Professional Documents
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OBJECTIVES OF STUDY
The setting of objective is the corner stone of a systematic study. The study will
be fruitful one when the basis laid down is a concrete one they represent the desired
solution to the problem and help in proper utilization of opportunities.
Objectives:
The objectives of the research are:
To know why economic integration has been pursued in practice are largely
political.
To know the level of Integration.
To know the Importance of Integration.
To know the Gain from Integration.
Executive Summary
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By integrating the economies of more than one country, the short-term benefits from the
use of tariffs and other trade barriers is diminished. At the same time, the more
integrated the economies become, the less power the governments of the member
nations have to make adjustments that would benefit themselves. In periods
of economic growth, being integrated can lead to greater long-term economic benefits;
however, in periods of poor growth being integrated can actually make things worse.
Methodology
This project is prepared with the combination of theoretical knowledge as well
as practical knowledge and a blend of advices and suggestion from the guide of
the project.
Various books helped me out in extracting the theoretical element. Also the
information relevant to the project is being surfed from internet. All these activities
are conducted as per the guide consent.
Finally, the project has been advantageously finished with various kinds of
experiences gained throughout. It had been possible with my facts and
information on this subject.
Sr.No
Topic
Pages
Introduction
Benefits of Integration
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Types Of Integration
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Obstacles to Integration
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Success Factors
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32
33
Levels Of integration
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10
38
11
Conclusion
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12
Bibliography
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Introduction
The elimination of tariff and nontariff barriers to the flow of goods, services, and factors
of production between a group of nations, or different parts of the same nation.
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 level of welfare, while leading to an
Increase of economic productivity of the states.
Economic integration has been one of the main economic developments affecting
international trade in the last years. Countries have wanted engage in economic
cooperation to use their respective resources more effectively and to provide large
markets for member-countries of the resulting integrated areas. There are mainly four
levels of economic integration:
The trade stimulation effects intended by means of economic integration are part of the
contemporary economic Theory: where, in theory, the best option is free trade, with free
competition and no barriers whatsoever. Free trade is treated as an idealistic option,
and although realized within certain developed states, economic integration has been
thought of as the "second best" option for global trade where barriers to full free trade
exist.
Economic integration is a new and striking idea for the expansion of foreign trade
among developing countries. Regional economic integration implies the creation of the
most desirable structure of inter-regional economy through the formation of a customs
union or of a free, trade within the region and deliberately introducing all desirable
elements of coordination and unification.
Generally, such an economic integration would have to pass through three distinct but
inter-dependent stages of cooperation, co-ordination and finally, of full integration. So,
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By integrating the economies of more than one country, the short-term benefits from the
use of tariffs and other trade barriers is diminished. At the same time, the more
integrated the economies become, the less power the governments of the member
nations have to make adjustments that would benefit themselves. In periods
of economic growth, being integrated can lead to greater long-term economic benefits;
however, in periods of poor growth being integrated can actually make things worse.
1. PROGRESS IN TRADE
All countries that follow economic integration have extremely wide assortment of
goods and
services from which they can choose. Introduction of economic
integration helps in acquiring goods and services at much low costs. This is because
the removal of trade barriers reduces or removes the tariffs entirely. Reduced duties
and lowered prices save a lot of spare money with countries which can be used for
buying more products and services.
2. EASE OF AGREEMENT.
When countries enter into regional integration, they easily get into agreements and
stick to them for long periods of time.
3. IMPROVED POLITICAL COOPERATION.
Countries entering economic integration form groups and have greater political
influence as compared to influence created by a single nation. Integration is a vital
strategy for addressing the effects of political instability and human conflicts that
might affect a region.
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realized in continental economic blocks such as ASEAN, NAFTA, SACN, the European
Union, and the Eurasian Economic Community; and proposed for intercontinental
economic blocks, such as the Comprehensive Economic Partnership for East Asia and
the Transatlantic Free Trade Area.
Economies of scale refers to the cost advantages that an enterprise obtains due to
expansion. There are factors that cause a producers average cost per unit to fall as the
scale of output is increased. Economies of scale is a long run concept and refers to
reductions in unit cost as the size of a facility and the usage levels of other inputs
increase.[4] Economies of scale is also a justification for economic integration, since
some economies of scale may require a larger market than is possible within a
particular country for example, it would not be efficient for Liechtenstein to have its
own car maker, if they would only sell to their local market. A lone car maker may be
profitable, however, if they export cars to global markets in addition to selling to the local
market.
Increase of Trade
When foreign products are subject to tariffs, exporters either have to accept the
extra cost of trade or make do with a lesser volume of exported products. A basic
element of economic integration policies is the abolition of part of the extra fees or
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even the full amount of them, making trade cheaper and giving exporters a bigger
incentive to do business with integrated economies.
Allowing Consumers to Spend More
Economic integration reduces or eliminates customs duties, which in turn results in
cheaper imported products for consumers. This way, the purchasing power of
consumers grows, and with it, activity in the market. The public can start buying
more imported products or spend former duty expenses on other products or
services. In addition, goods that are not produced in sufficient quantities in one
country can be imported and distributed in the market with low cost.
Movement of Capital
Movement of capital refers to the transfer of business or individual assets among
countries. The benefits of capital movement is the investment in new markets,
leading to their eventual development. Economic integration removes barriers to
foreign investors, minimizing or abolishing extra tax, while advanced integration
policies, such as a monetary union, can even eliminate the cost of currency
exchange. Movement of capital is recognized as an essential element of economic
integration by associations such as the European Union and the Caribbean
Community.
Economic Cooperation
The concepts of economic cooperation and equitable economic development are the
basis of economic unions. When economies within the integrated area encounter
problems, it is the duty of other members to help, not only as a moral obligation, but
because a failing economy can have serious effects in the whole integration
process. For this reason, European Union countries have offered to bail out the
troubled economies of Greece, Ireland and Portugal.
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Custom union
Common market
Economic Union,
Economic &Monetary Union
Complete Economic Integration
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Economic Union
Economic Union is a term applied to a trading bloc that has both a common
market between members, and a common trade policy towards non-members,
but where members are free to pursue independent macro-economic policies.
Monetary Union
Monetary union is the first major step towards macro-economic integration, and
enables economies to converge even more closely. Monetary union involves
scrapping individual currencies, and adopting a single, shared currency, such as the
Euro for the Euro-16 countries, and the East Caribbean Dollar for 11 islands in the
East Caribbean. This means that there is a common exchange rate, a common
monetary, including interest rates and the regulation of the quantity of money, and a
single central bank, such as the European Central Bank or the East Caribbean Central
Bank.
Fiscal Union
A fiscal union is an agreement to harmonize tax rates, to establish common levels of
public sector spending and borrowing, and jointly agree national budget deficits or
surpluses. The majority of EU states agreed a compact in early 2012, which is a less
binding version of a full fiscal union.
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Tariffs
The most common characteristic of free trade is the lack of state tariffs on
imports. A tariff is a tax placed on incoming goods by the host country. it
makes foreign goods, therefore, artificially more expensive than domestically
produced goods, giving the latter a competitive edge.
Markets
Markets, not the state or even powerful economic actors, are empowered to
make decisions in free trade systems. If foreign goods are priced according
to market norms, then the winner in economic competition is who makes the
best product at the lowest price. In protected trade, it often is the actor with
the most political power who gets its economic interests protected.
States
Free trade takes the state out of the economic equation. States are
disempowered to make any kind of economic decision concerning the global
economy. Consumers and companies are then empowered to make these
decisions based on their preferences rather than state policy.
Contracts
Markets are based on contracts between buyers and sellers. Therefore, the
removal of the state from economic decision-making means the dominance
of contracts over state regulations in global economics. In this case, free
contracts are an important characteristic of free trade. Protected trade, on
the other hand, is international economic activity controlled, at least in part,
by the state.
Economics
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Globalism
Free trade demands a world without borders. In an economic sense, the
states of the globe are irrelevant, only the demands of the global market
have any economic relevance. Hence, under free trade, the globe becomes
progressively smaller as corporations and bankers serve a global, rather than
a national, market.
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CUSTO MUNION
Agreement between two or more (usually neighboring) countries to remove trade
barriers, and reduce or eliminate customs duty on mutual trade. A customs union (unlike
a free trade area) generally imposes a common external-tariff (CTF) on imports from
non-member countries and (unlike a common market) generally does not
allow free movement of capital and labor among member countries.
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Economies of Scale
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Shared Currency
Another important aspect of a common market is a single currency. Single currency
lowers transaction costs by eliminating the exchange risks and currency conversion
fees. Furthermore, a shared currency also allows easier cross-border investments
and price comparisons by consumers between countries. For example, if a person in
country A goes online and finds a cheaper car in country B, he can order the car
from that country, without paying any additional taxes or levies.
Problems
A common market has a number of theoretical as well as practical problems. First,
as of February 2011 the implementation of a common market in its pure form has
never taken place in any country. The Euro zone comes close, but it still faces many
hurdles, and some states still protect their markets from foreign competition,
particularly cross-border takeovers. In addition, there are also problems that would
be present even in a pure common market. For example, a common market cannot
be fully integrated unless people speak a common language, which is difficult
provided countries' unique cultural and linguistic heritages. Technical problems also
exist. As different regions of the common market may experience different stages of
economic cycle, no single monetary policy, such as interest rates, can fully
accommodate them. For example, Germany may have high inflation, demanding
high interest rates, while Ireland can have deflation and may need low interest rates.
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ECONOMIC UNION
An economic union typically will maintain free trade in goods and services, set
common external tariffs among members, allow the free mobility of capital and labor,
and will also relegate some fiscal spending responsibilities to a supra-national
agency. The European Union's Common Agriculture Policy (CAP) is an example of a
type of fiscal coordination indicative of an economic union.
MONETARY UNION
Monetary union establishes a common currency among a group of countries.
This involves the formation of a central monetary authority which will
determine monetary policy for the entire group. Perhaps the best example of
an economic and monetary union is the United States. Each US state has its
own government which sets policies and laws for its own residents. However,
each state cedes control, to some extent, over foreign policy, agricultural
policy, welfare policy, and monetary policy to the federal government. Goods,
services, labor and capital can all move freely, without restrictions among the
US states and the Nations sets a common external trade policy .
POLITICAL UNION
Represents the potentially most advanced form of integration with a common
government. The level of Economic integration as opposed to its complexity is
illustrated in the graph below:
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Other Types
Vertical integration
In microeconomics and management, vertical integration is an arrangement in which
the supply chain of a company is owned by that company. Usually each member of
the supply chain produces a different product or (market-specific) service, and the
products combine to satisfy a common need. It is contrasted with horizontal
integration. Vertical integration has also described management styles that bring
large portions of the supply chain not only under a common ownership, but also into
one corporation (as in the 1920s when the Ford River Rouge Complex began
making much of its own steel rather than buying it from suppliers).
Vertical integration is one method of avoiding the hold-up problem. A monopoly
produced through vertical integration is called a vertical monopoly.
A simple example of backward vertical integration strategy is an ice cream company
that buys a dairy farm. The company requires milk to make ice cream and either can
buy milk from a dairy farm or other milk supplier or could own the dairy farm itself.
This ensures that it will have a steady supply of milk at its disposal and that it will
pay a reasonable price. This can protect the ice cream maker in the event that there
are several other buyers vying for the same milk supply.
Another example
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Let's assume XYZ Company, which manufactures frozen french fries, wants to vertically
integrate. By purchasing a potato farm and a potato processing plant, XYZ could
engage in upstream integration (also known as backward integration) and control the
quantity, cost, and quality of the product's raw materials. Likewise, XYZ Company could
engage in downstream integration (also known as forward integration) to control the
distribution of the company's products by purchasing a packaging plant and a fleet of
delivery trucks. Ultimately, XYZ could also use balanced integration, which incorporates
both upstream and downstream integration, to control the cost and quality of the entire
production and distribution process.
Advantages
One of the biggest advantages of vertical integration is that it often creates economies
of scale and lowers production costs because it eliminates many of the price markups in
each production step. Vertically integrated companies also achieve cost efficiencies by
controlling quality at each step, which reduces repair costs, returns, and downtime. In
addition, vertically-integrated companies do not have to allocate resources to pricing,
contracting, paying, and coordinating with third-party vendors.
Vertical integration can ultimately create barriers to entry for potential competitors,
especially if the company controls access to some or all of a scare resource involved in
production. This is why in some cases a company may control so much of the market or
supply of raw materials that vertical integration can raise antitrust concerns.
A company must have expertise in each step of the production and distribution process
in order to maximize the advantages of vertical integration. Using the example above,
XYZ Company must know how to farm potatoes as well as it knows how to manufacture
French fries. Another considerable risk is that XYZ will need to modify its infrastructure
significantly to accommodate technological changes and other industry innovations.
This investment in infrastructure can be very expensive and limit the company's
flexibility. By controlling the value chain, the company also becomes responsible for
innovation and product variety.
Horizontal integration
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An example
An example of horizontal integration would be McDonalds buying out Burger King.
Obviously, this has not happened, but is an example of what a horizontal integration
would be like. Another example that actually did happen was the Heinz and Kraft
Foods merger. On March 25th, 2015, Heinz and Kraft merged into one company.
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This kind of fragmentation commonly results from growth. In a tiny startup, the handpicked team of coworkers collaborates naturally. Everyone is communicating and
working toward a common purpose, or they would not be there in the first place. This
was certainly true in the early days of Ziba, when it was just me, an engineer, three
designers, and a project manager. We sat together in a single room and everyone knew
what everyone else was doing, and why we were there. Now there are 110 of us in a
dozen different disciplines, handling 25 complex projects simultaneously, and
collaboration takes effort. Our ability to provide a client with an integrated experience
used to be something I took for granted. Now my horizontal concerns keep me awake
nights.
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Backward integration
Backward integration refers to a company buying or internally producing parts of its
supply chain. They did backward integration and I found that to be a little bit strange,
because that was not how it was normally done. The company decided to purchase one
of their major suppliers to hopefully reduce material costs through backward
integration and improve profits. One way to improve the logistics of you company is to
use backward integration buy purchasing the supply chain from one or more of your
suppliers. Backward integration is when a firm buys a company who previously supplied
raw materials to the firm. It is a type of vertical integration, but specifically refers to the
merging with firms who used to supply the firm.
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Benefits
Increased control: Through the process of integrating backward, companies can control
their value chain in a more efficient manner. When retailers take the decision to develop
or acquire a manufacturing business, they attain increased control over the production
segment of the distribution phase.
Cost Control: Through backward integration, costs can be considerably controlled all
along the distribution process. In the conventional distribution process, each phase of
product movement includes mark-ups to enable the reseller to earn profit.
By direct sale to end buyers, manufacturers are able to do away with the middle man
through removal of one or more mark-up steps in the course. In other words, a single
entity controlling the entire distribution process brings in enhanced capability leading to
optimization of resource utilization. Transportation costs are lowered, and other wasted
costs can be avoided.
Competitive Advantages:
Some companies adopt backward integration in order to block competitors from gaining
any access to important markets or scarce resources. For instance, a retailer might
purchase a manufacturing company and have access to proprietary technology as well
as resources or patents that are solely available in the local area of the firm.
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SUCCESS FACTORS
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Trade Creation:
Member countries have (a) wider selection of goods and services not previously
available; (b) acquire goods and services at a lower cost after trade barriers due to
lowered tariffs or removal of tariffs (c) encourage more trade between member countries
the balance of money spend from cheaper goods and services, can be used to buy
more products and services
Greater Consensus
Unlike WTO with hugh membership (147 countries), easier to gain consensus amongst
small memberships in regional integration
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Political Cooperation:
A group of nation can have significantly greater political influence than each nation
would have individually. This integration is an essential strategy to address the effects of
conflicts and political instability that may affect the region. Useful tool to handle the
social and economic challenges associated with globalization.
Employment Opportunities:
As economic integration encourage trade liberation and lead to market expansion, more
investment into the country and greater diffusion of technology, it create more
employment opportunities for people to move from one country to another to find jobs or
to earn higher pay. For example, industries requiring mostly unskilled labor tends to shift
production to low wage countries within a regional cooperation.
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Trade Diversion:
Because of trade barriers, trade is diverted from a non-member country to a member
country despite the inefficiency in cost. For example, a country has to stop trading with
a low cost manufacture in a non-member country and trade with a manufacturer in a
member country which has a higher cost.
National Sovereignty:
Requires member countries to give up some degree of control over key policies like
trade, monetary and fiscal policies. The higher the level of integration, the greater the
degree of controls that needs to be given up particularly in the case of a political union
economic integration which requires nations to give up a high degree of sovereignty .
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Free trade. Tariffs (a tax imposed on imported goods) between member countries
are abolished or significantly reduced. Each member country keeps its own tariffs in
regard to third countries. The general goal is to develop economies of scale and
comparative advantages, which promotes economic efficiency.
Custom union. Sets common external tariffs among member countries, implying
that the same tariffs are applied to third countries. Custom unions are particularly
useful to level the competitiveness playing field and address the problem of reexports (using preferential tariffs in one country to enter another country).
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Common market. Factors of production, such a labor and capital, are free to
move within member countries, expanding scale economies and comparative
advantages. Thus, a worker in a member country is able to move and work in
another member country.
Economic union. Monetary and fiscal policies between member countries are
harmonized, which implies a level of political integration. A further step concerns a
monetary union where a common currency is used, such as with the European
Union (Euro).
Political union. Represents the potentially most advanced form of integration with
a common government and were the sovereignty of member country is significantly
reduced. Only found within nation states, such as federations where there is a
central government and regions having a level of autonomy.
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The tastes that people have and develop for the potential benefits of closer economic
integration are themselves partly dependent on experience that is made possible by
cheaper means of transportation and communication. 2For example, centuries ago,
wealthy people in Europe first learned about the tea and spices of the East as the
consequence of limited and very expensive trade. The broadening desire for these
products resulting from limited experience hastened the search for easier and cheaper
means of securing them. As a by-product of these efforts, America was discovered, and
new frontiers of integration were opened up in the economic and other domains. More
recently, if less dramatically, it is clear that tastes for products and services produced in
far away locations (including tastes exercised through travel and tourism), as well as for
investment in foreign assets, depend to an important degree on experience. As this
experience grows, partly because it becomes cheaper, the tastes for the benefits of
economic integration typically tend to rise. For example, it appears that as global
investors have gained more experience with equities issued by firms in emerging
market countries, they have become more interested in diversifying their portfolios to
include some of these assets.
the current issues concerning public policy with respect to commerce conducted over
the internet. Before recent advances in computing and communications technology,
there was no internet over which commerce could be conducted; and, accordingly,
these issues of public policy simply did not arise. Regarding the influence of tastes on
public policy, the situation is complicated. Reflecting the general desire to secure the
perceived benefits of integration, public policies usually, if not invariably, tend to support
closer economic integration within political jurisdictions. The disposition of public policy
toward economic integration between different jurisdictions is typically more ambivalent.
Better harbors built with public support (and better internal means of transportation as
well) tend to facilitate international tradeboth imports and exports. Import tariffs and
quotas, however, are clearly intended to discourage people from exercising their
individual tastes for imported products and encourage production of domestic
substitutes.. Even very smart politicians, such as Abraham Lincoln (who favored a
protective tariff, as well as public support for investments to enhance domestic
economic integration) often fail to understand the fundamental truth of Lerners (1936)
symmetry theorema tax on imports is fundamentally the same thing as a tax on
exports.
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It should be emphasized that the interactions between public policy and both tastes and
technology in their effects on economic integration can be quite complex and
sometimes surprising. Two examples help to illustrate this point. First, for several
centuries, there has been active trade between Britain and the Bordeaux region of
France, with Britain importing large quantities of Bordeaux wine. This trade, however,
was seriously interrupted (if not completely suppressed) during various periods of
hostility between the two countries when one side or the other wished to suppress trade
with the enemy. Partly as a result of being cut off from Bordeaux wines, and partly as a
means of strengthening its alliance with Portugal, Britain sought to develop imports of
Portuguese wines. The existing Portuguese wines, however, did not meet British
requirements. A solution was found in creating a new productPortuguese red wine
from the Duoro region, fortified with grape brandy that gave the wine an extra alcoholic
kick, retained some of the fruit sugar that would otherwise have been absorbed in
fermentation, and helped protect the wine during shipment in hot weather. The result of
this technological innovation was a new productmodern Portthat developed and
retained a considerable market, especially in Britain, even after barriers to the
acquisition of French wines were reduced.
The second example concerns U.S. public policy toward international trade in sugar
which, in a bizarre way, is partly the consequence of policies pursued by Napoleon
Bonaparte and Admiral Lord Nelson. For many years, the United States has maintained
tight import quotas on sugar to keep the domestic price typically at roughly three times
the world market level. The domestic political interests that support this policy include
some sugar refiners, some producers of cane sugar in the deep south and Hawaii, and
a few thousand sugar beet farmers primarily in the upper midwest. Production of sugar
from beets is a new technology, dating back to the Napoleonic period. Before that
time, sugar was produced from cane grown primarily in the West Indies. Admiral Lord
Nelsons establishment of naval supremacy over the French enabled Britain to cut off
Napoleons empire from imports of West Indian sugar. In response, Napoleon
established a prize for finding a substitute for cane-based sugar which could be
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produced within his empire. The sugar beet was discovered, and has been with us ever
since.
This story becomes even more complicated when we consider reactions to the U.S.
governments sugar policy. Responding to the high domestic price of sugar, users have
searched for alternatives. High fructose corn syrup is a cheaper and attractive
alternative, especially for producers of soft drinks who are major users of sweeteners. A
key by-product of high fructose corn syrup is corn gluten meal which can be used as
animal feed and which the U.S. both uses domestically and exports, notably to the
European Union. Thus, through this round-about channel of public policies and product
innovations, what was started by Napoleon and Nelson has come back to European
shores.
Conclusion
RTAs in general increase welfare through trade creation, but the discriminatory
nature of an RTA may make the net welfare effect negative.
NEGATIVE INTEGRATION:
POSITIVE INTEGRATION:
Bibliography
www.google.com
www.wikipedia.com
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www.economicsonline.co.uk
www.globalnegotiator.com
Manan Prakashan Book of Economics
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