ECONOMIC INTEGRATION AND
INTERNATIONAL BUSINESS
Objectives
By
the end of this, you should be able to:
- Identify the various types of economic and political integration
between countries.
- Analyse the impact of economic integration on trade, industry
activity, and the countries concerned.
- Discuss the development and significance of the major regional economic
groupings in different parts of the world.
- Establish the link between regional integration and globalization.
Introduction
Integration between countries is an important feature of the
international business environment.
International integration may be either political or economic. Political
integration is where countries pool their sovereignty to some degree.
Economic
integration involves links between the economies of a group of countries. These are often known as trade, blocks or
more formally, regional economic groupings.
In practice some degree of political integration as well though not
necessarily full political union.
Regional (economic) agreements
Regional
economic cooperation is based on the promise that, while responding to global
agreements to promote trade, nations in a region connected by historical,
geographic, cultural, economic and political affinities may be able to strike
more intensive cooperative agreements for mutual beneficial economic
advantages.
Benefits of an economic integration
A free Trade Area is a geographical area encompassing a number of
countries that have eliminated import duties (tariffs) and other restrictions
to the free movement of goods, services, labour and capital investments across
the region.
There are
several benefits of a an economic
integration
1. Incentive to increase trade:-
With
the elimination of tariff and non-tariff barriers, exporters/importers find it
easier and cheaper to do business among themselves and therefore increase the
exports and imports volume.
2. Increase profits of the private
sector:-
The
lowered transaction costs of business increase profitability and empowers
private sector to afford re-investment, staff training and research and
development.
3. Incentive to expansion of existing
industries:-
The
larger market enables existing industries to expand investment which in turn
contributes to economic growth and employment generation.
4.
Incentive of production of
capital, intermediate goods and foreign direct investment:-
Production of capital goods requires heavy capital investments which
makes production costs high. However the
large single market allows for large scale production which lower unit cost of
production and therefore makes such investments possible. A large market also
attracts foreign direct investment.
5. Provides a greater range of
products to consumers of each member state:
The
free flow of goods among the member states provides consumers with a greater
range of goods and services.
6. Training ground for competition in
international trade:-
The
large free market allows exporters/importers/producers to compete with other
member states. This results in
improvements in quality, import/export skills and therefore provides a training
ground to compete in the world market.
7. A catalyst for increased
cross-border investment and small scale trade:-
Free
movement of goods, services and capital enables firms to open branches or
subsidiaries in other member states.
Small scale cross boarder traders can also buy and sell goods across
countries and this can have profound implications on employment and food
security.
The
cumulative effect of the above is increased and faster economic growth and
development of each of the member states and generation of increased employment
and expansion of the tax base of the economies of each country.
The success of cooperation
A
question may be raised as to what factors account for the success of economic
integration. Briefly, economic
cooperation is likely to flourish when member countries have diverse products
and raw materials. The most successful
case of economic integration has been the European Community. Nations belonging to EC have more or less
complementary economies, diverse industries, different natural resources and
varying agricultural base. Further it is
desirable that member nations be of compatible economic status in terms of
balance-of-payments position and level of development.
Types of market agreements between
countries
There are six principal forms of integration between countries:-
preferential trading agreement, free trade area, customs union, common market,
economic union, and political union, such agreements are differentiated on
several bases.
Levels of integration between
countries
1. Preferential Trade Agreement
A preferential trade agreement is
perhaps the weakest form of economic integration. In a PTA countries would
offer tariff reductions, though perhaps not eliminations, to a set of partner
countries in some product categories. Higher tariffs, perhaps non-discriminatory
tariffs, would remain in all remaining product categories. This type of trade
agreement is not allowed among WTO members who are obligated to grant
most-favoured nation status to all other WTO members. Under the most-favoured
nation (MFN) rule countries agree not to discriminate against other WTO member
countries (Ball, 1996).
2. Free Trade Area
The second level of economic
integration, the Free Trade Area, involves the elimination of tariffs on trade
among the countries in the regional group while retaining their original
tariffs against the rest of the world. An example of a free trade area is the
North America Free Trade Area (NAFTA) comprising USA, Canada and Mexico; Latin
America Free Trade Area (LAFTA), which comprises Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela.
3. Customs Union
The third level of regional economic
integration, the customs union involves the elimination of tariffs among member
countries plus the establishment of a common external tariff structure toward
non-member countries. Examples include the East African Community Customs Union
(EACCU), which comprise of Kenya, Uganda, Tanzania, Burundi, and Rwanda,
established in January 1st, 2005 and the Southern Africa Customs
Union (SACU), which comprise Botswana, Lesotho, Namibia Swaziland and South
Africa.
4. Common Market
The fourth level of
economic integration, the Common Market, is characterized by the same tariff
policy as the Customs Union plus freedom of movement of factors of production,
especially Labour and Capital among the member countries. This permits
individual and firms to carry out their transnational businesses without facing
barriers to movements of products, people and money. This is what Common Market
for East and Southern Africa (COMESA) comprising of twenty African states,
ultimately intends to achieve.
5. Economic Union
Fifth
in the list is an economic union, characterized by the harmonization of
economic policy beyond that of the common market. Specifically, an economic
union seeks to unify monetary and fiscal policies among its member states. A
common currency, a permanently fixed exchange rate, is a crucial aspect of an
economic union. Harmonized tax structures are other requirements. To a large degree,
national governments participating in an economic union relinquish control over
much of their national economic policies to the group. The European Union is a
good example of an Economic Union.
6. Political Union
The sixth or the highest
level of regional economic integration is a political union, under which all
economic and political policies are unified. Countries that unite under a
common government lose their national identities and become part of a single
state. Important examples of political union are Canada, the former Soviet
Union, and the United States of America, each of which combined independent
states into a single country. Attempts
at an Economic African Federation in the early 1960s between the Republic of
Kenya, the Republic of Uganda, and the Republic of Tanganyika failed due to
nationalistic interests and ideological differences.
To
an extent, the Commonwealth of Nations and the council for Mutual Economic
Assistance (COMECON) can be characterized as politically based agreements, in the
future, in a very limited sense; the EC with the European Parliament in place
could be considered political Union.
ECONOMIC INTEGRATION IN AFRICA
Influenced
by the EC, a number of African countries have attempted to draw up market
agreement in order to benefit from economic integration and cooperation. The economic community of West African States
(ECOWAS) was created with Benin, Cape Verde, Gambia, Ghana, Guinea,
Guinea-Bissau, Ivory Cost, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal,
Sierra Leone, Togo and Burkina as members.
This bloc is now called COMESA.
a)
The East African Customs Union
b)
The Western African Economic
Community, etc.
Despite
the fact that there are many market agreements in force in Africa, they have
had no significant effect in promoting trade or economic progress because most
African nations are small and have no economic infrastructure to produce goods
to be traded among themselves. These nations depend to a very large extent upon
imports from developed countries. In
return they export minerals and other natural resources.
Even where natural resources, such as
petroleum in the case of Nigeria, have brought monetary wealth, lack of mass
education and economic experience has inhibited capitalizing on market
agreements.
COMESA (COMMON MARKET FOR EASTERN
AND SOUTHERN AFRICA)
The
common market for Eastern and Southern Africa (COMESA) was established in 1994
to replace the preferential Trade Area of Eastern and Southern Africa (PTA)
hence has been in existence since 1981.
PTA
was established to take advantage of a larger market size, to share the regions
common heritage and destiny and to allow greater social and economic
cooperation, with the ultimate objectives being to create an economic
community.
PTA
treaty encouraged its transformation into a common market for East and Southern
Africa, and in conformity with this, the treaty established COMESA, was signed
on 5th November, 1993 in Kampala, Uganda and was ratified “a year
later in Lilongwe, Malawi on 8th December, 1994.
The
current members of COMESA are Angola, Burundi, Comoros, Democratic Republic of
Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi,
Mauritius, Namibia, Uganda, Rwanda, Seychelles, Sudan, Swaziland, Zambia and
Zimbabwe.
Objectives of COMESA
The
main objective of the Common Market for Eastern and Southern Africa (COMESA) is
to create a fully integrated regional economic community where there is freedom
of movement of:-
Goods
Services
Capital
Labour and persons
So
as to improve the living standards of the peoples of the countries of the
region.
COMESA
member states have agreed on the need to create and maintain:-
·
A full Free Trade Area guaranteeing
the free movement of goods and services produced within COMESA and removal of
all tariffs and non-tariff barriers.
·
A customs union under which goods
and services imported from non-COMESA countries will attract an agreed single
tariff in all COMESA states.
·
Free movements of capital and
investment supported by the adoption of common investment practices and
policies so as to create a more favourable investment climate for the COMESA
region.
·
A gradual establishment of a
payments union based on the COMESA clearing House and eventual establishment of
a common monetary union within a common currency.
·
The adoption of common Visa
arrangements, including the right of establishment leading eventually to the
free movement of bona fide persons.
The Free Trade Area
The
key mechanism for trade liberalization is the removal tariff and non tariff
barriers to intra COMESA trade. In this
regard, COMESA has adopted a programme for the reduction and eventual
elimination of tariff and non tariff barriers to intra COMESA trade.
The
launching of COMESA was the second stage in its programme or regional
integration as it moves towards an economic community.
In
the Free Trade Area, tariffs and non-tariff barriers will be eliminated among
member states, in conformity with agreed rules of origins with each country
maintaining its own tariff on goods imported from third countries.
This
large single market will result in a more efficient allocation of regional:-
·
Resources
·
Promote competition leading to
better quality, fair-priced goods and provide incentives for Foreign Direct
Investment (FDI).
·
The larger market will also
encourage longer production runs and better, cost-effective utilization of
production capacity.
Others:-
Other
than trade, COMESA has put in place several strategies for cooperation and
coordination of regional agricultural policy, livestock and irrigation
development.
¨
Member states will also be
encouraged to among others remove restrictions of the movement of tourists
within the common market and to promote regional tourist circuits.
¨
In addition transport and
communication infrastructure within the region will continue to receive high
priority among COMESA programmes.
¨
COMESA will work towards a common
environmental management policy to preserve the sub-regions Eco-systems as well
as pool energy resources with the aim of optimizing intra-COMESA production and
trade in commercial energy products.
Rules of origin
The treaty establishing the common market of Eastern and Southern
Africa sets out rules of origin with respect to products originating in the
member states. An essential requirement
for the proper functioning of the COMESA arrangements is the observance by
member states of these Rules of Origin.
Since Intra- COMEASA trade involves the participation at one time or
another of all member states as exporters or importers, then they must be able
to rely on the controls established and operated by each member state at the
points where the traded goods leave the territory of one member state and enter
the territory of another.
The
Rules of Origin contain criteria to enable the authorities in member states to
determine which goods qualify as originating in any of the member states. They are five in number and only one of them
must be complied with for any goods to qualify for COMESA tariff treatment. The five criteria are as follows:-
1.
Goods wholly produced or obtained
in a member state (that is no materials from outside the common market have
been used) Or
2.
Goods produced in the member states
and the C.I.F. value of any foreign materials (that is non-COMESA) used does
not exceed 60% of the total cost of all materials used in their production.
3.
Goods produced in member states
whose value added resulting from process of production accounts for at least
35% of the -factory cost of the goods.
4.
Goods produced in member states and
are classified under a tariff heading other than the tariff heading under which
they were imported.
5.
Goods of a particular importance to
the economic development of the member states and containing not less than 25%
value added notwithstanding the provision in no. 3 above.
The
exporter is free to base his claim to COMESA tariff- treatment on any one of
the five criteria described above. An
exporter in a COMESA member state intending to export goods to another COMESA
state must obtain a certificate of origin from the issuing authority in his
state.
The
certificate when presented by the importers to the customs Authority in the
importing member state will serve as an evidence to enable the goods to be
accorded the COMESA tariff treatment that is being sought.
In
order to obtain a COMESA certificate of origin, the exporter must present to
issuing authorities in his country evidence that goods have been produced in
conformity with the conditions specified above.
Where
the goods have been produced by a company or enterprise that is not the exporter
who is seeking the certificate or origin, then the exporting company or
enterprise must obtain from the producer a declaration in the form and
containing the information, concerning the specific origin which has been
complied with in respect of the goods being exported.
No comments:
Post a Comment