global and Regional Integration of ASEAN Economic Community Stock Market:
Dynamic Risk Decomposition Approach.
Continued..

5. Heterogenous Patterns of Financial Development: Implications for Asian

Financial Integration.
6. The future of East Asia’s Trade.
7. The Mexican and U.S. Economies after 20 years of NAFTA.
8. False friends? Empirical evidence on trade policy substitution in RTA.
9. Regional Integration Agreements: Trade Flows and Economic Crisis: A
Static and Dynamic Gravity Model.
10. Trade Effects of Regional Integration in Imperfect Competition: Evidence
from the Greater Arab Free Trade Area(GAFTA)
Article 1:THE ASEAN ECONOMIC
COMMUNITY:MYTHS AND REALITIES

 The association of SOUTH EAST ASIAN NATIONS consist of diverse economy

ranging from Singapore to Cambodia
 This combined economy was around 600 million population and aggregate GDP of 3.9
trillion dollars in 2013.
 ASEAN has come long way to reduce the barriers to trade in goods among the member
countries since the creation of ASEAN Free trade Area Agreement, signed in 1993
 Currently 99% of the products in this group of countries are traded at the preferential
zero tariff rate
 It has been negotiating liberalization in the service sector since the creation of the
ASEAN frame work agreement on service in 1996
 The ASEAN summit in 2002, called for further integration of the regional economy
with view to create an “ASEAN Economic Community”(AEC).
 In 2007, the AEC blueprint, which provides a “road map” for achieving the AEC goals was
approved by the ASEAN leader
 The blue print consist of 4 key pillars
a. A single market and production base
b. A highly competitive economic region
c. A region of equitable economic development
d. A region fully integrated into the global economy
 “The single market and production base” pillar comprises of 5 core element
a. Free flow of goods
b. Free flow of services
c. Free flow of capital
d. Free flow of skilled labor
 This paper aims to shed light on the AEC, in particular its liberalization agenda and the actual
implementation for the first pillar only
 The service sector liberalization in ASEAN can be attributed to unilateral policy movers rather than
regional commitment

 The ASEAN secretary need do ground work for supporting the liberalization agenda

 Consumers and small business are not only likely to advocates- the media and academics will also
need to come on board to effectively push the liberalization of service trade

 ASEAN instead focus on an anti-monopoly platform that can be easily appreciated by a layperson

 The ASEAN should focus on the sector-specification liberalization

 The advantage of sector specification negotiation is the scope negotiations that include rules and
regulation to specific sector that pose barriers to market access.
Conclusion and policy implication

 The service sector liberalization in ASEAN can be attributed to unilateral policy

movers rather than regional commitment
 The ASEAN secretary need do ground work for supporting the liberalization
agenda
 Consumers and small business are not only likely to advocates- the media and
academics will also need to come on board to effectively push the liberalization of
service trade
 ASEAN instead focus on an anti-monopoly platform that can be easily appreciated
by a layperson
 The ASEAN should focus on the sector-specification liberalization
 The advantage of sector specification negotiation is the scope negotiations that
include rules and regulation to specific sector that pose barriers to market access.
Article 2:THE MEXICAN AND U.S. ECONOMIES
AFTER 20 YEARS OF NAFTA
 The North American Free Trade Agreement (NAFTA), in effect since January 1994, plays a very
strong role in the bilateral economic relationship between Mexico and the United States
 The effects of NAFTA on Mexico and the Mexican economic situation have impacts on U.S.
economic and political interests
 In 1990, Mexico approached the United States with the idea of forming a free trade agreement
(FTA)
 In 1993, the average Mexican production worker in manufacturing sector earned 18% of the
hourly compensation of a typical U.S. production worker
 Their was a gap in per capita income between Mexico and other neighboring countries
 After definite consequence of NAFTA it increase the degree of integration of industrial production
in Mexico and United states.
 Deeper integration with United States turned out to be boon for Mexico in late 1990’s
 U.S. nonpetroleum imports from Mexico grew at a remarkable 25.2% annual rate between 1993
and 2000
 The Chinese share came more expensive than that of other U.S. trading partners rather than
Mexico
 Mexico diversify its destination market iva other trade agreement have been also successful
 The Chinese export expanded rapidly in 1990s and 2000s due to undervaluation of the Chinese
currency
 The depreciation of yuan gave China a significant edge both in the U.S. market and the Mexican
market
 The Mexican labor force has increased by about 950000 per year throughout the NAFTA period
 The Mexico has achieved large bilateral surplus es in goods trade with the United States, reaching
$112 billion in 2013
 Mexico export industries experienced a significant quality upgrading after NAFTA and peso
crisis, leading to rising demand for more educated workers
 Trade agreement like NAFTA and the WTO certainly helped to facilitate the globalization of
production, but they were not only the cause
 In 2013, Mexico purchased $182 billion of U.S. exports, while China purchased only $114 billion
 Mexico has done relatively better than the U.S. on the employment side in manufacturing, but
with no long term increase in real earnings
Article 3:The Emerging Regional Economic Integration
Architecture in East Asia

 This particular paper examines how East Asia's economic architecture has been evolving over the
last ten years and how it will shape itself in the future.

 With the progress of market-driven economic integration, East Asian economies have developed
various cooperative initiatives for trade and finance, including free trade agreements (FTAs), the
Chiang Mai Initiative, the Economic Review and Policy Dialogue, and the Asian Bond Markets
Initiative.

 The India-ASEAN FTA also needs to be viewed in the broader context of global trends and
longer-term strategic interests of the country. Regional or bilateral free trading arrangements
(RTAs/ FTAs) have become important aspects of any country’s trade policy.
 The paper suggests policy directions for greater regional economic cooperation. First, trade
authorities are advised to consolidate multiple, overlapping FTAs into a single East Asian
agreement—particularly among the East Asia Summit (EAS, or ASEAN+6) countries—to minimize
negative "noodle bowl" effects and achieve "deep, WTO-plus" integration.

 The paper suggests policy directions for greater regional economic cooperation. First, trade
authorities are advised to consolidate multiple, overlapping FTAs into a single East Asian
agreement—particularly among the East Asia Summit (EAS, or ASEAN+6) countries—to minimize
negative "noodle bowl" effects and achieve "deep, WTO-plus" integration.
Article 4:The future of East Asia’s Trade
 This research paper has underpinned East Asia’s strong and successful export orientation, is under
serious threat.
 The authors also argue that Asia needs to respond not by a resort to protectionism but by
continuing to open up unilaterally and by playing a constructive role in keeping the global system
open.
 On factors explaining the slowdown in trade, the authors refer to the slower growth in both
productivity and innovation.
 The patent data do support the authors’ contention that innovation is slowing down, yet some of
the predictions of the ongoing information technology (IT) revolution, robotization, and so on
suggest that these data may be an imperfect proxy.
 The author, Pangestu also contend that the maturation of global value chains (GVC) explains the
slower trade growth.
 The intuition here is that major producers like China have less need to source inputs from other
countries as their industrial competence spreads ever more widely.
 Pangs et al. argue that rising economic and political uncertainty is just as important, if not more so,
than rising protectionism. He shows clearly that the resort to nontariff measures (NTM) since the
global financial crisis has intensified. They caution that these NTM do not necessarily indicate
rising protectionism.
 In their discussion on trade and inequality in Section 4, Pangestu cites various studies that
globalization appears to be associated with rising intracountry (but not intercountry) inequality.
 Pangestu rightly emphasize, it is the accompanying policies that matter – education and training,
the tax system, social safety nets, geographic poverty traps, and so on. This points to an argument
that is now gathering global momentum, that the defenders of open economic policies need to pay
more explicit attention to an active, redistributive social policy agenda.
 Concluding, the rise of e‐commerce is arguably freeing up services trade quicker than it can be
regulated or restricted. Moreover, segments of this trade are open to developing countries; witness
for example the dramatic growth in the Philippine’s Business Process Outsourcing (BPO) over the
past decade
Article 5:ASEAN ECONOMIC COMMUNITY:
Playing a key role in Asian economic integration
 Established in 1967 with the primary objective to promote intergovernmental
cooperation and facilitate economic integration among its member nations
 As an organization it has immensely helped its member nations to achieve
impressive economic growth as well as regional stability by working together
 Aim of moving closer to create a single free trade area for the region, the member
nations agreed on consolidating, integrating and transforming ASEAN into a
community called ASEAN Economic Community(AEC)
Creation of AEC
 Established on December 2015 with the aim of opening up opportunities for members to capitalize
on their diverse resources, factors of production and advantages of their geography
 The four pillars of AEC are as follows

 Single Production and market base

 Competitive Economic region
 Equitable economic development
 Integration with the global economy
 Along with this objectives ,measures such as elimination of intra- ASEAN import tariffs and
restrictions in the goods and services, simplification of cross-border trading processes have created
immense trading opportunities
Challenges Ahead

 The four pillars which are key to AEC requires specific and committed actions by
ASEAN member nations both collectively and individually
 Development divide- the existing gap in the degree of economic development
among the member nations
 Level of protectionism is not uniform
 Differences between member countries with respect to issues ranging from tax
codes to foreign ownership restrictions
 Unlike European Union, the AEC lacks a proper framework that institutionalizes
the structure of a community
The Way Forward

 ASEAN nations need to undergo structural reforms within and take

bold measures to deepen the economic integration which is a key to
achieve objectives of AEC
 There is a need for proper coordination of regulations and
synchronization of national policies across member nations
,businesses
 Requires changes in domestic laws
 The establishment of AEC is not the end goal
 Blueprint 2025 has been adopted
Article 6:FALSE FRIENDS? EMPIRICAL EVIDENCE
ON TRADE POLICY SUBSTITUTION IN RTA

 AD originally intended to prevent or offset “unfair ”price setting in international

trade relations
 There are 3 central findings to highlight:
 RTA’s generally reduce the likelihood of AD activity among integration partners
 An improvement in the tariff treatment between trading partners—regardless of
whether expressed as the directly faced tariff or as a tariff margin—generally leads to a
lower likelihood of bilateral AD
 A higher tariff margin between integration partners leads to a higher likelihood of
bilateral AD than an equal tariff margin among non‐integration trading partners
Conclusions & way forward

 The estimated result indicate an increase in the likelihood of bilateral AD

activity with increasing ad-valorem tariffs
 The co-efficient estimate for RTAijt points towards a decreased likelihood
of AD activity between member countries of the same RTA
 Based on these results further research can be conducted. But however
there some questions to address . That include
 i) Why does this effect appear to be particularly pronounced in RTA’S
with ‘south’ country involvement?
 ii)What are the implications with regard to the design of future and
existing RTA’S?
Article 7:Heterogenous Patterns of Financial Development:
Implications for Asian Financial Integration
 ASEAN is a regional intergovernmental organization comprising ten countries in Southeast Asia, which

promotes intergovernmental cooperation and facilitates economic, political, security, military, educational, and

sociocultural integration among its members and other countries in Asia.

 Here, the differences in patterns of financial development across the major Asian economies are shown to

understand how these differences might affect possibilities for greater regional financial integration.

 The Asian financial crisis of 1997-98 called attention to the differences b/w openness to trade and openness to

capital, producing a set of policy responses.

 The global financial crisis of 2007-09 had an unavoidable impact on East Asia as well, but it is arguable that the

lessons of 1997-98 permitted the region to be better prepared for Global financial crisis.

 Main issue brought by this global crisis was the benefits and costs of financial openness and financial
 Continued..
 Financial openness and integration are more likely to have positive outcomes in cases where the
economies involved have adequate levels of financial development.
 The core aspect of financial integration is openness of capital account but it does not lead to perfect
financial integration due to home bias in investment( positive correlation b/w domestic savings and
investment.
 Many of economists opined that trade openness is strengthened the linkage whereas financial openness
eroded it.
 This also analyses the that possibilities for successful financial integration are a function of similarities in
financial development among countries that are integrating.
 Dissimilarities in financial development may also be positive( strong stock market in country helping the
whole region)
 World Economic forum produced a financial development index(vector of 7 indicators scaled from 1 to
7) as basis for its annual Financial Development Reports. WEF did not publish FDR after 2012
Components of FDI and GCI
Continued…

 FDIndex8 is a slight modification of the measure of financial market development that is used in the
GCI report.
 FDIndex7 removes Legal rights of investors from the index calculation
 FDIndex10 adds our measure of business environment and institutional environment
 FDIndex9 adds these 2 to 7 components excluding legal rights.
 Conclusion:
 Even after global financial crisis, which included financial contagion across national boundaries,
there is a continued interest in financial integration.
 Since the components of financial development include various aspects of financial market
institutions, as well as regulatory and governance institutions, focusing on patterns and sub-patterns
of financial development provides a more systematic way of assessing potential regulatory reform
and coordination, and possible regional risk management policies and institutions, and aspects of,
financial integration
 Article 8:An Investigation of Global and Regional Integration
of ASEAN Economic Community Stock Market: Dynamic Risk
Decomposition Approach
 ASEAN established the ASEAN Economic Community with the objective of creating a fully
liberalized, single region common market with a free flow of goods, services, labor, and
capital.
 AEC is the third largest Economic cooperation following the NAFTA and the EU with an
aggregated GDP of $2.5trillion USD’
 An analysis of the effects of the AEC on the level of financial market integration and an
understanding of the patterns and trends of the integration process will provide important
implications for risk-sharing and portfolio diversification for international investors.
 This article contributes by investigating the dynamic pattern of stock market movements
between the AEC and two major stock markets with China representing the regional market
and the United States representing the exogenous global market.
 The weekly stock market indices of the AEC, China, and the United States were examined
over the sample period from 1991 to 2014
Continued..
 For the time-varying evolution of the stock market linkages, a GARCH risk decomposition
model was developed in order to measure the contribution of the global and regional systematic
risk to the total risk of a particular market.
 A traditional risk decomposition model does not consider the time varying volatility of asset
returns and, therefore, it cannot effectively capture the dynamic integration process between stock
markets.
 In order to overcome this problem, they have developed a GARCH risk decomposition model to
reflect the time varying volatility of stock returns.
 This model is utilized to break down the rate of return for ith market into three components:
 (a) a component that is perfectly correlated with the rate of return of the regional market that is
uncorrelated with the rate of return of the global market,
 (b) a component that is perfectly correlated with the rate of return of the global market, and
 (c) a component of the market-specific risk that is uncorrelated with either the rate of return of
the regional or the global market
Findings…

 First, the stock market of the AEC is more integrated with the regional
market than with the global market.
 Second, the movement in the AEC market is mainly driven by domestic
economic situations, even if it is temporarily vulnerable to external
financial turbulences, such as the recent global financial crisis.
 Third, the level of global integration of the AEC market has increased only
at the onset of the global shocks, and the AEC market rapidly absorbs the
shocks in the subsequent period.
 Fourth, international investors are able to significantly reduce unsystematic
risk by adding an AEC market portfolio to their existing portfolios
Article 9:Regional Integration Agreements: Trade Flows and
Economic Crisis: A Static and Dynamic Gravity Model

 Regional Trade Agreements(RTAs) are defined as reciprocal trade agreements

between two or more partners. They include free trade agreements and customs
unions.
 RTAs strengthening is a crucial component of the contemporary global economy.
 There are over 546 RTAs which have been notified to the WTO where nearly 354 are
active.
 There are theoretical and empirical studies conducted on RTAs.
 Of which Gravity Model is successful and used in different types of flows.
 Gravity Model:- It uses static and dynamic panel data to measure impact of RTAs on
export flows between regions, determine the relevance of other determinants of
bilateral exports such as GDP, population, geographical proximities and cultural
similarities and assess the impact of the global economic crisis on the export flows
and regional groupings.
Results:
 The results of the Gravity Model through the equations shows the statistically significant coefficients
having hypothesized signs by using F-test for the common intercept.
 Negative values support the view that the countries are more populated, no variable gap in the per
capita income, etc.
 Positive values imply that intra-regional trade is high and the effect of the trade creation exists.

 Integration has pushed members to prefer members to non-member economies n their import
activities. This effect is called diversion of import trade, the dummies show significant evidence of
import diversion effects indicating that trade with non-members is less than what is predicted by the
model of dynamic gravity (inference is according to the facts and figures in the article).
CONCLUSION:
 It is useful for the policy makers and development of programs.
 The global effect can be assessed.
 Improve the image of the partner countries by improving the business
environment and level of services which are essential.
 And that the regional dummy variables affect the gravity model of trade
positively.

 However political instability maybe an obstacle to attract more export flows.

Government should make a concerted effort to reduce the negative political
impact on trading partners. The Ministry of Trade and Ministry of Industry will
should develop models that are friendly to the trade policies and stimulate and
support export flows and economic growth.
Article 10:Trade Effects of Regional Integration in Imperfect
Competition: Evidence from the Greater Arab Free Trade Area(GAFTA)

The GAFTA refers to Imperfect Therefore a new As the economies of The Gravity model
the agreement model of trade theory scale are significant in and CGE(computable
Competition. most GAFTA countries,
concluded by 14 Arab has been developed general equilibrium)
which means that there model concludes that
countries to achieve which shows the is still a great potential
Free Trade Area. potential gains due to there is limited effects
of intra-trade and reap on the trade due to
imperfect competition benefit from a deeper
and provide GAFTA(as only direct
regional integration
resulting in larger trade effects are
additional insights regarded in a perfect
into the quantitative accessible markets. And
GAFTA is more trade competition
impact of the GAFTA framework).
creating than trade
Agreement. diverting.
The model generated includes new developments in gravity equations as well as in supply-demand
export equations. The advantage of this model is that it simultaneously takes into account mass
variables(GDPs) and trade costs, but doesn’t include some crucial variables which are specific to the
imperfect competition framework, product varieties and scale of economies(included in supply-demand
export model).

Results:
(Here the inference is drawn by calculating the values for the full country and for the restricted country
samples.
Inference drawn is from the results of the application of the equation to find out the potentiality of
GAFTA)
The implementation of GAFTA agreement has made it possible to increase significantly intra-regional
trade across Arab countries.
Trade gains due to imperfect competition remain small and that actual trade figures hardly reach the
potential trade levels.
The market structures barely give room to gains in imperfect competition, due to the absence of
product differentiation and intra-industry trade and due to similarity of consumer tastes and production
costs.
 Some limitations are:
 Although tariffs have been removed, some GAFTA members have started new trade barriers(taxes or
other NTBs).
 Shallow integration; absence of fully fledge dispute settlement mechanism, inability to reach a
detailed rules of origin scheme.
 No supra-national institutions or strong leading country to solve the problem of disputed matters. This
leads to ineffective reaping of benefits through economies of scale by producing large product
varieties.
 Thus the gains from imperfect competition is not realised, and there is further room for the trade gains
provided,
 (i) reduction of existing NTBs
 (ii) efforts to go towards deeper integration process. And also political cooperation and possible to
control disputes.
References
Abedini, N. P. (2014). Trade Effects of Regional Integretion in Imperfect competition :Evidence from the
Greater Arab Free Trade Area(GAFTA). International Economic Journal.
Blecker, R. A. (2015). The Mexican and U.S Economies After Twenty Yeard of NAFTA. International
Journal of Political Economy.
Chia, S. Y. (2013). The Emerging Regional Economic Integretion Architecture in East Asia. Asian Economic
Journal.
Jeong, G. L. (2016). An Investigation of Global and Regional Integretion of Asean Economic Community
stock market: Dynamic Risk Decomposition Approach. Emerging Markets Finance and Trade.
Kahouli, B. (2016). Regional Integretion Agreements,Trade Flows and Economic Crisis: A Static and
Dynamic Gravity Model. International Economic Journal.
Majumdar, D. (2016). Asean Economic Community - Playing a key role in Asian Economic Integretion.
Nikomborirak, D. (2015). The Asean Economic Community(AEC) :Myths and Realities. Asian Economic
Journal.
Pangestu, M. (2018). The Future Of East Asia's Trade: A Call for Better Globalization. Asian Economic .
Sillberger, M. (2018). False friends? Empirical evidence on trade policy substitution in regional trade
agreements. The World Economy.
Singh, L. B. (2016). Heterogenous Patterns Of Financial Development :Implications for Asian Financial
Integretion. International Economic Journal.
THANK YOU!