5.8 Summary
This topic has looked at five forms (or levels, as Hill (2005) calls them) of regional economic integration. We have noted that only two of the five forms, free trade areas and common markets, are represented in truly functional guise around the world. Besides the newly created AUSFTA, there are three outstanding examples of free trade areas: the EU, CER and NAFTA, but APEC may ultimately become one.
We dwelt at length on the EU because of its size and importance and because it is the most successful example of regional economic integration. Even so, integration in Europe has been a difficult process: monetary union is almost complete but the hoped-for political union of a US of Europe is a long way from consummation. We noted that the political effects of integration are twofold: integration means increased size and thus increased market power, and integration, particularly in Europe , is seen as a means of avoiding war. In addition to political effects, the economic effects of integration may be trade creation or trade diversion. Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within a free trade area. Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within a free trade area.
In reviewing regional integration outside Europe and North America, we noticed the existence in principle of a number of groupings in Central and North America, Africa and Asia . Asia is of particular relevance to Australia which is not represented in ASEAN. However, Australia has been a prime mover in APEC and now AUSFTA of which it has high hopes for its future.
Finally, this chapter drew attention to the opportunities and threats posed by regional economic integration. The opportunities are:
- to set up subsidiaries in any new free trade area so as to avoid exclusion in the event of a fortress mentality developing
- economies of scale because there is only one market without boundaries where previously there were a number of country-specific markets.
The threats arise from the competition which free markets encourage by the absence of tariff and other barriers. This competition may include firms from outside free trade areas seeking entry, and firms within the free trade area fighting for survival in the newly-competitive free market.
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