Chapter 4
Regional Economic and Political Integration
LEARNING OBJECTIVES
After studying this chapter students should be able to:
• Provide an overview of the determinants of regional economic and political
integration.
CHAPTER SPOTLIGHTS
• Determinants of Economic and Political Integration: There are several factors that
induce countries to expand trade with other countries. Such factors include
sharing a common culture and a common history, regional proximity, a similar
CHAPTER OVERVIEW
This chapter explains the determinants of regional economic and political integration. It
provides an examination of the different levels of economic and political integration, and
of the functions of the different policy and governance bodies of the European Union.
CHAPTER OUTLINE
4-1 Determinants of Economic and Political Integration
Sharing a culture, a common language, a common history, or even common borders may
lead countries to join forces in an effort to eliminate barriers to trade.
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4-1a A Common Culture
4-1b A History of Common Economic and Political Dominance
A history of dominance by one nation in a region can lead to shared cultural
4-1c Regional Proximity
4-1d Economic Considerations
Countries with a similar level of economic development are likely to be
4-1e Political Considerations
Political considerations, such as the threat of losing national identity and
4-2 Levels of Regional Economic and Political Integration and Examples of
Integration Successes
4-2a Bilateral Agreements and Multilateral Forums and Agreements
Bilateral and multilateral agreements can be industry-specific or involve some or
all products exchanged between countries. These agreements are bilateral if they
involve two countries. If they involve multiple countries, they are referred to as
multilateral. They are less formal in nature than free trade agreements, and they
are not as stable. Some examples include:
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4-2b Free Trade Agreements
Free Trade Agreements take place between two or more countries and involve a
reduction or elimination of customs duties and other trade barriers between
member countries:
1) European Free Trade Association (EFTA): Current member countries are
Iceland, Liechtenstein, Norway, and Switzerland. At present EFTA is not an
4) Central American Free Trade Agreement – Dominican Republic (CAFTA-
DR): Agreement between the United States, the five countries of Central
America (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua), and
the Dominican Republic. The Agreement was designed to eliminate tariffs and
barriers to trade and to expand regional opportunities for workers,
manufacturers, famers, and service providers of the member countries.
4-2c Customs Unions
Customs Union: Free trade association that has either eliminated or greatly
reduced all tariffs and other trade restrictions between all of the member
4-2d Common Markets
Common Market: Agreement between member countries to eliminate all tariff
and non-tariff barriers to trade within the area, to adopt common external tariffs,
and to allow for the free movement of capital and labor within the common
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market area. The European Union has developed a viable, long-standing, common
market; a number of other economic groups are well on their way to establishing a
common market:
1) Latin American Integration Association (LAIA): Established in 1980, it
comprises the countries of Latin America. It replaced the Latin American Free
Trade Association, a failed attempt to create a free trade association that would
have comprised all of Latin America.
4) Central American Common Market (CACM): economic agreement
between Belize, Costa Rica, the Dominican Republic, El Salvador, Guatemala,
Honduras, Nicaragua, and Panama (with observer status); it includes plans for
forming a regional economic union similar to the European Union.
4-2e Monetary Unions
Monetary Unions require a unified monetary policy for member countries. A
monetary union involves, among others, the creation of a unified, parastatal
central bank and the use of a single currency, or currencies that are in a fixed
relationship to each other. Examples of monetary unions are:
1) European Economic and Monetary Union (also known as Euroland):
Created by the 1992 Maastricht Treaty, it has a common monetary policy, an
3) Economic Community of West African States (ECOWAS): Strives to
achieve complete economic integration and to address impediments to the
integration process caused by political unrest and lag in economic development of
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4-2f Political Unions
Political Union: The highest level of regional integration, it assumes a viable
economic integration and involves the establishment of viable common governing
bodies, legislative bodies, and enforcement powers. The European Union is the
The governmental bodies set in place by the European Union are:
1) European Council, the highest policy-making body, it consists of heads of
member-countries’ governments.
2) European Parliament consists of members elected by direct universal
suffrage with representation allocated among member states based on their
population; it debates the policies and legislation in the European Union.
5) European Commission, the executive body of the European Union, is
subordinated to the European Council. It consists of a president and
commissioners who are in charge of initiating and supervising the
execution of laws and policies. It answers to the European Parliament and
acts only on behalf of and in the interest of the European Union, and not
that of individual member states.
KEY TERMS
Andean Common Market: A trade group of the Andean countries that aspire to become
a common market; it is currently in the process of agreeing upon common external tariffs.
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Bilateral Agreement: Regional trade cooperation between two countries aimed at
reducing or eliminating trade barriers for all or for selected products.
Central American Common Market: An economic agreement between Central
American countries; this agreement includes plans for forming a regional economic union
similar to the European Union, and to advance regional and international trade.
Council of Mutual Economic Assistance (CMEA): A trade agreement between the
countries of the Soviet Bloc that disintegrated after the fall of communism. CMEA was
an economic body similar in nature to a free trade area, and approached what would be
considered a political union.
addressed issues related to the use and control of atomic energy.
European Central Bank: The bank of the European Union charged with enacting
monetary policy for the twelve countries that share a common currency, the Euro.
European Coal and Steel Community: An agreement that represents an early attempt at
tariff reduction between members of the European Union.
European Monetary Union (EMU): A union composed of the members of the
European Union who adhere to the joint monetary policy enacted by the European
Central Bank and who have adopted the Euro as the single currency.
European Parliament: The Parliament of the European Union, composed of members
elected every five years by direct universal suffrage; seats in the Parliament are allocated
Central, and South America.
Latin American Free Trade Association (LAFTA): An attempt by Latin American
countries to establish a free trade association; its demise is attributed to the economic
disparity between member countries and to protectionist policies.
Latin American Integration Association (LAIA): Latin America’s largest trade
agreement striving to establish bilateral and multilateral agreements aimed at reducing
tariff and nontariff barriers.
Multilateral Forums and Agreements: Agreements that involve multiple countries,
have an informal structure, and/or do not necessarily have regional integration as their
goal.
North American Free Trade Agreement: An agreement between the United States,
Canada, and Mexico, aiming to eliminate tariff and nontariff barriers between the
countries.
South African Customs Union (SACU): A customs union that includes Botswana,
Swaziland, Lesotho, and Namibia. The group’s main trading partner is South Africa, and
member countries have partially or entirely tied their currencies to the South African
rand.
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Southern African Development Community (SADC): A free trade organization that
Southern Cone Common Market (MERCOSUR): A free trade agreement in South
America that has met with considerable success; MERCOSUR is presently in the process
of becoming a viable customs union.
REVIEW QUESTIONS
True/ False
1. True
Multiple Choice
1. D
DISCUSSION QUESTIONS
1) Identify the determinants of regional economic and political integration.
There are several factors that prompt countries to favor trade with other countries.
One such factor is a common culture. The commonality of language and other elements
of culture facilitate interaction between neighboring countries and promote cooperation,
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2) Describe the different stages of regional economic and political integration. What
is the difference between a free trade association and a common market?
There are six basic stages of regional economic and political integration. Bilateral
or multilateral agreements are the most basic form of integration. A bilateral agreement
involves regional trade cooperation between two countries aimed at reducing or
eliminating trade barriers for selected products. Multilateral agreements involve multiple
3) There are arguments that much of the groundwork for the Free Trade Area of
the Americas already has been done by other free trade agreements in the region
targeted for economic integration. Which free trade agreements are operating
within the Free Trade Area of the Americas?
NAFTA, MERCOSUR, and the Andean Common Market (AnCom) are the primary free
trade agreements in the Americas. The idea of the FTAA is currently facing challenges,
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4) Identify the different bodies of the European Union and describe their main
function.
The highest policy-making body of the European Union is the European Council,
which is the meeting place of the heads of the EU member nations. The European
Case 4-1
Damianov Press
1. What are some of the challenges that Damianov Press is facing in its new
business?
Damianov Press needs to invest in the company to meet the environmental requirements
2. What are some of the advantages that Damianov Press derives from Bulgaria’s
membership in the European Union?
Membership in the European Union means that Damianov Press will benefit from the
3. What are the costs that Damianov will incur directly due to Bulgaria’s
membership in the European Union?
Damianov will need to finance the refurbishing of old equipment and to invest in new
equipment that complies with European Union equipment requirements. Among others,
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