_ Yaroslav Lissovolik, Senior Managing Director — Head of Research at Sberbank Investment Research (CIB). Moscow, 20 June 2019.
The trends observed in the world economy point to the emergence of “integration of integrations”, or accords among regional trade blocks, as an important new strand of globalization. In fact the discussions on the creation of mega-regional accords such as the Trans-Pacific Partnership or the African Free Continental Trade Area (AfCTA) could be viewed as the aggregation of existing regional trade alliances into larger integration groupings. Furthermore, last year Russia’s Ministry of Foreign Affairs called on its BRICS partners to explore “BRICS+” as the potential platform for “integration of integrations”. What is behind this drive to expand the scale and the modes of integration in recent years and how prevalent is the “integration of integrations” phenomenon in the world economy today?
The incidence of economic integration accords among not just individual countries, but entire regional blocks is rising, with large-scale fresh initiatives launched in the past several years. Among the developed economies the most active in building alliances with other regional blocks are EFTA (Switzerland, Norway, Lichtenstein and Iceland) and the EU. The EFTA block has signed and implemented FTAs with the South African Customs Union (SACU) and the Gulf Cooperation Council (GCC), while also concluding FTAs with Central American States (Costa Rica, Guatemala and Panama) and creating a European Economic Area (EEA) with the EU.
In the developing world several regional blocks concluded FTAs or other types of trade agreements with the peers from other regions, including such alliances as the MERCOSUR-SACU preferential trade agreement, the Economic partnership agreement between the EU and the SADC EPA Group, and the FTA between ASEAN and the Australia-New Zealand Free Trade Area. There is also a number of accords that are in the process of negotiation, in particular, the MERCOSUR-EU FTA accord as well as the EU-GCC FTA agreement. The ASEAN-EU action plan for 2018-2022 envisages further efforts to attain the conclusion of a free-trade agreement –according to the EU, “a joint EU ASEAN Working Group for the development of a Framework setting out the parameters of a future ASEAN-EU FTA gathers at a regular basis”.
Free trade agreements do not exhaust the possibility set of the alliances built on the basis of “integration of integrations”. In particular, there may be a greater role in the coming years for connectivity agreements among regional integration blocks – one example of such an agreement is the accord between the Eurasian Economic Union and the Belt and Road Initiative (BRI) spearheaded by China. Such agreements going forward may be reinforced through creating a set of alliances among the regional development banks to promote connectivity and development financing.
And then there are also the mega-regional deals that are currently negotiated and that may be considered in part as an aggregation of the regional integration blocks in the respective locations of the world economy. In the Pacific region it is the TPP-11 accord, with a full-fledged TPP agreement still eyed in the longer term. There is also the Regional Comprehensive Economic Partnership (RCEP) that is yet to be clinched and that could lead to the formation of the largest trade block yet. In Latin America last year consultations were conducted between the Pacific Alliance and MERCOSUR on trade liberalization. In Africa it is the African Free Continental Trade Area (AfCTA) launched in 2018.
Admittedly, the “integration of integrations” is still a rare phenomenon and its implementation has been hampered by the coordination difficulties of conducting talks and ratifying agreements across a large number of participants. There may also be issues related to the implementation of such agreements as the economic implications of such trade accords may be difficult to gauge ex-ante. Notwithstanding these difficulties size matters in global economic diplomacy and the race to build ever greater mega-regional platforms is likely to continue to be driven by the desire to attract a rising share of trade and investment flows into these larger blocks.
In the end, the increasing use of “integration of integrations” may serve to bring greater coherence and structure to the set of trade alliances in the global economy, whose numbers are now in the hundreds. For developing economies this mode of economic integration may significantly speed up the process of South-South integration and the catch-up with developed economies in terms of the breadth and depth of integration into the global economy. Importantly, the progression of integration among regional blocks may also provide guidelines and practices for attenuating the intra-continental fissures among regional blocks and bridge the divides between regional alliances such as the EU and the Eurasian Economic Union.