197

17.1 Introduction
17.2 Objectives
17.3 Functions
17.4 Agreements
I. TRIPS
II. TRIMS
III. GATs
IV. AoA

17.1 INTRODUCTION
From 1948 to 1994, the General Agreement on Tariffs and Trade
(GATT) provided the rules for much of world trade and presided
rates in
over periods that saw some of the highest growth
on 1 January 1995
international commerce. The WTO's creation
trade since the end of
marked the biggest reform of internationalmainly dealt with trade
the Second World War. Whereas the GATT cover trade in services
in goods, the WTO and its agreements alsoWTO also created new
and intellectual property. The birth
of the
for the settlement of disputes. In 2020, the WTO marked
Procedures
hs 25th anniversary.
198 International Economics (T.Y.B 4
It also provides a forum for its members to negotiate
agreements and to WTO is the only global international organ- tr^
dealing with the rules of trade between nations. The WTO
the global system of trade rules and helps developing countrie??tes
their trade capacity. The WTO provides a forum for negoT^
agreements aimed at reducing obstacles to international trad^
ensuring a level playing field for all, thus contributing to econ
growth and development. The WTO helps member countri^*
resolve the trade problems they face with each other. In this com t0
WTO provides a legal and institutional framework fOr
implementation and monitoring of these agreements, as well as f
settling disputes arising from their interpretation and applicatio^r
The current body of trade agreements comprising the WTO
consists
of 16 different multilateral agreements (to which all WTO members
are parties) and two different plurilateral agreements (to which only
some WTO members are parties).
The WTO currently has 164 members, of which 117 are developing
countries or separate customs territories. The WTO's membership
represents over 98% of international trade. Decisions in the WTO
are generally taken by consensus of the entire membership. The
highest institutional body is the Ministerial Conference, which meets
roughly every two years. A General Council conducts the
organisation's business in the intervals between Ministerial
Conferences. Both of these bodies comprise all members. Specialised
subsidiary bodies (Councils, Committees, Sub-committees), also
comprising all members, administer and monitor the i
implementation by members of the various WTO agreements.

17.2 OBJECTIVES
The predominant objective of WTO is to help trade flow smoothly/
freely, fairly and predictably. WTO aims to help its members use
trade as a means to raise living standards, create jobs and improV
people s lives. The overall objectives of WTO are as follows:
1. Improving people's lives : The fundamental goal of the
is to improve the welfare of people around the world.
^0 .
founding Marrakesh agreement
00's recognizes that trade
be con ucted with a view to raising
should standards of living,
expanding g al 7™^
trade in
increasing real income and
goods and services while allowing
optimal use of the world's resources. 8
for the
j
Negotiating trade rules : The WTO was bom out of five decades
°f negotiations aimed at progressively reducing obstacles to
trade [Link] have faced trade barriers and wanted
them lowered, the negotiations have helped to open markets
for trade. Conversely, in some circumstances, WTO rules
support maintaining trade barriers - for example, to protect
consumers or the environment.
(iii) Overseeing WTO agreements : At its heart are the WTO
agreements, negotiated and signed by the bulk of the world's
trading nations. Essentially contracts, these documents provide
the rules for international commerce and bind governments to
keep their trade policies within agreed limits. Their goal is to
help producers of goods and services, exporters and importers
conduct their business, with a view to raising standards of
living, while allowing governments to meet social and
environmental objectives.
(iv) Maintaining open trade : The system's overriding purpose is
to help trade flow as freely as possible - provided there are no
undesirable side effects - because this stimulates economic
growth and employment and supports the integration of
developing countries into the international trading system. Its
rules have to be transparent and predictable, to ensure that
individuals, companies and governments know what the trade
will
rules are around the world, and to assure them that there
be no sudden changes of policy.
(v) Settling disputes : Trade relations often involve conflicting
intereste. Agreements, includingthose^pamstakii^lynegotiated
in the WTO, often need mterPreh gh
to settle these differences is th g
ahneutrpurpose
al procedurebased
behindthe
on an agreed legal founda_io . WTO agreements.
dispute settlement process
 Internntioml Economics (T y n
200 h)
,7.3n*22£
The WTO T manv roles: operates
many
has
it a global
trade
feting agreements,
of system
it s
s of
disputes
develop
^untries.
functions a described as follows:
WTO's

and permitted exceptions.

*e *
"^’^^untnes'
indivrdualcounm commitments to lower customs tarfe’1^
to
oth"
k U set procedures for settling disputes.
ents are not
static; they are renegotiated from

S negotiated under the Doha Develop^Ma?

a§ree^d new agreements can be added to the package. '

A^da, launched by WTO trade ministers in Doha, *

November2001.
, implementation and monitoring: WTO agreements require
governments to make their trade policies transparent by
notifying the WTO about laws in
force and measures adopted.
seek to ensure that these
Various WTO councils and committees
requirements are being followed and that WTO agreements are
taig properly implemented. All WTO
members must undergo
periodic scrutiny of their trade policies and practices, each
review containing reports by the country concerned and the
WTO Secretariat.
trade
3. Dispute settlement The WTO's procedure for resolving
quarrels under the Dispute Settlement Understanding is vitale
for enforcing the rules and therefore for ensuring that tra
flows smoothly. Countries bring disputes to the WTO if t
ey
.
think their rights under the agreements are being infringe
Judgements by specially appointed independent u
based on interpretations of the agreements and indivi
countries' commitments.
 201
WTO agreements contain special
i
4 >"
Ciods
fOf deve °Pln8 countries, including longer time
to '"Ple™ otagreements and commitments, measures
P increase their trading opportunities, and support to help them
build The
disPutes and to implement
standards. WTO organises hundreds of technical
technical
^operation misslons t0 developing countries annually. It also

bolds numerous courses each year in Geneva for government

Aid for Trade aims to help developing countries
officials. the skills and infrastructure needed to expand their
develop
trade.
Outreach- The WTO maintains regular dialogue with non¬
_,Tornmental organisations,
governmental orsanisatinn^ parliamentarians, other ,

internationalaspects
organisations, the media and the general public
of the
on various WTOs and the ongoing Doha
negotiations, with the aim of enhancing cooperation and
increasing awareness of WTO activities.

In performing its various functions, the main activities of WTO

include the following:
1. Administration: Administering the WTO trade agreements.
This includes administering and monitoring the application of
the WTO's agreed rules for trade in goods, trade in services,
and trade-related intellectual property rights.
2. Forum for trade negotiations: Providing the forum for
negotiations among its members concerning their multilateral
trade relations in matters dealt with under the Agreements.
This includes negotiating the reduction or elimination of
obstacles to trade (import tariffs, other barriers to trade) and
agreeing bn rules governing the conduct of international trade
(e.g., antidumping, subsidies, product standards, etc.).
3. Handling trade disputes: Administering the mechanism for
settling trade disputes between the member countries. Settling
disputes among members regarding the interpretation and
application of the agreements.
 International Economics (T.Y.b
202 4
4. Monitoring

^aS
Monitoring national trade policies.
policies of members, as well Mon^ ^
transparent;
a
^nS
training: Providing technical
5. Assistance a loping countries. Building
assists
caPa?. aM
‘^Xtfccmntry government officiate inintenM,^
matters.
6.
c
IBRD and its affiliated agencies with a
E nd
greater consistency in global economic policy viJ^
7. Assistin’ the process of accession of some 30 countries
members of the organisation. who
8. reducting economic research and collecting an(i
disseminating trade data in support of the WTO's other
main
activities.
9. Explaining to, and educating the public about the WTO, its
mission and its activities.

17.4 AGREEMENTS

At the heart of WTO are the WTO agreements, negotiated and signed
by the bulk of the world's trading nations, and ratified in their
parliaments. The goal is to ensure that trade flows as smoothly,
predictably and freely as possible.

I. TRIPS

The WTO s Agreement on Trade-Related Aspects of Intellectual

Property Rights (TRIPS), negotiated during the 1986-94 Uruguay
h-arp1 ' m^ro<^uce^ intellectual property rules into the multilateral
fading system for the first time
 *e freed°m tOachleve their domestic policy objectives it
of innovation'
Public
ip
r^xr8 Agreement is a legal recognition of the
’gnificance
system.
of links between IPandtradeand the needforabalXed
intellectual Property
intellectual property" refers to creations of the mind. These
can take many different forms, such as artistic expressions,
creations
signs, symbols and names used in commerce, designs and
inventions. Governments grant creators the right to prevent others
from using their inventions, -
designs or other creations and to
use that right to negotiate payment in return for others using them.
These are "intellectual property rights". They take a number of
forms. For example, books, paintings and films come under
copyright; eligible inventions can be patented; brand names and
product logos can be registered as trademarks; and so on.
Governments grant creators these rights as an incentive to produce
and spread ideas that will benefit society as a whole.
Trade in Intellectual Property
The idea of trade, and what makes trade valuable for societies, has
Innovation,
evolved beyond simply shipping goods across borders.
that
creativity and branding represent a large amount of the value this
changes hands in international trade today. How to enhance and
goods
value and how to facilitate the flow of knowledge-rich
services across borders have become integral
considerations in
development and trade policy.
Intellectual Property Rights
given to persons over the
Intellectual property rights are the rights
usually give the creator an exclusive
creations of their minds. They for a certain period of time.
right over the use of his/her creation
 International Economics (T y g
2Q4
protection and enforcement of these riBlUs ^'Vh
The extent of
the world; and as
intellectual property [J Van
widely around
important in trade, these
differences became a source
New internationally
of?
relations.
property rights were seen as a way t^ C”
international economic
rules for intellectualpredictability, and to settle disD,,?^^' ®
more order and pu‘es
tn0 V
1
systematically.
Agreement plays a critical role in facilitatin
The TRIPS
knowledge and
creativity, in resolving trade disn??^ in
property, and in assuring WTO members the °v^r
intellectual objectives. The Agreement is legal r r to
achieve their domestic
significance of links between intellectual property
of the
Agreement is an attempt to narrow th
The WTO's TRIPS
the way these rights
are protected and enforced around th
common international rules. It t W.01H
and to bring them under enforcemenUb^'8^5
minimum standards
of protection and eac^
has to give to the intellectual property held bv na^°nals
government
of fellow WTO members.
WTO members have consid
Under the TRIPS Agreement, to IP protection and
scope to tailor their approaches enforcem^^
achieve public policy goa^ Th*
order to suit their needs and for members to strike a bal
Agreement provides ample room incentivising innovation andT
between the long-term benefits
of
mind6
to creations of the
possible short-term costs of limiting access various mechanisms
Members can reduce short term costs through or exceptions
allowed under TRIPS provisions, such as exclusions are trade disputes
to intellectual property rights. And, when there
over the application of the TRIPS Agreement, the
WTO's dispute
settlement system is available.
The TRIPS Agreement covers five broad areas:
(i) How general provisions and basic principles of the
multilateral
trading system apply to international intellectual
property.
(ii) What the minimum standards of protection are for
intellectual
property rights that members should provide.
 205
membersshould provide for the enforceme
ch pr°cedurestheir
(il0 ^hoSe rights in own territories.

w to settle disputes on intellectual property between

(ivl^bersoftheWTO.
cial transitional arrangements for the implementation of
(v) TRIPS provisions.

^principles
starting point of the TRIPS Agreement are basic principles.

1
. Rational treatment
than one's
(treating foreign nationals no less
favourably own nationals) and
(ii)
k 7
Most-favoured-nation (MFN) treatment (not discriminating
among nationals of trading partners).
The TRIPS Agreement has an additional important general objective:
(iii) Intellectual property protection should contribute to technical
innovation and the transfer of technology. Both producers and
users should benefit, and economic and social welfare should
be enhanced.
The second part of the TRIPS Agreement looks at different kinds of
intellectual property rights and how to protect them. The purpose
is to ensure that minimum standards of protection exist in all WTO
members. Here the starting point is the obligations of the main
international agreements of the World Intellectual Property
Organization (WIPO) that already existed before the WTO was
created.
(a) The Paris Convention for the Protection of Industrial
Property (patents, industrial designs, etc.).
(b) The Berne Convention for the Protection of Literary and Artistic
Works (copyright).
Some areas are not covered by these agreements. In some cases, the
standards of protection prescribed were thought inadequate. So, the
TRIPS Agreement adds significantly to existing international
standards regarding the following:
 International Economics (T y g

. Copyright: Copyright usually refers to the rights

their literary and artistic works. Copyright also includ ;
rights':therights of perfornwrs, producers of ph^
broadcasting organisations. TRIPs added
programmes databases under copyright- it
international copyright rules to cover rental rights to c
programmes and producers of films and sound record*^
says performers must also have the right to ^Mt
unauthorised recording, reproduction and broadcast
performances (bootlegging) for no less than 50 years °f
• Trademarks: A trademark is a sign or a combination
used to distinguish the goods or services of one enterpri Si^s
another. The TRIPS Agreement defines what types of si J*
be eligible for protection as trademarks, and what the
rights conferred on their owners must be.
S
1111181

• Geographical indications: A name or indication associated

a place is sometimes used to identify a product
"geographical indication" does not only say where the pr 8
d
?
comes from. More importantly, it identifies the product's sp
characteristics, which are the result of the product's
Well-known examples include "Champagne",
ori?^
Whiskey", "Tequila", "Darjeeling" tea and "Roquefort"
"Scot h
cheese
• Industrial designs: Industrial design is generally
understood
to refer to the ornamental or aesthetic aspect of an article
rather
than its technical features. Under the TRIPS Agreement, original
or new industrial designs must be protected for at least 10 years.

• Patents: The TRIPS Agreement says patent protection must be

available for eligible inventions (both products and processes)
in all fields of technology that are new, involve an inventive
step and can be industrially applied. They must be protected
for at least 20 years. However, governments can refuse to issue
a patent for an invention if its sale needs to be prohibited for
reasons of public order or morality.
• Layout designs of integrated circuits: An integrated circuit is
an electronic device that incorporates individual electronic
components within a single 'integrated' platform configured
 207

an electronic function. The protection of layout

t0 per^°f^f integrated
circuits in the TRIPS Agreement is
jesi£nS trough the incorporation of the Washington Treaty
i

pr<?v ||ectual Property in Respect of Integrated Circuits, a

on ^,atc was concluded under the World Intellectual Property
treaty in 1989, but was not yet entered into force. In
iayout designs of integrated circuits are commonly
P^ected underinformation:
patents.
Undisclosed information includes
j
-eclosed data. Trade secrets must be protected
9 secrets and testuse,
inst unauthorised including through breach of contract
a^acOnfidence
°
or other acts contrary to honest commercial
Test data submitted to governments in order to obtain
ractices. approval for new pharmaceutical or
Marketing be
also protected
agricultural
chemicals must against unfair commercial use
and disclosure.
Anti-competitive practices in licensing: One way for a right
holder to commercially exploit his or her intellectual property
rights includes issuing a licence to someone else to use the
rights. Recognizing the possibility that right holders might
include conditions that are anti-competitive, the TRIPS
Agreement says that under certain conditions, governments
have the right to take action to prevent anti-competitive
licensing practices. It also says governments must be prepared
to consult each other on controlling anti-competitive licensing
practices.
Enforcement: WTO members must give right holders the tools
to ensure that their intellectual property rights are respected.
Enforcement procedures to do so are covered in part IH of the
TRIPS Agreement. The Agreement says governments have to
ensure that intellectual property rights can be enforced to
prevent or deter violations.

• Technology transfer: The TRIPS Agreement aims for the

transfer of technology and requires developed country members
to provide incentives for their companies to promote the transfer
of technology to least-developed countries in order to enable
them to create a sound and viable technological base.
 Transitional arrangements : One year, a years or more
While the WTO agreements entered into force on 1 JanUarv ,
the TRIPS Agreement allowed WTO members certain tran 1 .
periods before they were obliged to apply all of its provjS,tion
Developed country members were given one year to ensum ?lS
their laws and practices conform to the TRIPs Agree fha|
Developing country members and (under certain conditi
transition economies were given five years, until 2000 LeT*
-
developed countries initially had 11 years, until 2006 now
extend’
edj
to1 July 2034 in general.
In November 2015, the TRIPS Council agreed to further
exemptions on pharmaceutical patent and undisclosed information
extend
protection for least-developed countries until 1January 2033 or
until
such date when they cease to be a least-developed country member
whichever date is earlier. They are also exempted from the otherwise
applicable obligations to accept the filing of patent applications and
to grant exclusive marketing rights during the transition period.

Institutional Arrangements
The TRIPS Council is responsible for administering the TRIPS
Agreement In particular, it monitors the operation of the Agreement.
In its regular sessions, the TRIPS Council mostly serves as a forum
for discussion between WTO members on key issues. The TRIPS
Council also meets in "special sessions". These are for negotiations
on a multilateral system for notifying and registering geographical
indications for wines and spirits.

II. TRIMs

Trade-Rela‘ed investment Measures (TRIMS)

°? measures can restrict and distort
trade It states «» Wly »y ™»« M
or that leads to quantitative
proSe^X
restrictions

Agreement.
‘Xh ^r

Th^ Ssc^
'8” Products
VioIate basic P™P^ °‘
re<luirements'
<1MS Committee monitors “
A Ust
Part °fand
the operation
 209
^0
piementation of tihe Agreement and allows members the
to consult on any relevant matters.
Opportunity
originand Definition
neg°dated during the Uruguay Round, applies only
fhis Agreement,
to measures
that affect trade in goods. Recognising that certain
investment measures can have trade-restrictive and distorting
effects, it states that no Member shall apply a measure that is
prohibited by the provisions of GATT Article III (national treatment)
or Article XI (quantitative restrictions).
Hie term "trade-related investment measures" ("TRIMs") is not
defined in the Agreement. However, the Agreement contains in an
annex an Illustrative List of measures that are inconsistent with
GATT Article III : 4 or Article XI : 1 of GATT 1994.
Objectives
The objectives of the Agreement, as defined in its preamble, include
"the expansion and progressive liberalisation of world trade and to
facilitate investment across international frontiers so as to increase
the economic growth of all trading partners, particularly developing
country members, while ensuring free competition".
The TRIMs Agreement and Regulation of Foreign Investment
As an agreement that is based on existing GATT disciplines on trade
in goods, the Agreement is not concerned with the regulation of
foreign investment. The disciplines of the TRIMs Agreement focus
on investment measures that infringe GATT Articles III and XI, in
other words, that discriminate between imported and exported
products and/or create import or export restrictions.

For example, a local content requirement imposed in a non-

discriminatory manner on domestic and foreign enterprises is
inconsistent with the TRIMs Agreement because it involves
discriminatory treatment of imported products in favour of domestic
Products. The fact that there is no discrimination between domestic
and foreign investors in the imposition of the requirement is
irrelevant under the TRIMs Agreement.
 International Economics (T.Y g 4
220
List of TRIMs agreed to be inconsiste I
The Illustrative
principles is appended
which require particular
to the agreement. The list includes
levels of local procurement by an measures ’
("local content requirements"), volum^^86
or which restrict the
enterprise can purchase or use to an
of imports such an products it exports ("trade ba
related to the level of
requirements").
mandatory notification of all
The Agreement requires
elimination within two
non¬
conforming TRIMs and their years for
countries, within five years for developing countries and
developed
within seven years for
least-developed countries. It establishes a
other things, monitor the
Committee on TRIMs which will, among
implementation of these commitments. The agreement also provides
for consideration, at a later date, of whether it should be
complemented with provisions on investment and competition
policy more broadly.
Developing countries: Article 4 allows developing countries to
deviate temporarily from the obligations of the TRIMs Agreement,
as provided for in Article XVIII of GATT 1994 and related WTO
provisions on safeguard measures for balance-of-payments
difficulties.

Limitation
The Agreement applies to investment measures related to trade in
goods only. Thus, the TRIMs Agreement does not apply to services.

in. GATS

Agreement on Trade in Services (GATS)

was one of tho 1 d ene^a^achievements of the Uruguay Round of
°
GATT which UdT n? establishment of the WTO, in January 1995.
GATS came into f ° and provides for the extension
of the multilateral 8 System1995to serv£es.
Whil
account for over two-thirds of gl°baJ
production and
whprnP^°ymenb
tbey represent no more than 25% of
total trade, n measured on a balance-of-payments basis-
 211
.
however, this because
seeminglymodest share should not be
underestimated, even though services are increasingly
own right, they also serve as crucial inputs into the
traded in their
production of goods and, consequently, when assessed in value-
added terms, services account for about 50% of world trade.
The GATS
was inspired by essentially the same objectives as its
counterpart in merchandise trade, the General Agreement on Tariffs
and Trade (GATT): creating a credible and reliable system of
rules; ensuring fair and equitable treatment of
international trade(principle of non-discrimination); stimulating
all participants
economic activity through guaranteed policy bindings; and
promoting trade, and development through progressive
liberalisation.
All WTO members are at the same time members of the GATS and,
to varying degrees, have assumed commitments in individual
service sectors. They are also committed, (Article XIX of the GATS),
to enter into subsequent rounds of trade liberalising negotiations.
Any member is free to expand or upgrade its existing commitments
at any time.

Services Covered
The GATS applies in principle to all service sectors, with two
exceptions.
(i) Article I (3) of the GATS excludes "services supplied in the
exercise of governmental authority". These are services that are
supplied neither on a commercial basis nor in competition with
other suppliers. Cases in point are social security schemes and
any other public service, such as health or education, that is
provided at non-market conditions.
(ii) Furthermore, the Annex on Air Transport Services exempts
from coverage measures affecting air traffic rights and services
directly related to the exercise of such rights.
GATS distinguishes between four modes of supplying services:
Cr°ss-border trade, consumption abroad, commercial presence, and
P^sence of natural persons.
 IntmwHoiwl Economics (T.Y.B.A
212 •
“
tA/1'Vn
1.

S^mmuracationso^^ via
..nn abroad refers to situations where a
1
^X£(e g ^"stor p^^^
Serv.
territory to obtain a service,
, commercial presence implies that a service supplier of
meX
XhiD establishes a territorial presence, including through
or lease of premises, in another member's territory
Xovide
durance
a service (e.g-, domestic subsidiaries of foreign
companies or hotel chains); and
4 Presence of natural persons consists of persons of one member
entering the territory of another member to supply a service
(e g z accountants, doctors or teachers). The Annex on
Movement of Natural Persons specifies, however, that members
remain free to operate measures regarding citizenship,
residence or access to the employment market on a permanent
basis.

Obligations Under The GATS

Obligations contained in the GATS may be categorised into two
broad groups:
(a) General obligations that apply to all members and services
sectors, as well as

(b) Obligations that apply only to the sectors inscribed in a

member*s schedule of commitments.
Such commitments are laid down in individual schedules whose
scope may vary widely between members. The relevant terms and
concepts are similar, but not necessarily identical to those used in
the GATT; for example, national treatment is a general obligation in
goods trade and not negotiable as under the GATS.
 213
jvr0
General Obligations:
I4FN treatment Under Article II of the GATS, members
W are held to extend immediately and unconditionally to
services or services suppliers of all other members
"treatment no less favourable than that accorded to like
services and services suppliers of any other country". This
amounts to a prohibition, in principle, of preferential
arrangements among groups of members in individual
sectors or of reciprocity provisions which confine access
benefits to trading partners granting similar treatment.
(ii) Relaxations are possible in the form of so-called Article II
- exemptions (Members were allowed to seek such
exemptions before the Agreement entered into force). All
exemptions are subject to review; they should in principle
not last longer than10 years. Furthermore, the GATS allows
groups of members to enter into economic integration
agreements or to mutually recognise regulatory standards,
certificates and the like if certain conditions are met.
(iii) Transparency: GATS members are required, among other
things, to publish all measures of general application and
establish national enquiry points authorised to respond to
other members' information requests.
Other generally applicable obligations include:
(iii) The establishment of administrative review and
(iv) Appeals procedures and disciplines on the operation of
monopolies and exclusive suppliers.
(b) Specific Commitments :
(i) Market access: Market access is a negotiated commitment
in specified sectors. It may be made subject to various types
of limitations enumerated in Article XVI (2). For example,
limitations may be imposed on the number of services
suppliers, service operations or employees in the sector;
the value of transactions; the legal form of the service
supplier; or the participation of foreign capital.
214 International Economics (T v n
(u) National treatment A commitment to national h
implies that the member concerned does
discriminatory measures benefiting
not^
domestic s*
^t
service suppliers. The key requirement is not toZb Of
law or in fact, the conditions of competition in f in
the member's own service industry. Again, the aV°Ur °f
of national treatment in any particular sector mav
e
subject to conditions and qualifications. ^Me
(iii) Members are free to tailor the sector coverage
substantive content of such commitments as they and
The commitments thus tend to reflect national see fit
objectives and constraints, overall and in policv
individual
While some members have scheduled less than a sectors
of services, others have assumed market access handful
national treatment disciplines in over 120 out of a and
160-odd services. total of

(iv) Specific commitments may be modified subject to

certain
procedures. Countries which may be affected by such
modifications can request the modifying member to
negotiate compensatory adjustments; these are to be
granted on an MFN basis.
Services "Schedules" Requirement
Each WTO member is required to have a Schedule of Specific
Commitments which identifies the services for which the member
guarantees market access and national treatment and any limitations
that may be attached. The Schedule may also be used to assume
additional commitments regarding, for example, the implementation
of specified standards or regulatory principles. Commitments are
undertaken with respect to each of the four different modes of service
supply. All schedules are available on the WTO website.
Specific Exemptions to Cater for Important National Policy
Interests
The GATS permits members in specified circumstances to introduce
or maintain measures in contravention of their obligations under
the Agreement, including the MFN requirement or sped ic
 215
k The relevant article provides cover, among other

public morals or maintain public order;

p
protect
* animal or plant life or health; or
protectrt human,
*
ure compliance with laws or regulations not inconsistent
^th
• the Agreement including, among other things, measures
Necessary to prevent deceptive or fraudulent practices.
ver, the Annex on Financial Services entitles members,
other provisions of the GATS,to take measures for
rdless ofreasons,
regajential including for the protection of investors,
sitors, policy holders or persons to whom a fiduciary duty is
by a financial service supplier, or to ensure the integrity and
stability of the financial system.
finally/ in the event of serious balance-of-payments difficulties
members are allowed to temporarily restrict trade, on a non-
discriminatory basis, despite the existence of specific commitments.

Special Provisions for Developing Countries

Developing country interests have inspired both the general
structure of the Agreement as well as individual articles. In
particular, the objective of facilitating the increasing participation
of developing countries in services trade has been enshrined in the
Preamble to the Agreement and underlies the provisions of
Article IV.
This Article requires members, among other things, to negotiate
specific commitments relating to the strengthening of developing
countries' domestic services capacity; the improvement of
developing countries' access to distribution channels and
information networks; and the liberalisation of market access in areas
°f export interest to these countries.
Progressive liberalisation is one of the basic tenets of the GATS.
Article XIX makes the provision that liberalisation takes place with
due respect for national policy objectives and members'
development levels, both overall and in individual sectors.
 International Economics (T.y g
216
Developing countries are thus given flexibility for 0_ .
sectors, liberalising fewer types of transactions, and p^R
extending market access in line with their ^elopn^*^
Developing countries have more flexibility in pursuing
integration policies, maintaining restrictions on balance of n
grounds and determining access to and Use
telecommunications transport networks and services. In
developing countries are entitled to receive technical assistan
Ce
the WTO Secretariat.

IV. AoA
The specific agreement which provides the framework
multilateral trade in agriculture, is the Agreement on Agricuitlt°r
(AoA). The present rules and commitments on agriculture are oft
called the "Uruguay Round reform programme" as they
negotiated in the Uruguay Round and they include reductions^
subsidies and protection as well as other disciplines on the trade in
agriculture.

Agricultural Trade
While the volume of world agricultural exports has substantially
increased over recent decades, its rate of growth has lagged behind
that of manufactures, resulting in a steady decline in agriculture's
share in world merchandise trade. In 1998, agricultural trade
—
accounted for 10.5% of total merchandise trade when trade in
services is taken into account, agriculture's share in global exports
drops to 8.5%. However, with respect to world trade agriculture is
still ahead of sectors such as mining products, automotive products,
chemicals, textiles and clothing or iron and steel. Among the
agricultural goods traded internationally, food products make up
almost 80% per cent of the total. The other main category of
agricultural products is raw materials. Since the mid-1980s, trade in
processed and other high value agricultural products has been
expanding much faster than trade in the basic primary products
such as cereals.
Agricultural trade remains in many countries an important part
overall economic activity and continues to play a major ro e
 217

He agrlcu^ura^ ProducH°n and employment. The trading

plays also a fundamentally important role in global food
sys^ for example by ensuring that temporary or protracted food
arising k°m adverse ^imatic and other conditions can be
de^m world markets.
dements of the Agreement on Agriculture and Related
Agreement on Agriculture establishes a number of generally
plicable rules with regard trade-related agricultural measures,
to
^^arily in the areas of market access, domestic support and export
^^petition. These rules relate to country-specific commitments to
C^prove market access and reduce trade-distorting subsidies which
the individual country schedules of the WTO
re contained in
^embers and constitute an integral part of the GATT.

I Market Access
The Uruguay Round resulted in a key systemic change: the switch
from a situation where numerous non-tariff measures impeded
agricultural trade flows to a regime of bound tariff-only protection
plus reduction commitments.
The key aspects of this fundamental change have been to stimulate
investment, production and trade in agriculture by:

(i) Making agricultural market access conditions more transparent,

predictable and competitive,
(ii) Establishing or strengthening the link between national and
international agricultural markets, and thus
(iii) Relying more prominently on the market for guiding scarce
resources into their most productive uses both within the
agricultural sector and economy-wide.
In many cases, tariffs were the only form of protection for agricultural
Products before the Uruguay Round. The Uruguay Round led to
fte "binding" in the WTO of a maximum level for these tariffs.
F°r many other products, however, market access restrictions
Involved non-tariff barriers. The Uruguay Round negotiations aimed
 International Economics (TY&
barriers. For this purpose,
a
toremove suchwhich, amongst other things, providedpMa
was agreed agriculture-specific non-tariff measures ° for
replacement of equivalent level of protection. a
tariff
which afforded an
force of the Agreement on Agricy]^
Following the entry into
on agriculture-specific non-tariff measy S'
is now a prohibition agricultural products traded intern^Or|ally
virtually all
the tariffs on
are bound in the WTO.
Schedule of Tariff Concessions
Member has a "schedule" of tariff concessions co
Each WTO
The schedule sets out for each
all agricultural products. some cases agricultural products
indi^^8
agricultural product, or, in tariff that can be applied on in/^
more generally, the maximum concerned. The -P°rts
into the territory of the
Member tariffs
include those that resulted from the tariffication nr°
schedules
which, in many cases, are
considerably higher than industrial tan^
non-tariff measJr
reflecting the incidence of agriculture-specific
prior to the WTO. Many developing countries have bound th *
levels, i.e., at levels hieher
previously unbound tariffs at "ceiling" °
than the applied rates prior to the WTO.
Developed country Members agreed to reduce, over a six-year period
beginning in 1995, their tariffs by 36% on average of agricultural
all
For
products, with a minimum cut of 15% for any [Link] be
developing countries, the cuts are 24% and 10%, respectively,
implemented over ten years. Those developing country Memberscases,
which bound tariffs at ceiling levels did not, in manycountry
undertake reduction commitments. Least-developed not to
Members were required to bind all agricultural tariffs, but
undertake tariff reductions.
2. Domestic Support
The agricultural package of the Uruguay Round
fundamentally
c anged the way domestic support in favour of agricultural has
producers was treated under the GATT 1947. A key objective
een to discipline and reduce domestic support while at the
same
me eaving great scope for governments to design domestic
 245

20.1 Introduction
20.2 ASEAN
20.3 European Union
20.4 NAFTA
20.5 SAARC

In a report published in 1995 the WTO said that "the regional and
multilateral integration initiatives are complements ... in die pursuit
of open trade". Also, that the legal foundations for more open trade
have been laid by the global multilateral trading system with
regional integration agreements serving to deepen relations with
neighbouring countries.
The share of world merchandise trade which is intra-regional (i.e.,
conducted within a geographic region) has risen from 40.6% in 1958
to 50.4% cent in 1993. This increase is mainly accounted for by the
development of Western Europe, whose internal trade grew from
53 to 70% of its overall trade during this period. This is the only
region to exhibit a clear policy-induced increase in the relative
importance of intra-regional trade. However, it should be noted,
 246 Intcnmtional Economics (T.Y r a
r
" $EA4- v»
that the importance of Western Europe s trade with other
in relation to its output has largely been maintained.
Between 1947 and the end of 1994, a total of 108 regional agre
were notified to the GATT. Trade Blocs have been
expanding throughout the world economy. In 1992, the Eur
dramati^*5
Union (EU) completed the single-market programme and b^Pean
historic initiative for monetary union. The United States,
and Mexico launched the North American Free Trade Agreem^ 9
9
Ca^H
(NAFTA) in 1994. Even Japan, for years the only industrial
that was not a member of any regional arrangement, completed
count??
trade agreement with Singapore in 2001. Thirty -four countries a
the Americas envision free trade "from Alaska to Tierra del Fuego"-
the Association of Southeast Asian Nations (ASEAN) launched
free trade area in 2010, closer to home; South Asian Association for
Regional Cooperation (SAARC) negotiated the SAARC Preferential
Trading Arrangement (SAPTA) in 1993.
Based on the statistical data from the WTO, there have been
increasing amounts of regional trade arrangement (RTA) since 2000.
From 1958 to 1999, there were 75 RTAs which have notified to the
WTO. From 2000 to the present, there were 156 additional RTAs
around the world. (WTO, 2021). As of 15 October 2021, 350 RTAs
were in force. These correspond to 568 notifications from WTO
members, counting goods, services and accessions1 separately.

Regional trade agreements (RTAs) have risen in number and reach

over the years, including a notable increase in large plurilateral2
agreements. Non-discrimination among trading partners is one of
the core principles of the WTO; however, RTAs, which are reciprocal
preferential trade agreements between two or more partners,
constitute one of the derogations and are authorized under the WTO,
subject to a set of rules.

Accessions refer to goods that are affixed to and become part of other goods.
Examples includes semiconductors that are inserted into computers, parts that
are added onto.
2. A plurilateral agreement is a multi-national legal or trade agreement between
countries. In economic jargon, it is an agreement between more than two
countries, but not a great many, which would be multilateral agreement.
 >« «>■
$

Association of South EastBangkok,

Asian Nations, or ASFAM
^hedonSAugustWin
ASEAN Declaration (Bangkok
Thailand,
Declaration) by the FouZ
XheL?
of
^7' dT'y
Thadand. Brunei
Singapore and on 2f I July 1995 Darussalam
Malay?ia' ^14«
then jomed on 7Januarv
Lao People's Democratic Republic
1984, Vietnam
My^um31 on Juv I™' Cambodia on 30 April 1999,
making up what is today the ten Member States of ASEAN.

ASEAN Motto
"One Vision, One Identity, One Community"

Aims and Purposes of ASEAN

1. Accelerate the economic growth, social progress and cultural

development in the region through joint endeavours in the spirit
of equality and partnership in order to strengthen the
foundation for a prosperous and peaceful community of South
East Asian Nations;
2 - Promote regional peace and stability through abiding respect
for justice and the rule of law in the relationship among
countries of the region and adherence to the principles of the
United Nations Charter;
3
Promote active collaboration and mutual assistance on matters
of common interest in the economic, social, cultural, technical,
scientific and administrative fields;
248 International Economics (T.Y.B.A.: SEM-Vl)
4. Provide assistance to each other in the form of training and
research facilities in the educational, professional, technical and
administrative spheres;
5. Collaborate more effectively to encourage further growth in
die agriculture and industry and trade sectors. This includes
improving transportation and communications facilities and
conducting studies on international commodity trade with the
over arching goal of raising the living standards of ASEAN
peoples;
6. Promote Southeast Asian studies; and
7. Maintain close and beneficial cooperation with existing
international and regional organisations with similar aims and
purposes, and explore all avenues for even closer cooperation
among themselves.

Fundamental Principles of ASEAN

In their relations with one another, the ASEAN Member States have
adopted the following fundamental principles, as contained in the
Treaty of Amity and Cooperation in Southeast Asia (TAC) of 1976:
1. Mutual respect for the independence, sovereignty, equality,
territorial integrity, and national identity of all nations;
2. The right of every State to lead its national existence free from
external interference, subversion or coercion;
3. Non-interference in the internal affairs of one another;
4. Settlement of differences or disputes by peaceful manner;
5. Renunciation of the threat or use of force; and
6. Effective cooperation among themselves.
The group aims for steps that go beyond tariff reforms to include
the elimination of non-tariff barriers, harmonising and simplifying
customs procedures, and developing common product certification
standards. In addition, there is an effort to develop a framework
 249
.
,nvestment
rOmPass'n^cross-border protection as well as measures to promote
facilitate investing.
be noted that ASEAN integration efforts in Asia are not
n should to the 1° member nations.

ASEAN Economic Community (AEC)

size of $2.3 trillion
With a market
a e
and 600 million people, AEC aims
to achieve sing .integrated market through the process
r of regional
economic integration.
AEC is based on four "pillars":
। A single market,
2. A competitive region vis-^-vis the rest of the world,
3. Equitable economic development within the AEC, and
4. An integration of ASEAN into the world economy.
The AEC is the realisation of the region's end goal of economic
integration. It envisions ASEAN as a single market and product
base, a highly competitive region, with equitable economic
development, and fully integrated into the global economy.
The history of AEC can be traced back as far as 1992 when the
ASEAN Leaders mandated the creation of the ASEAN Free Trade
Area (AETA). Since then, efforts were intensified to broaden the
region's economic potentials. The adoption of ASEAN Vision 2020
by the Leaders in 1997 further envisaged ASEAN as a highly
competitive region with free flow of goods, services, investments, a
freer flow of capital, equitable economic development and reduced
poverty and socio-economic disparities.
In 1998, the Leaders adopted the Hanoi Plan of Action (HPA). It
chartered out a set of initiatives for economic integration to realize
the ASEAN Vision 2020. Recognizing the needi for an integrated
of ASEAN Concord II m
region, the Leaders issued the Declaration ASEAN
of Community
2003 which set out the establishmentaccelerated to 2015).
(initially targeted by 2020 butwas later
250 International Economics (TXB.A.: SEM-p/j
The AEC Blueprint 2015 was adopted in 2007 as a master piari
guiding the establishment of the AEC in 2015. Immediately after
that, a new AEC Blueprint 2025 was developed to set the strategic
directions for the next phase of ASEAN's economic integration
agenda.
The AEC Blueprint 2025 is envisaged to further deepen economic
integration and achieve a more integrated economic community with
the following characteristics:

I. A Highly Integrated and Cohesive Economy

The ASEAN Economic Community envisions ASEAN as a single
market and production base. Free flow of goods, services,
investments, capital and labour will allow the development of
production networks in the region and enhance ASEAN's capacity
as the global supply chain.

II. A Competitive, Innovative, Inclusive and Dynamic ASEAN

The goal of ASEAN economic integration is to create a stable,
prosperous and highly competitive economic region. The core
elements under the competitive region include :
(a) Competition Policy : Preserving competition within markets
by eradicating anti-competitive behaviour of corporations is
crucial to promote and protect the competitive process and
provides a level playing field for all enterprises.
(b) Consumer Protection : Enhanced regional cooperation is set to
safeguard the well-being and interests of over 600 million
consumers in ASEAN through education, mobilisation and
representation. As the region continues to grow with increased
globalisation, cross border purchasing, changes in consumer
demographics and advances in technological innovation,
consumer protection ensures that consumers make well-
informed decisions about their choices and have access to
effective redress mechanisms. It also pushes for businesses to
guarantee the quality of the products and services they offer.
 251
f^^ectual
innovation
Property Rights (IPR)
have become the new capital of the
and Property >s a tool of economic development dav
<edual 'he dve and
that can
'f^dation-
’^uce wea'th fOT
Managing Intellectual
segment of the
Property well can help increase
Pop ne streams of busmesses and enhance shareholders' value As
that lncludes “’tangible creation of the human
of propel Property also protects technology innovations
’cd intellectual
10 brand recognition and increase competitive advantage for
nance
e
ducts and services in the global marketplace.
Property includes patents, utility models, copyright,
f teilectual
designs, trademarks, plant variety protection, integrated
dustrialdesign, genetic resources, trade secret, traditional
Circuits
knowledge, geographical indications and domain names. It plays
role in the achievement of national and regional socio¬
an important
development goals of the ASEAN Economic Community
economicis also a critical tool in encouragmg transfer of technology,
(AEC). It will lead to a
and stimulating innovation and Creativity that
as envisioned in the
competitive, innovative, and dynamic ASEAN
AEC Blueprint 2025.
IV. Enhanced Connectivity and Sectoral Co-operation
Regional economic integration under the AEC necessarily demands
as
greater connectivity between ASEAN Member States as welland
within the countries. Transport, ICT, energy connectivity
to people
tourism are key elements of physical and people
sectors such as
connectivity in the region. Additionally, other
technology all play an
agriculture, forestry, fisheries, science and
an integrated market
important and complementary role to achievecooperation are:
for
under the AEC. In sum, the main sectors
(a) Energy
(b) Minerals
Forestry
(c) Food, Agriculture and
(d) ICT
. (e) E-commerce
252 International Economics (Tyn A
(f) Tourism
(g) Science and Technology
(h) Transport
(i) Standard and Conformance
(j) Services
V A Resilient, Inclusive, People Oriented and People
ASEAN ntered
Kev initiatives in the development of a resilient and
S focus on the development of/mcro smali andmc^
median,

hrid<X’
b"nomk the development divideboth at the SME level and
of Cambodia, Lao FDR, Myanmar,
integration enhance
nLm (CLMV)AUtoofenable all Member States to move forwardand
^fied manner.
ZTremon as well as
which willenhance
in a
ASEAN's competitiveness
to ensure the benefits of the integration process
7 ,n The
sector engagement
ASEAN Economic Community also supports private
by facilitating work with ASEAN Business
Advisory Council and other business councils m the region.
MSMEs: Micro, Small and Medium Enterprises (MSMEs) are
integral to the economic development and growth of ASEAN
Member States. They constitute the largest share of establishments
and contribute significantly to the labour force of ASEAN Member
States (AMS). MSME account for between 88.8% and 99.9% total
establishments and contribute between 51.7% and 97.2% of total
employment. The contribution of these enterprises to GDP ranges
between 30% and 53% and the contribution of SMEs to exports is
between 10% and 29.9%.
These figures indicate that MSMEs play important roles to economic
and social development, contributing to value added activities,
innovation and inclusive growth through the creation of job
opportunities and their widespread presence in both urban and rural
areas. MSMEs are thus the backbone of ASEAN and are fundamental
 253
achieving long-run and sustainable economic growth and
U’*3 rowing the development gap.
'ri 0^*
’ Tbe private sector is a key stakeholder in ASEAN integration •

f?%ublic-Private sector engagement (PPE) is crucial for the

t|on of the ASEAN Economic Community (AEQ. PEE allows
fe
rivate sector to better understand the desired outcomes and
of the AEC and in turn, private sector feedback contributes
W°the success of ASEAN in designing regional strategies and
^ natives as well as in identifying impediments to deepen regional
^onomic integration. Greater involvement and more structured
^ticipation of the private sector provides the necessary input to
^ie regional process, particularly in reducing current and future trade
investment impediments faced by business enterprises.
VI. Integration with a Global Economy
ASEAN operates in an increasingly inter connected and highly
networked global environment, with interdependent markets and
globalised industries. Establishing ASEAN as a dynamic region with
businesses that are able to compete internationally means looking
beyond the border of ASEAN Economic Community (AEC).
Through Free Trade Agreements (FTA) and Closer Economic
Partnership (CEP) as well as enhanced participation in global supply-
networks, ASEAN is both integrating into the global
economy as
well as enhancing the attractiveness of its internal market for
foreign
investment.
1. ASEAN-China Economic Relations: China was accorded full
Dialogue Partner status at the 29th ASEAN Ministerial Meeting
in July 1996 in Jakarta, Indonesia.
2. ASEAN-J apan Economic Relations: Japan's formal relationship
with ASEAN was first established in 1977 as among the first
ASEAN's Dialogue Partners. The Framework for
Comprehensive Economic Partnership between ASEAN and
Japan was signed by leaders at the ASEAN-Japan Summit on 8
October 2003 in Bali, Indonesia, and was aimed at establishing
a Comprehensive Economic Partnership agreement between
ASEAN and Japan.
254
International Economics (T.Y.B.A.;
se^v
d, °
.
Thr
Three Economic Cooperation: The
3. ASEAN-Plus
w ASEAN ASEAN.p. s
Member States, China,
Three (APT) const
[ASEAN-Korea Free
RePubl between ASEAN A^'
Trade
and the
cooperation
mic
and1
,„
» & China Economic Relations: The
ASEAN-Hong„ KKnne
4.
ent (AHKFTA) and the ASEAN
ASEAN-HRc
. ™asSvAgreement (AHKIA) entered into force on11
70 9 respectively. They are comprehensrve in
scope,
,
encompassm0 trade in goods, trade in services, investment,
[Link], dispute
settlement
5. ASEAN-Australia-New Zealand Economic Relations-
Australia and New Zealand are among the first ASEAN^
Dialogue Partners. Formal relationships were established h
1974 and 1975 respectively. ASEAN, Australia and New
Zealand signed the ASEAN-Australia-New Zealand Free Trade
Area Agreement (AANZFTA) in 2009. The Agreement went
into effect in January 2010, and is the most comprehensive
ASEAN's FTA to date.
6. ASEAN-India Economic Relations: India became ASEAN
Dialogue Partner in 1996. India as ASEAN's sixth largest
trading partner and eight largest source of FDI among ASEAN
Dialogue Partners.
At the 2nd ASEAN-India Summit in 2003, the Leaders signed
the ASEAN-India Framework Agreement on Comprehensive
Economic Cooperation. The Framework Agreement laid a
sound basis for the establishment of an ASEAN-India Free
Trade Area (FTA), which includes FTA in goods, services and
investment.
The ASEAN-India Trade in Goods Agreement (AITIGA)
enteredinto force on1January 2010. The signing of the AITIGA
on 13 August 2009 in Bangkok paved the way for the creation
of one of the world's largest free trade areas with more than 1.9
billion people and a combined GDP of US$ 5.36 trillion. The
ASEAN-India Trade in Services Agreement was signed by all
 255
flocks
parties on 13 November 2014 and had entered into force on 1
July 2015. As of date, the Agreement has been ratified by all
parties. Meanwhile, the ASEAN-India Investment Agreement
was signed by all Parties on 12 November 2014. The Agreement
entered into force on 1 July 2015. To date, it has been ratified by
all Parties, except Cambodia.
7 ASEAN-Russia Economic Relations: Efforts to enhance
economic cooperation activities was intensified in 2002 during
the 3rd ASEAN-Russia Joint Cooperation Committee (ARJCC)
Meeting which endorsed the establishment of the ASEAN-
Russia Working Group on Trade and Economic Cooperation
(ARWGTEC).
8. ASEAN-US Economic Relations: Dialogue relationship
between ASEAN and the U.S. started in 1977. As one of
ASEAN's important trading partner, economic cooperation
between ASEAN and the US is stipulated under the Trade and
Investment Framework Arrangement (TIFA) and Expanded
Economic Engagement (E3) Initiative.
9. ASEAN-Canada Economic Relations: ASEAN-Canada
dialogue relationship was established in February 1977. In 1981,
the ASEAN-Canada Economic Cooperation Agreement
(ACECA) was signed, laying the grounds for industrial,
commercial, and technical cooperation between the two sides.
In 2011, ASEAN and Canada signed the Joint Declaration on
Trade and Investment (JDTI) which guides economic
engagement between ASEAN-Canada.
10. ASEAN-EU Economic Relations: In 2019, the EU was ASEAN's
third largest trading partner after China and the United States.
It was also the third largest provider of Foreign Direct
Investment in 2019.
11- There is also the ASEAN-East Asia Summit (EAS) Economic
Cooperation and The Regional Comprehensive Economic
Partnership (RCEP) initiative.
These characteristics support the vision for the AEC under the
ASEAN Community Vision 2025.
 256 International Economics (T. Y.R.4 •

f'V/)
20.3 EUROPEAN UNION (EU)3

The European Economic Community (EEC), also known as

th
European Common Market (ECM) or the European Community
and now as European Union (EU), is by far the most successful
of
the regional economic integration schemes. With a population
much
larger than that of the US and a GDP close to that of the US and
much higher than that of Japan, the EC is the largest market in the
world. The EC accounts for roughly a quarter of the world trade.
The unification of the EU was expected to produce great benefits
for the member nations. It would lead to restructuring the economy
of the EU and would result in efficiency improvement in production,
trade creation and increase in income, employment and
consumption. It was also expected to achieve significant reduction
in prices.
Some observers regarded the EC-1992 as the European Fortress/
Fortress 92 implying that henceforth exports from non-member
countries to the EC would have to encounter a mounting barrier.
EC officials, however, argued that the single European market would
boost world trade and growth.

Aims of The European Union

The aims of the European Union within its borders are:

1. Promote peace, its values and the well-being of its citizens.
2. Offer freedom, security and justice without internal borders,
while also taking appropriate measures at its external borders
to regulate asylum and immigration and prevent and combat
crime.
3. Establish an internal market
4. Achieve sustainable development based on balanced economic

3. In 2012, the EU was awarded the Nobel Peace Prize for advancing the causes
of peace, reconciliation, democracy and human rights in Europe.
 Trade Blocks 257
growth and price stability and a highly competitive market
economy with full employment and social progress.
5. Protect and improve the quality of the environment.
6. Promote scientific and technological progress.
7, Combat social exclusion and discrimination.
8. Promote social justice and protection, equality between women
and men, and protection of the rights of the child.
9. Enhance economic, social and territorial cohesion and solidarity
among EU countries.
10. Respect its rich cultural and linguistic diversity.
11. Establish an economic and monetary union whose currency is
the euro.

The aims of the EU within the wider world are:

1. Uphold and promote its values and interests.
2. Contribute to peace and security, and the sustainable
development of the earth.
3. Contribute to solidarity and mutual respect among peoples, free
and fair trade, eradication of poverty and the protection of
human rights.
4. Strict observance of international law.
The EU's aims are laid out in Article 3 of the Lisbon Treaty (Signed:
13 December 2007; Entered into force : 1 December 2009)
Purpose: To make the EU more democratic, more efficient and better
able to address global problems, such as climate change, with one
voice.
258 International Economics (T.Y.B.A.;
SEM-V/j
Values of The European Union
The European Union is founded on the following values:
1. Human Dignity: Human dignity is inviolable. It must
respected, protected and constitutes the real basis
be
Of
fundamental rights.
2. Freedom: Freedom of movement gives citizens the right to move
and reside freely within the Union. Individual freedoms
such
as respect for private life, freedom of thought, religiOn
assembly, expression and information are protected by the EU
Charter of Fundamental Rights.
3. Democracy: The functioning of the EU is founded on
representative democracy. A European citizen automatically
enjoys political rights. Every adult EU citizen has the right to
stand as a candidate and to vote in elections to the European
Parliament EU citizens have the right to stand as a candidate
and to vote in their country of residence, or in their country of
origin. |
4. Equality: Equality is about equal rights for all citizens before
the law. The principle of equality between women and men
underpins all European policies and is the basis for European
integration. It applies in all areas. The principle of equal pay j
for equal work became part of the Treaty of Rome in 1957.
5. Rule of Law: The EU is based on the rule of law. Everything
the EU does is founded on treaties, voluntarily and
democratically agreed by its EU countries. Law and justice are
upheld by an independent judiciary. The EU countries gave
final jurisdiction to the European Court of Justice - its judgments
have to be respected by all.
6. Human Rights: Human rights are protected by the EU Charter
of Fundamental Rights. These cover the right to be free from
discrimination on the basis of sex, racial or ethnic origin, religion
or belief, disability, age or sexual orientation, the right to the
protection of your personal data, and the right to get access to
justice.
rrade Blocks 259
^Charter
tbe EU Charter
of
in Artic^e 2 °f the Lisbon Treaty and
°ut
Fundamental Rights.
unding Agreements of The European
Union
Hie European Union is based
every action taken by the EU ' °B ^aw’ ™s means that
approved voluntarily and d on Beaties that have been
countries. For example, if a emocratically by all EU member
Commission cannot propose^ iX^^ dted 3 the
A treaty is a binding agreempn+ k
sets out EU objectives, rules foT member countries. It
made and the relationshin Eph* institutions, how decisions are
een the EU and its member countries.
to prepare for nw meX^ ^parent,
-
cooperation such as the single
Under the treaties, EU institute „
Sne^ ° mtroduce new 31635 of

legislation' which the

member countries then implement. ”
Sorted chronologically from oldest
to latest, the main treaties are:
I. Treaty Establishing the European Coal and
Steel Community
Signed: 18 April 1951
Entered into force: 23 July 1952
Expired: 23 July 2002
Purpose: To create interdependence in coal and steel so that one
country could no longer mobilise its armed forces without others
knowing. This eased distrust and tensions after WW-II. The ECSC
treaty expired in 2002.
II. Treaties of Rome : EEC and EURATOM Treaties
Signed: 25 March 1957
Entered into force:1 January 1958
260 International Economics ([Link].: SEM-Vi)
Purpose: To set up the European Economic Community (EEC)
and
the European Atomic Energy Community (Euratom).
Main changes: Extension of European integration to include general
economic cooperation.
The EEC originally comprised six nations, Belgium, France, Federal
Republic of Germany, Italy, Luxembourg and the Netherlands. The
EEC was expanded in 1973 with the inclusion of the United
Kingdom, Denmark and Ireland. Greece joined the Community in
1981. Spain and Portugal became members on January 1, 1986. With
Austria, Finland and Sweden joining the EC later, the membership
rose to 15.
The Treaty of Rome required every member country to:
1. Eliminate tariffs, quotas and other barriers on intra-community
trade.
2. Devise a common internal tariff on their imports from the rest
of the world.
3. Allow the free movement of factors of production within the
community.
4. Harmonise their taxation and monetary policies and social
security policies.
5. Adopt a common policy on agriculture, transport and
competition in industry.

III. Merger Treaty - Brussels Treaty

Signed: 8 April 1965
Entered into force: 1 July 1967
Purpose: To streamline the European institutions.
Main changes: Creation of a single Commission and a single Council
to serve the then three European Communities (EEC, Euratom,
ECSC). Repealed by the Treaty of Amsterdam.
ir" a ^ust0Tins Union had been established among the
Iv 1*
W six members of the EEC as they abolished tariffs on trade
°^ng themselves and imposed a common tariff schedule on
from other countries. The Community members had also
sOme noteworthy steps towards approximating their economic
licies, including the adoption of Common Agricultural Policy
?CA^) es^^s^neni of the European Monetary System
inl979-
detailed programme for attaining a single integrated market was
set forth by the EC Commission (the ECs executive body) in June
1985 in a White Paper entitled Completing the Internal Market. The
$C Council (the ECs supreme decision making body) promptly
committed the EC to carry out the White Papers programme by the
end of 1992. This programme envisaged the unification of the
economies of the member nations into a single market by removing
all border barriers to trade and mobility and by unifying the
economic policies and regulations. This came to be described as
Europe 1992/EC1992.
The White Paper listed 300 specific areas (subsequently reduced to
279) for action by 1992. These actions were intended to eliminate
the physical, technical, and fiscal obstacles to an integrated market
to achieve a genuine European Community without internal
economic frontiers with freedom of movement for goods services,
persons and capital.
The barriers targeted for removal pertained to the following eight
categories:
I 1. Border control
2. Limitations on the movement of people and their right to
establishment
3. Differing internal taxation regimes
4. Lack of a common legal framework for business
5. Controls on movement of capital
6. Heavy and differing regulation of services
262 IntcnutioiMl Economics (T. SEM~]/h
7. Divergent product regulations and standards
8. Protectionist public procurement policies
IV. Single European Act
Signed: 17 February 1986 (Luxembourg) / 28 February 1986 (The
Hague)
Entered into force: 1 July 1987
Purpose: To reform the institutions in preparation for Portugal and
Spain's membership and speed up decision-making in preparation
for the single market.
Main changes: Extension of qualified majority voting in the Council
(making it harder for a single country to veto proposed legislation),
creation of the cooperation and assent procedures, giving Parliament
more influence.
V. Treaty on European Union - Maastricht Treaty
Signed: 7 February 1992
Entered into force: 1 November 1993
Purpose: To prepare for European Monetary Union and introduce
elements of a political union (citizenship, common foreign and
internal affairs policy).
Main changes: Establishment of the European Union and
introduction of the co-decision procedure, giving Parliament more
say in decision-making. New forms of cooperation between EU
governments - for example on defence and justice and home affairs.

VI. Treaty of Amsterdam

Signed: 2 October 1997
Entered into force:1 May 1999
Purpose: To reform the EU institutions in preparation for the arrival
of future member countries.
LinEEC [Link],
changes. renumbering and
More transparent decision-making I
W
d ordinary legislative
the procedure).
Treaty of Nice
01.
Signed. 26 February 2001
Entered into force:1February 2003
purpose' To reform the institutions so that the EU could function
efficiently after reaching 25 member countries.
Ma'n changes. Methods for changing the composition of the
Commission and redefining the voting system in the Council.
Vin. Treaty of Lisbon
Signed: 13 December 2007
Entered into force:1December 2009
Purpose. To make the EU more democratic, more efficient and better
able to address global problems, such as climate change, with one
voice. .
Main changes: more power for the European Parliament, change of
voting procedures in the Council, citizens' initiative, a permanent
president of the European Council, a new High Representative for
Foreign Affairs, a new EU diplomatic service.
The Lisbon treaty clarifies which powers:
I • Belong to the EU

' • Belong to EU member countries

• Are shared.
EU, 2019-2024
A New Strategic Agenda for The
4 priority areas in its 2019-2024
The European r^mcil set out of the EU institutions over the
work
| strategic agen a
seeE t0 reSpOnd to the challenges and
opporS UP’
264 Intem/itiotMl Economics (T. SEM- Vn
focusing on them, the EU can strengthen its role in today's
challenging environment. The strategic agenda also identifies how
to deliver on the priorities.
The 4 priorities are:
1. Protecting citizens and freedoms: Ensuring effective control
of the EU's external borders and further developing a
comprehensive migration policy. Fighting terrorism and cross-
border/online crime, increasing the EU's resilience against both
natural and man-made disasters.
2. Developing a strong and vibrant economic base: Building a
resilient economy by deepening the Economic and Monetary
Union to ensure that Europe is better prepared for future shocks,
completing the banking and capital markets union,
strengthening the international role of the euro, investing in
skills and education, supporting Europe's businesses,
embracing digital transformation, and developing a robust
industrial policy.
3. Building a climate-neutral, green, fair and social Europe.
Investing in green initiatives that improve air and water quality,
promote sustainable agriculture and preserve environmental
systems and biodiversity. Creating an effective circular
economy (where products are designed to be more durable,
reusable, repairable, recyclable and energy-efficient) and a well¬
functioning EU energy market that provides sustainable, secure
and affordable energy. A faster transition to renewables and
energy efficiency, while reducing the EU's dependency on
outside energy sources.
4. Implementing the European Pillar of Social Rights: Promoting
European interests and values on the global stage. Building a
robust foreign policy based on an ambitious neighbourhood
policy with 16 of its closest eastern and southern neighbours
and a comprehensive partnership with Africa. Promoting global
peace, stability, democracy and human rights. Ensuring a robust
trade policy in line with multilateralism and the global rules-
based international order. Taking greater responsibility for
security and defence, while cooperating closely with NATO.
 7.^'

already indications of a number of other

courdri#
There are
^coming members of the Union in future.

,
20.4 NAFTA
. .

NORTH AMERICAN EREE TRADE AGREEMENT (NAFTA)

North American Eree Trade Agreement (N AFT A), was enacted
Canada, and the
in 1994 and created a free trade zone for Mexico,
United States. As of January 1, 2008, all tariffs and quotas were
eliminated on U.S. exports to Mexico and Canada under the North
American Free Trade Agreement.
Mexico is the United States' third largest trading partner and second
largest export market for U.S. products. In 2018, Mexico was THE
third-largest trading partner (after Canada and China) and second-
largest export market. Two-way trade in goods and services totalled
USD 678 billion, and this trade directly and indirectlv supports
millions of U .S. jobs. The United States sold USD 265 billion of U.S.
products to Mexico in 2018 and USD 34 billion in services, for a
total of USD 299 billion inU .S. sales to Mexico. Mexico is the first or
second-largest export destination for 27 U.S. states.
NAFTA provides coverage to services except for aviation transport,
maritime, and basic telecommunications. The agreement also
provides intellectual property rights protection in a variety of areas
including patent, trademark, and copyrighted material. The
government procurement provisions of the NAFTA apply not onlv
to goods but to contracts for services and construction at the federal
level. Additionally, U.S. investors are guaranteed equal treatment
to domestic investors in Mexico and Canada.
NAFTA allows Canadian and Mexican companies to ship goods to
customers in Canada and Mexico duty free. Goods can qualify tn
several ways under NAFTA s rules of origin.
 International Economics (Ty^
266
Features of NAFTA
tariffs on products mov‘
The NAFTA seeks to eliminate all
the three countries and end other
barriers to services and arn°ng
capital within North America. NAFTA covers the follow^08^6^
areas.
^8
1. Market access: Tariff and non-tariff barriers, rules
' of
governmental procurement. origi^
2. Trade rules: Safeguards subsidies countervailing and
^dumping duties, health and safety standards.
3. Services: Provides for the same safeguards for trade in
(consulting, engineering software, etc.) that exist for services
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 liberalisation,
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 jobs
to Mexico as a result of Mexico's 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 o
 Trade Blocks 267
environmental standards in Mexico and the strengthening of
compliance.

Impact of NAFTA
NAFTA has achieved substantial trade liberalisation. 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 concern 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 liberalisation. Many Mexicans
feared that fierce competition from the US firms would seriously
damage the Mexican industry and economy, while many others
maintained that liberalisation 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 estimates indicate
26g International Economics (T.Y.B.A SE^
is
significant net job creation in the US. This corroborated by
relatively low unemployment rates prevailing in the US after
nJ
formation of the free trade area.
Foreign investment in Mexico has risen substantially sinCe
Agreement. Companies from outside NAFTA have been makii^
large investment in Mexico to gain a free entry to the huge IAFTa
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 being a member of the NAFTA
would get a considerable edge over other nations in selling in the
US and Canada.
The U.S.-Mexico-Canada Agreement (USMCA) entered into force
on July 1, 2020, replaced the North American Free Trade Agreement
(NAFTA).

205 SAARC

The long felt desire for cooperation among the countries of South
Asia was affirmed with the birth of South Asian Association for
Regional Cooperation (SAARC). SAARC was established with the
signing of the SAARC Charter in Dhaka on 8 December 1985. SAARC
comprises of eight Member States: Afghanistan, Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri Lanka. The Secretariat of
the Association was set up in Kathmandu, Nepal on17 January 1987.
Decisions at all levels are to be taken on the basis of unanimity; and
bilateral and contentious issues are excluded from the deliberations
of the Association.

Profile of the SAARC Countries

SAARC accounts for over one-fifth of the world population. The
density of population in the SAARC countries, which have o y
about 3.3% of the world's land area, is very high, nearly double
average density in the low-income economies taken as a whole.
 Irate flocks 269
density of population in some of the countries, Bangladesh and
Maldives, are among the highest in the world. The population in
die SAARC region has been growing very fast. SAARC countries
are characterised by low per capita income, high population growth
and density and heavy dependence on primary sector.
A major share of the world's poor live in the SAARC countries. All
these are low-income economies. Among the SAARC members,
Maldives has the highest and Nepal the lowest per capita income.
In spite of the growing importance of service and industrial sectors
in these countries, a majority of population is still dependent on
agriculture. Some of the member countries, like Pakistan, Bangladesh
and India, have been receiving large amounts of remittances from
the nationals working abroad, particularly in the Middle East.
The share of this region in the world trade is only about one per
cent. All the major countries of the region have trade deficit. Intra-
regional trade is an important means of promoting regional
economic cooperation. In South Asia, however, such trade has been
at a very low level. Statistics for recent years show that India accounts
for a very large share of the total intra-regional exports. However,
the share of India's intra-regional exports as a percentage of its total
exports is very low. It may be noted that the total exports of India is
more than twice the aggregate exports of all other members of the
Association. Theshare of intra-regional trade in the total world trade
of Nepal is exceptionally high because of its large volume of trade
with India.
India's exports to the SAARC countries increased marginally from
3% in 1990-91 to 4.6% of the total in 2000-01, as against the increase
from less than 12-19% to other Asian developing countries with
whom India does not have any trading agreement. During the same
period, India's imports from SAARC crept up from 0.5 to 1.1%
whereas from other Asian developing countries it increased from
13.5 to nearly 17%.
Manufactured exports account for a very large share of the exports
of SAARC. However, the share of high technology exports in their
total manufactured exports is either nil or very negligible. Although
manufactured products predominate the export sector,
primary
270 International Economics (T.Y.B.A.: SEM
products also contribute significantly to their exports. Among th
e
SAARC countries, India's exports are relatively diversified.

Objectives and Principles

The fundamental goal of SAARC is to accelerate economic and social
development through optimum utilisation of the collective human
and material resources.
According to Article I of the Charter of the SAARC, the Objectives
of the Association are:
1. To promote the welfare of the people of South Asia and to
improve their quality of life.
2. 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 realise their full potentials.
3. To promote and strengthen collective self-reliance among the
countries of South Asia.
4. To contribute to mutual trust, understanding and appreciation
of each other's problems.
5. To promote active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields.
6. To strengthen cooperation with other developing countries.
7. To strengthen cooperation among themselves in international
forums on matters of common interest.
8. To cooperate with international and regional organisations with
similar aims and purposes.

Article II of the Charter Lays Down the Principles of the

Association
1. Cooperation within the framework of the Association shall be
based on respect for the principles of sovereign equality'
territorial integrity, political independence, non-interference in
the internal affairs of other States and mutual benefit.
Trade Blocks 271
2. Such cooperation shall not be substitute for bilateral and
mu ti ateral cooperation but shall complement them.
3. Such cooperation shall not be inconsistent with bilateral and
multilateral obligations.

Potential Areas of Cooperation

There are many potential areas of cooperation. Having started with
some non-economic areas such as sports, arts and culture, the process
of cooperation in the SAARC has moved to economic areas. As of
December 2021, on the SAARC website, the areas of cooperation
include the following:
1. Human Resource Development and Tourism
2. Agriculture and Rural Development
3. Environment Natural Disasters and Biotechnology
4. Economic Trade and Finance
5. Social Affairs
6. Information and Poverty Alleviation
7. Energy Transport Science and Technology
8. Education Security and Culture

Problems
There are a number of problems which confront the SAARC.
1. Border disputes, ethnic issues and religious, 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,
272 International Economics (T.Y.B A cti
an important contributor to the success of economic inteora44
is limited.
°n'

3. As the member countries have been emphasising very

on the promotion of exports to the hard currency areas* a'
regional trade has been relatively neglected.
4. Some of the member countries are important exporters of s
type of products and are, therefore, competitors in
international market. This is true of India and Bangladesh w tk
respect to jute, and India and Sri Lanka with respect to tea
Similarly, textiles and clothing are very important export item
of some of the members.
5. Due to the differences in the levels of development and
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. In fact however, the least developed members
could enormously benefit from others, particularly from India.
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 considerations may
discourage governments the abolition/ reduction of tariffs even
on intra-regional trade.
Underdevelopment of transport, communications, payment
and clearing arrangements, institutional inadequacies etc. also
hinder expansion of economic relations.

1. Explain regional trading agreements as trading blocs.

2. Whare the aims and purposes of ASEAN?
3. Write a note on the ASEAN Economic
Community.
4. What is the AEC Blueprint 2025?
5. What are the aims and values of the
European Union?
6. Discuss the main treaties that led to the
establishment of the
Union.
 227

40 ECONOMIC
IO] INTEGRATION

18.1 Introduction
18.2 Definition
18.3 Objectives of Economic Integration
18.4 Forms of Economic Integration
18.5 Advantages of Economic Integration
18.6 Costs of Economic Integration

18.1 INTRODUCTION

Economic integration is an arrangement among nations that

typically includes the reduction or elimination of trade barriers and
the coordination of monetary and fiscal policies. Economic
integration is sometimes referred to as regional integration as it often
occurs among neighbouring countries.
When regional economies agree on integration, trade barriers fall
and economic and political coordination increases. A regional
trading bloc is a group of countries within a geographical region
I that protect themselves from imports from non-members in other
geographical regions, and who look to trade more freely with each
’

other Regional trading blocs are increasingly shaping the pattern

of world trade - a phenomenon often referred to as regionalism.
228 International Economics (T.Y.B A • q
Nearly all of the WTO's Members have signed regional
agreements with other countries. Some of these agreements a
ranging in scope; others, aim to achieve trade liberalisation °
across a
number of sectors over time.

Bela Balassa defines economic integration as a process and as a

state
of affairs. As a process, it includes measures designed to abolish
discrimination between economic units belonging to different
nation
states. Viewed as a state of affairs, it can be represented by the
absence of various forms of discrimination between national
economies.
While interpreting his definition, Balassa draws a distinction
between integration and cooperation. The difference is qualitative
as well as quantitative. Cooperation includes actions aimed at
lessening discrimination; whereas 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
the 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.

18.3 OBJECTIVES OF ECONOMIC

— INTEGRATION
—
Economic integration aims to reduce costs for both consumers and
producers and to increase trade between the countries involved in
the agreement.

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, according to Shiells, the
 iclnKrl,ti°n 229
seem to play a key role in the formation of
/' motivations
ni

economic benefits from achieving a more efficient

"1. .n, obtain
oduction structure by exploiting economies of scale through
nr fixed costs over larger regional markets, increased
Leading
from foreign direct investment, learning from
ecOnon“c growth
experience etc.
To pursue non-economic objectives such as strengthening
1
political ties and managing migration flows.
, 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.

184 FORMS OF ECONOMIC INTEGRATION

Bela Balassa in The Theory of Economic Integration (1961) explained

five possible levels or degrees of economic integration. At each
succeeding stage, members surrender a greater measure of their
national sovereignty. In practice today, we observe and can therefore
add two more stages to make it a total of seven stages.
The stages in the process of economic integration, range from a very
ioose association of countries in a preferential trade area,
to complete economic integration, where the economies of member
countries are completely integrated.
230 International Economics .
The seven stages of economic integration are:
1. Preferential trading area,
2. Free trade area,
3. Customs union,
4. Common market,
5. Economic union,
6. Economic and monetary union and
7. Complete economic integration.
1. Preferential Trade Area : Preferential Trade Areas (PTAs) exist
when countries within a geographical region agree to reduce
or eliminate tariff barriers on selected goods imported frOrn
other members of the area. This is often the first small step
towards the creation of a trading bloc. Agreements may be made
between two countries (bi-lateral), or several countries (multi¬
lateral).
2. Free Trade Area : According to Balassa, this is the first (and
least restrictive) form of economic integration. The free trade
area/ association is a grouping of countries set up to facilitate
free trade between them. The free trade area abolishes all
restrictions on trade among the members. However, each
member is left free to determine its own commercial policy with
non-members.
Free Trade Areas (FTAs) are created when two or more
countries in a region agree to reduce or eliminate barriers to
trade on all goods coming from other members. The North
American Free Trade Agreement (NAFTA) is an example of
such a free trade area, and includes the USA, Canada, and
Mexico.
3. Customs Union : According to Balassa a customs union is a
more advanced level of economic integration than the free trade
area. It not only eliminates all restrictions on trade among
members but also adopts a uniform commercial policy against
the non-members.
 237
Integration
^ic
customs union involves the removal of tariff barriers1^ j
^embers, together with the acceptance of a common
external tariff against non-members. Countries that expo
the customs union only need to make a single payment (
once the goods have passed through the border. Once inside
the union, goods can move freely without additional tariffs.
Tariff revenue is then shared between members, with the
country that collects the duty retaining a small share. A common
external tariff effectively removes the possibility of arbitrage^
and, some would argue, is one of the
fundamental building
blocks of economic integration. However, members are not free
to negotiate individual trade deals. Equally, if a member wishes
to open up to complete free trade, it cannot do so if a common
tariff exists.
4 Common Market : According to Balassa, the common market
is a step ahead of the customs union. A common market allows
free movement of labour and capital within the common
market, besides having the two characteristics of
the customs
union, namely, free trade among members and uniform
tariff
policy towards outsiders.
A common (or single) market is the most significant step towards
full economic integration. In the case of Europe, the single
market is officially referred to as the 'internal market'. The key
feature of a common market is the extension of free trade from
just tangible goods, to include all economic resources. This
means that all barriers are eliminated to allow the free
movement of goods, services, capital, and labour. In addition,
besides removing tariffs, non-tariff bamers are also reduced
and eliminated.
For a common market to be successful there must also be a
significant level of harmonisation of macroeconomic policies,
and common rules regarding product standards, monopoly
power and other anti-competitive practices. There may also be
common policies affecting key industries, such as the Common
Agricultural Policy (CAP) and Common Fisheries Policy (CFP).
232 International Economics (T.Y.B a • er.
5. Economic Union and Monetary Union : According to Ba]
the economic union is a further more advanced lev
integration. Apart from satisfying the conditions of the com
010,1
market mentioned above, the economic union achieves
degree of harmonisation of national economic policies, thrS°,Tle
a common central bank, unified monetary and fiscal
etc. P°hc*s
Economic union is a term applied to a trading bloc that h
°S
both a common market between members, and a commontr
policy towards non-members, although members are fre6
pursue independent macroeconomic policies. The Euro
Union (EU) is the best-known Economic union, and came ’
force on November 1, 1993, following the signin
the Maastricht Treaty (formally called the Treaty on Euro
uPean
Union.)

Union (EMU) is a key stage towards compete integration, and

involves a single economic market, a common trade policy, a
single currency and a common monetary policy.
Monetary union is the first major step towards macroeconomic
integration, and enables economies to converge even more
closely. Monetary union involves scrapping individual
currencies, and adopting a single, shared currency, such as the
Euro (19 out of 27 countries). This means that there is a
common exchange rate, a common monetary policy, including
interest rates and the regulation of the quantity of money, and
a single central bank, such as the European Central Bank (for
19 countries).
7. Complete Economic Integration : According to Balassa, the
ultimate form of integration is full economic integration
characterised by the abolition of all barriers to intra-bloc
movement of goods and factors, unification of social as well as
economic policies, and all the members bound by decisions of
a supernational authority consisting of executive, judicial and
legislative branches.
 7U
^”,c • final stage represents a total harmonisation of fiscal policy
^3 a complete monetary union. Complete economic
^oration involves a single economic market, a common trade
1
a single currency,
P^icy,a single fiscal policy, common monetary policy, together
a
including common tax and benefit
-
ates ln sh0Tt' complete harmonisation of all policies, rates,
nd economic trade rules. A fiscal union is an agreement to
harmonise tax rates, to establish common
pending and borrowing, and jointly agree on
levels of public sector
national budget
deficits or surpluses.
best example of complete economic integration is with
the European Union (EU). Economically, the 27 countries
-
function as one with free trade between the countries and
unified monetary policies and fiscal policies. Though, each
country functions separately politically and keeps defined
borders, different laws, and government systems.

18.5 ADVANTAGES OF ECONOMIC

INTEGRATION
The advantages or benefits of economic integration fall into three
categories:
1. Trade benefits: More specifically, economic integration
typically leads to a reduction in the cost of trade, improved
availability of goods and services and a wider selection of them,
and gains in efficiency that lead to greater purchasing power.
Economic integration is beneficial as it allows countries to
specialise and trade without government interference, which
can result in a reduction of costs and ultimately an increase in
overall wealth.
2. Employment: Employment opportunities tend to improve
because trade liberalisation leads to market expansion,
technology sharing, and cross-border investment. The
movement of employees is liberalised under economic
integration as well. Normally, employees would need to deal
with visas and immigration policies in order to work in another
234 International Economics (T.Y.B.A.: SEM
'V/)
country. However, with economic integration, employees
move freely, and it leads to greater market expansion can
and
technology sharing, which ultimately benefits all economies.
3. Political co-operation: Political cooperation among counts^8
also can improve because of stronger economic ties, vvh
provides an incentive to resolve conflicts peacefully an(j
leads to greater stability. Political conflicts usually end 1
economic losses stemming from trade wars, or even milit
-T
wars breaking out, resulting in extreme costs for all combata tS/
and are thus best avoided.

18.6 COSTS OF ECONOMIC INTEGRATION

Despite the benefits, economic integration has costs. These fall into
two categories:
1. Diversion of trade : That is, trade can be diverted from non¬
members to members, even if it is economically detrimental
for the member state.
Z Erosion of national sovereignty : Members of economic unions
typically are required to follow to rules on trade, monetary
policy, and fiscal policies established by an unelected external
policymaking body. The notable feature of economic integration
is the loss of independence of individual central banks who
control monetary policy. It leads to less national sovereignty,
and the responsibilities of central banks are delegated to an
external body instead. The external control becomes
troublesome in terms of managing a cohesive fiscal and
monetary policy among many different countries.

1. What is economic integration?

2. What are the objectives of economic integration?
3. Describe the stages of economic integration.
4. Discuss the advantages and costs of economic integration.