ADMN 417 Lecture Notes - Lecture 5: Economic Integration, Trade Bloc, Trade Creation
27 May 2018
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Lesson 5 – Chapter 8 – Regional Economic Integration
1. The process whereby countries in a geographic region cooperate with one another to reduce or
eliminate barriers to international flow of products, people, or capital is called:
a. regional economic integration.
b. regional domestication.
c. regional trading block.
d. FDI (foreign direct investment).
2. Canada and United States are examples of early formations of
a. customs unions.
b. free-trade area.
c. economic unions.
d. political unions.
e. common markets.
3. Discuss one benefit and one drawback of regional economic integration.
(From Lessons Note1)
BENEFITS: An important merit of REI is that its favourable view of free trade
promotes economic growth in member countries for the same reasons discussed in
the previous lesson. Another merit is that REI often spurs investment by firms
domiciled in one country into other member countries. REI can augment political
cooperation among member country governments, and may also increase their
collective bargaining power in relation to other national governments or trading
blocks.
DRAWBACKS: It is likely that governments from member countries hold different
political ideologies. In the absence of a common economic platform, it is possible
that REI will not be fully achieved. There is also the challenge that different cultural
attitudes create tensions among member countries that weaken the spirit of REI.
There seems to be a growing sentiment that REI is a vehicle for protectionism. There
is also a concern that economic self-interest, not collectivist sentiment, guides the
economic conduct of member countries in a regional agreement, which implies that
REI might take a second seat to member countries’ domestic economic agendas. As
well, some have suggested that REI is a forum for retaliation among different trading
blocks.
4. Explain the concept of trade creation and trade diversion. Who are the winners with trade
creation? Who are the losers?
Economic integration removes barriers to trade and/or investment for nations belonging to a
trading bloc. The increase in the level of trade between nations that results from regional
economic integration is called trade creation. One result of trade creation is that consumers and
industrial buyers in member nations are faced with a wider selection of goods and services not
previously available. The free trade agreement between Canada, Mexico, and the United States
created export opportunities. Another result of trade creation is that buyers can acquire goods
and services at lower cost after removal of trade barriers such as tariffs. Furthermore, lower-
priced products tend to drive higher demand for goods and services because they increase
purchasing power. Consumers and competitive businesses are winners; non-competitive (old,
non-efficient) businesses are the losers)
The flip side of trade creation is trade diversion—the diversion of trade away from nations not
belonging to a trading bloc and toward member nations. Trade diversion can occur after the
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