Economic cooperation

Given inherent constraints in any system, conditions for the best policy rarely exist. A policy maker must then turn to the second-best policy. This practice applies to international trade as well. Worldwide free trade is ideal, but cannot be attained. The theory of second best suggests that the optimum

policy is to have economic cooperation on a smaller scale.¹⁷ In an attempt to reduce trade barriers and improve trade, many countries within the same geo- graphic area often join together to establish various

forms of economic cooperation. Major regional groups are shown in Exhibit 2.1. As shown in Figure

2.6, Some countries are members of multiple groups.

COMESA

Djibouti

_Egypt

Levels of economic integration

Eritrea

Ethiopia

Sudan

Burundi

Rwanda

RIFF

Angola

Congo, Dem. Rep.

Malawi Zambia Zimbabwe Mauritius

SADC

^{Trade theorists have identified five levels of}

economic cooperation. They are: free trade area, customs union, common market, economic and monetary union, and political union.Table 2.6 shows a concise comparison of these cooperation levels.

Comoros

Madagascar

Kenya

Uganda

Seychelles

Tanzania EAC Namibia

^Swaziland

Mozambique

Free trade area

In a free trade area, the countries involved eliminate duties among themselves, while maintaining sepa- rately their own tariffs against outsiders. Free trade

SACU

Botswana Lesotho South Africa

areas include the NAFTA (North American Free Trade Agreement), the EFTA (European Free Trade Association), and the now defunct LAFTA (Latin- American Free Trade Association). The purpose of a free trade area is to facilitate trade among member nations. The problem with this kind of arrangement

Figure 2.6 Regional trading arrangements in

Eastern and Southern Africa

Notes

COMESA: Common Market for Eastern and Southern Africa

EAC: East African Community

RIFF: Regional Integration Facilitation Forum SADC: Southern African Development Community SACU: Southern African Customs Union

Source: Robert Sharer, “An Agenda for Trade, Investment, and Regional Integration,” Finance & Development, December 2001, 16.

is the lack of coordination of tariffs against the non- members, enabling nonmembers to direct their exported products to enter the free trade area at the point of lowest external tariffs.

The first free trade agreement signed by the USA was with Israel in 1985, and the US–Israel Free Trade Area Agreement eliminates all customs duties and most nontariff barriers between the two coun- tries. More recently, the USA has entered into free

Table 2.6 Levels of regional cooperation

Characteristics of	Free trade	Customs	Common	Economic	Political
cooperation	area	union	market	and	union
				monetary
				union
Elimination of internal duties	Yes	Yes	Yes	Yes	Probably
Establishment of common barriers	No	Yes	Yes	Yes	Probably
Removal of restrictions on factors of production	No	No	Yes	Yes	Probably
Harmonization of national economic policies	No	No	No	Yes	Probably
Harmonization of national political policies	No	No	No	No	Yes