There are different forms and methods of economic integration including FTA, Custom Union CEPA and CECA. Economic integration between two or more countries promotes free trade. There are two effects of economic integration. The positive effects of economic integration for a country takes place through “trade creation” while the adverse effects take place through “trade diversion.”
Here is a brief description of different methods to economic integration:
Free Trade Agreement: A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
Customs Union: It reflects a higher level of economic integration between the participating countries than FTA. Important distinctions exist between customs unions and free-trade areas. Both types of trading bloc have internal arrangements which parties conclude in order to liberalize and facilitate trade among themselves. The crucial difference between customs unions and free-trade areas is their approach to third parties. While a customs union requires all parties to establish and maintain identical external tariffs with regard to trade with non-parties, parties to a free-trade area are not subject to such a requirement. Instead, they may establish and maintain whatever tariff regime applying to imports from non-parties as they deem necessary. In a free-trade area without harmonized external tariffs, to eliminate the risk of trade deflection, parties will adopt a system of preferential rules of origin.
Common Market: A common market is an extension of the customs union concept, with the additional feature that it provides for the free movement of labour and capital among the members; an example was the Benelux common market until it was converted into an economic union in 1959.
Economic Union: The economic union is a higher level of economic integration which includes a common market and agreement between its members to harmonize their economic policies generally, as is the case with the European Union. Finally, total economic integration implies the pursuit of a common economic policy by the political units involved; examples are the states of the United States or the cantons of the Swiss Confederation.
CEPA AND CECA– CEPA stands for Comprehensive Economic Partnership Agreement. CECA stands for Comprehensive Economic Cooperation Agreement. The major “technical” difference between a CECA and CEPA is that CECA involve only tariff reduction/elimination in a phased manner on listed/all items except the negative list and tariff rate quota (TRQ) items. CEPA also covers the trade in services and investment and other areas of economic partnership.
The Comprehensive Economic Cooperation Agreement (CECA) between India and Singapore was signed on 29th June, 2005 its second review was done on 1 June.
ROK and India signed a Comprehensive Economic Partnership Agreement (CEPA) in Seoul on 7th August, 2009, heralding a new era of greater economic exchanges, between the two countries. Negotiated over twelve rounds, during more than three years, CEPA came into effect on 1st January 2010.
India and Japan was signed the Comprehensive Economic Partnership Agreement (CEPA) on 16th February, 2011 which came into force from 1st August of the same year. The India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) will come into effect on 1 July 2011. India-Malaysia CECA is India’s fourth bilateral Comprehensive Economic Cooperation Agreement, after Singapore, South Korea and Japan.
The terms that make difference are “Cooperation” and “partnership”. Both these terms are synonymous with each other but the major “technical” difference between a CECA and CEPA is that CECA involves only “tariff reduction/elimination in a phased manner on listed / all items except the negative list and tariff rate quota (TRQ) items” , CEPA also covers the trade in services and investment, and other areas of economic partnership. So CEPA is a wider term that CECA and has the widest coverage. CECA is usually an earlier stage of economic integration followed usually by a higher level of economic integration through CEPA.
Trade Creation and Trade Diversification
Trade creation means that consumption shifts from a high-cost producer to a low-cost producer and trade therefore expands. Trade diversion on the other hand means that trade shifts from a lower cost producer outside the union to a higher cost producer inside the union.
Trade creation refers to the increase in economic welfare from joining a free trade area, such as a customs union. Trade creation will occur when there is a reduction in tariff barriers, leading to lower prices. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare. Thus, trade creation takes place due to an FTA or customs Union between two or more countries. It decreases the price of the goods for more consumers, and therefore increases overall trade. In this case, the more efficient producer within the fold of the agreement sees increase in its exports and overall trade.
Trade diversion refers diversion of trade from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union. Total cost of good becomes cheaper when trading within the agreement because of the low tariff. This is as compared to trading with countries outside the agreement with lower cost goods but higher tariff.