Bilateral Free Trade Agreement · Economic Integration · Regional Free Trade Area · Regionalism · SAARC · South Asia

Regional Economic Integration: Learning from South Asia and the World

Regional Economic Integration: Learning from South Asia and the World

 Md. Joynal Abdin

Diplomacy & Foreign Affairs, July 2013, New Delhi, India

 Background: The framework of the theory of economic integration was laid out by Jacob Viner (1950) who defined the trade creation and trade diversion effects, the terms introduced for the change of interregional flow of goods caused by changes in customs tariffs due to the creation of an economic union. He considered trade flows between two states prior and after their unification, and compared them with the rest of the world. His findings became and still are the foundation of the theory of economic integration.

The basics of the theory were summarized by the Hungarian economist Béla Balassa in the 1960s. As economic integration increases, the barriers of trade between markets diminish. Balassa believed that supranational common markets, with their free movement of economic factors across national borders, naturally generate demand for further integration, not only economically (via monetary unions) but also politically—and, thus, that economic communities naturally evolve into political unions over time.

Economic Integration:

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the combined economic productivity of the states.

Why Economic Integration?

There are economic reasons:

a.       For the increase of trade between members states.

b.      For mass scale production, higher productivity and economies of scale.

c.       Ability of a person or a country to produce a particular good or service at a lower marginal and opportunity cost over another.

d.      Technology transfer & replication of best practices.

Political reasons:

a.       United position in different international platforms.

b.      Increases exchange of culture, knowledge sharing.

c.       Reduces armed conflicts.

Steps towards regional economic integration:

The degree of economic integration can be categorized into seven stages:

A preferential Trade Area (also preferential trade agreement, PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. The line between a PTA and a free trade area (FTA) may be unclear, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade. Example:

Multilateral Asia-Pacific Trade Agreement (APTA)-1976, SAARC Preferential Trade Arrangement (SAPTA) – 1999 and many more . . . . . .

Bilateral India – Afghanistan (2003),  India – Nepal (2009), India – Chile (2007), India – MERCOSUR (2009), ASEAN – PR China (2005), Laos – Thailand (1991) and many more . . . . . .

A Free Trade Area is a trade bloc whose member countries have signed a free-trade agreement (FTA), which eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be considered an open border. It can be considered the second stage of economic integration.

Example: Multilateral ASEAN Free Trade Area (AFTA) – 1992, Asia-Pacific Trade Agreement (APTA), North American Free Trade Agreement (NAFTA) – 1994, South Asian Free Trade Agreement (SAFTA) – 2004/2006  and many more . . . . . . Bilateral ASEAN – Australia – New Zealand Free Trade Area (AANZFTA) in effect as of 1 January 2010,  ASEAN–China Free Trade Area (ACFTA), in effect as of 1 January 2010, ASEAN–India Free Trade Area (AIFTA), in effect as of 1 January 2010, ASEAN–Korea Free Trade Area (AKFTA), in effect as of 1 January 2010, and many more . . . . . .

A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Example: In Action East African Community (EAC) – 2005, Customs Union of Belarus, Kazakhstan and Russia – 2010, EU-Turkey (1996) etc. Proposed 2015 Arab Customs Union (ACU), 2015 Economic Community of West African States (ECOWAS), 2019 or before Union of South American Nations (UNASUR), 2019 African Economic Community (AEC)etc.

A single market is a type of trade bloc which is composed of a free trade area (for goods) with common policies on product regulation, and freedom of movement of the factors of production (capital and labour) and of enterprise and services. The goal is that the movement of capital, labour, goods, and services between the members is as easy as within them. The physical (borders), technical (standards) and fiscal (taxes) barriers among the member states are removed to the maximum extent possible. Example: In Action Canada – Agreement on Internal Trade (AIT), European Free Trade Association (EFTA), European Economic Area (EEA), Switzerland – European Union etc. Proposed 2015 ASEAN Economic Community (AEC), East African Community (EAC) etc.

An economic and monetary union is a type of trade bloc which is composed of an economic union (common market and customs union) with a monetary union. It is to be distinguished from a mere monetary union (e.g. the Latin Monetary Union in the 19th century), which does not involve a common market. This is the fifth stage of economic integration. Example: In Action: Economic and Monetary Union of the European Union (1999/2002). Proposed: Gulf Cooperation Council (GCC) – 2013[1], East African Community (EAC) – 2015, Caribbean Single Market and Economy (as part of the CARICOM) – 2015[2], Southern African Customs Union (SACU) – 2015, Southern African Development Community (SADC) – 2016 etc.

Fiscal union is the integration of the fiscal policy of nations or states. Under fiscal union decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. For example, in federal nations such as the United States, fiscal policy is determined to a large extent by the central government, which is empowered to raise taxes, borrow and spend. It is often proposed that the European Union adopt a form of fiscal union. Most member states of the EU participate in economic and monetary union (EMU), based on the euro currency, but most decisions about taxes and spending remain at the national level. Therefore, although the European Union has a monetary union, it does not have a fiscal union. Example: There is no active fiscal union in the world. It is often proposed that the European Union adopt a form of fiscal union. Most member states of the EU participate in economic and monetary union (EMU), based on the euro currency, but most decisions about taxes and spending remain at the national level. Therefore, although the European Union has a monetary union, it does not have a fiscal union.

Complete economic integration is the final stage of economic integration. After complete economic integration, the integrated units have no or negligible control of economic policy, including full monetary union and complete or near-complete fiscal policy harmonization. Complete economic integration is most common within countries, rather than within supranational institutions. Example: A good example of this is a country like the United States of America which can be viewed as a series of highly integrated quasi-autonomous nation states. In this example it is true that complete economic integration results in a federalist system of governance as it requires political union to function as, in effect, a single economy.

Obstacles to economic integration:

Obstacles standing as barriers for the development of economic integration include the desire for preservation of the control of tax revenues and licensing by local powers, sometimes requiring decades to pass under the control of supranational bodies. The experience of 1990-2009 has shown radical change in this pattern, as the world has observed the economic success of the European Union. So now no state disputes the benefits of economic integration: the only question is when and how it happens, what exact benefits it may bring to a state, and what kind of negative effects may take place.

Initiative towards Economic Integration in South Asia:

Though South Asia covers 4,488,300 sq kms of the world’s surface area with a population of 1.5 billion, still it has only a negligible share of the world’s total volume of trade. Most of the people of this region are living below the poverty line. Only mutual initiatives towards economic integration can play a vital role in upgrading the standards of living of the poor people.

Academicians have predicted two opposite outcomes, both positive and negative. Negative effects include the possibility that the infant industrial sector may not survive the open market competition or that the sick industries might face ruin. On the other hand, positive effects in the short-run include inland ‘trade-creation effects.’ But that must outweigh trade diversion effects in order to achieve beneficial trade liberalization. However, apart from short-run benefits, there are also the long-run benefits such as greater technical efficiency due to greater competition, larger markets, higher consumer surpluses, and more foreign investments.


1. The South Asian Association for Regional Cooperation (SAARC) – 8 December 1985

2. SAARC Preferential Trade Agreement (SAPTA) – 1999

3. South Asian Free Trade Area (SAFTA) – 2004/2006

4. BIMSTEC Free Trade Area Framework Agreement – 2004.

5. Asia-Pacific Trade Agreement – 2005.


1. India-Afghanistan Preferential Trading Agreement

2. India-Bhutan Trade Agreement

3. India-Chile Preferential Trading Agreement

4. India-Korea Comprehensive Economic Partnership Agreement

5. India-MERCOSUR Preferential Trade Agreement

6. India-Singapore Comprehensive Economic Cooperation Agreement

7. India-Sri Lanka Free Trade Agreement

8. Pakistan-Mauritius Preferential Trade Agreement

9. Pakistan-Sri Lanka Free Trade Agreement

Barriers to make SAFTA effective:

A. Tariff and Non-tariff barriers: Usually there are three types of problems in trans-border business. These are – tariff barriers, non-tariff barriers and non-routine barriers. Tariff barriers are getting removed according to the agreement declarations but non-tariff barriers may be more effective in some cases. On the other hand, some new problems are arising day by day. These may be for short period, though those may be more dangerous than any others. These types of problems may be addressed as non-routine barriers. First steps towards economic integration should be to remove all sorts of barriers to international business.

B. Negative list: A country must think of its own industries but those should not be used as barriers to the major exportable goods from other countries. If any common product is there, market should be opened up to face competition. We must have to remember that open competition increases efficiency. Some may argue that infant or sick industries have to be protected. On this score, we must think about the strategic advantage. If any industry has strategic advantage, it will have to continue; otherwise, it will die even after lots of subsidies. For example, in Bangladesh, the readymade garment (RMG) is the energetic sector from the day it was born in 1980s. But jute remained in infancy since the British period. However, at the same time some jute mills are also making enough profit.

C. Rules of origin: Rules of origin must not be more stringent than that prevailing under SAPTA. The Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) therefore advocates non-restrictive and simplified rules of origin, based on value addition criteria (summation of freight on board (FOB) value of exports – summation of cost insurance freight (CIF) value of imports >or = 30 per cent) to match their industrial capabilities as in SAPTA, with derogation of 20 per cent value addition for RMG and other such labor incentive exports products.

D. Free Movement of People: Till now visa procedures of SAARC countries is very complicated. To facilitate economic integration at first free movement of goods, services, investment as well as people has to be ensured. Primarily visa system should make easier and intra-SAARC connectivity should be ensured.

Way forward:

The following trade facilitation measures should be implemented as an obligation to ensure enabling trade policy and governance for smooth and speedy movement of goods across the borders which can make FTA effective as well as work to build confidence among the nations, which lead us towards the next step of economic integration:

1. Functioning roads and transit facility: Bangladesh, India, Nepal and Bhutan have to be connected through functioning roads and transit facility should be ensured. More generally, we can say that trucks from any country should have the right to enter any signatory state without prior permission with legal goods.

2. Harmonization of documentation: Cross-border trade regulations and documents do and to be harmonized by an end date.

3. Easy access to information: There should be online publications of relevant trade regulations and procedures, including fees and charges, in the local language and in English.

4. Time bound customs clearance: Simplification of customs procedures do need to aim at cutting the time taken and cost of transactions at each customs point. Regional customs action plan should be implemented.

5. Dispute settlement: An effective appeal procedure has to be put in place for customs and other agencies’ rulings must be in place.

6. Infrastructure development: Transport and communications infrastructures, port and warehousing facilities must be developed to benchmark levels within a time frame.

7. Transportation facilities: Direct shipping and air links with necessary support and incentives provided by the respective governments have to be established

8. Including private sector in the negotiation table: Private sector specialists should have facilities to take part in the negotiation for effective dialogue among the states.

9. Free movement of people: Nothing will be functional until people can move easily from one country to others without facing visa complexity.

10. More interactions for confidence building: We in South Asia do not believe each others. More frequent interaction among the general people of the region may play a vital role in confidence building among the nations.

Concluding remarks:

Regional economic integration is a wide topic to discuss in any single paper. It is quite difficult to cover all issues of economic integration elaborately in a single seminar. A book or a series of working paper may touch the technical & theoretical terminologies and well as procedural aspects of the economic integration. I would like to offer my apologies for skipping out many theoretical, technical and procedural issues of economic integration here in this paper.


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