Geneva Sep (Chakravarthi Raghavan) -- As regional economic integration has been gathering pace rapidly, with groupings expanding around major trading nations and involving mixed groupings, there is no unambiguous evidence of a clear positive or negative impact of such groups trade and growth of third countries in the aggregate, according to an UNCTAD secretariat report.

The report, "Evolution and Consequences of Economic Spaces and Regional Integration Processes" (TD/B/40.1.7), however says that there are implications for particular countries and products.

Chief among these implications are creation or diversion of both trade and investment and the risk of marginalisation of the weaker economies. Various specific concerns for third countries have also arisen, needing continuous review of measures and the explicit and implicit economic effects of integration schemes.

An analysis of implications of integration has also pointed to a number of areas where support of the international community or regional groupings would be beneficial -- such as in identifying new opportunities arising from integration, technical support to third countries trying to adjust to new trading conditions, promotion of joint ventures and enterprise cooperation, training of business operators and government officials on operation of integration schemes.

International support would also need to be further strengthened in favour of economic integration and cooperation groupings among developing countries.

The report brings out that since the end of the 1980s, regional integration has intensified and expanded geographically, substantially faster than progress in the multilateral trade negotiations.

The main new feature of this process has been formation of large economic spaces around major markets of the US and the EC, extension of integration to new areas (services, investment, labour, environment etc) and emergence of mixed integration groupings of industrialized and developing countries of a reciprocal nature, as well as intensification of mutual cooperation between them in various forms.

There has also been a revival of market integration among developing countries and investment-led integration of trade relations without formal integration arrangements.

These include the NAFTA; the EC's Single European Market (SEM); EC-EFTA agreements for the European Economic Area and negotiations of four EFTA countries for joining the EC as well as the EC's various integration, association and preferential arrangements with the ACP and Mediterranean countries; the disbandment of the CMEA (trade and economic grouping of the former east european socialists) and rearrangement of economic links of these with Western Europe. and the evolving arrangements within the Commonwealth of Independent States (CIS).

There have also been the market integration arrangements among developing countries such as Mercosur, free trade arrangements among some Andean countries, Asean Free Trade Area; and plans of several developing countries with heavy market dependence on the US or EC to enter into reciprocal arrangements (such as Chile, Argentina and Venezuela exporting free trade agreement with the US and Turkey, Cyprus and Malta with the EC).

APEC in Asia is framework of business-led integration of mutual trade and investment.

As a result, a number of very large and potent networks of various integration arrangements are building up, organized according to major geographical regions.

Taken together, the trade coverage of such arrangements amount to about 45 percent of world trade. The rapid extension and intensification of integration has implications for multilateralism. The two evolving tendencies of regionalism and globalization raise questions about future cohesion and relationship between integration arrangements and emerging multilateral disciplines.

Based on some preliminary estimations, the report says that aggregate trade performance of developing countries on EC markets confirm that SEM has had little impact on developing countries as a group. But there has been concentration of intra-EC trade on commodities, particularly food, at expense of both developing and developed countries due to the continued effects of EC's Common Agricultural Policy. However, EC imports of manufactures was more dynamic and imports from developing countries grew particularly fast.

Intra-EC investment and Foreign Direct Investment into the EC, as a result of the SEM, increased.

The SEM effects seem likely to differ among developing countries. Most developing regions seem likely to benefit from opening up of new opportunities and growth. However, Sub-Sahara Africa seems to face a cumulation of potential problems.

Some of these, coupled with the trade liberalization effects of the Uruguay Round could lead to further marginalization of African countries.

The EEA arrangements between the EC and EFTA, and negotiations of some EFTA countries to join the EC, resulting in the take-over of EC's common policy instruments, carry some potential dangers of deteriorating market access for third developing countries, in particular over the application of the Multifibre Agreement and the GSP.

While the Uruguay Round Draft Final Act envisages phasing out of the MFA, the new members would be restricting temporarily the present access for developing countries if they were to take over the EC's set of agreements, in particular Sweden where the market is fully liberalized.

Similarly, the GSP schemes of the EFTA countries are more liberal than the EC's. Analysis done by the UNCTAD secretariat in this behalf, in just over half of ten most valuable goods enjoying GSP, the EC system would result in a deterioration of market access.

But the accession of EFTA to EC would extend the additional preferences enjoyed by the ACP and Mediterranean countries to the EFTA region and strengthen the financial mechanisms and resources for the EC's common development policy.

The implications for developing countries of the various association agreements of EC in central and eastern Europe, and the EFTA agreements with Baltic States would lie mainly in EC markets, though the aggregate effects on competition with developing countries of the Europe agreements may remain limited for some time to come. Competition will intensify mainly in food, fertilizers, steel, machine parts. It is also likely to increase in textiles, clothing and footwear, though the competitive strength of suppliers from the central and east European countries in transition is less pronounced.

In the Western hemisphere, the three members of NAFTA should benefit from increased efficiency and growth in trade due to further specialization. Changes could also be expected in their patterns of trade, among themselves and with third countries.

For third countries, some studies also show that trade creation effects of NAFTA may largely balance the trade diversion effects at the aggregate level, though trade diversion could be important for individual countries, specially small economies. This could occur relatively quickly in case of products for which NAFTA requires the US to remove immediately all tariff and non-tariff barriers in trade with Mexico, while trade of other countries will still face these barriers.

Risk of trade diversion can also occur on the Mexican market, favouring North American suppliers, for certain industrial exports from Brazil, Argentina, China, Hong Kong and Republic of Korea as well as for other industrially advanced suppliers such as for steel, pumps, construction machinery, tractors, office machinery etc. Some Latin American and Caribbean agricultural products like vegetable oils might also be affected.

NAFTA would also increase attractiveness of Mexico for foreign investors, and thus divert investments from third countries.

So far, the report says, framework of economic integration in Asia and the Pacific have been outward-oriented and not inward-looking and the intra-regional dynamism has not been a threat to open multilateral trading system. Rather, it has led to the establishment of production networks which are building blocs of an international division of labour based on comparative advantage.

As for various trade and market integration arrangements among developing countries, the report says that both the volume and relative importance of trade within integration arrangements have remained modest. In contrast to the past, these arrangements are also being developed in the context of an outward-oriented approach and regional integration was acting in full complementarity with increased participation in the world economy. There is also a slow but perceptible movement towards a more flexible approach to regional and subregional cooperation by freeing it from geographical constraints and allowing for various speeds of integration.

Much of the recent gain in momentum of regional integration, UNCTAD says, has been motivated by the goal to increase international competitiveness of economies. But, these dynamic effects have also other implications for third countries and organization of production and investment.

If the integration process takes place undisturbed by protectionist pressures, it will create new export opportunities for third countries in industries at the lower end of the scale, where competition from internal producers will tend to diminish.

International support, UNCTAD suggests, could be provided to developing countries to enable them to identify such opportunities and adjust their production and marketing to the needs of demand.

The concentration of FDI on regional markets have reinforced to some extent the general trend to concentrate on major industrialized countries, implying that developing countries had become comparatively less attractive. To the extent, FDI growth has been a response to major impulses of integration, there have been both investment-creating and investment-diversion effects.

But these FDI tendencies are not only discernible within formal groupings. Similar concerns have arisen over tendency of Japanese TNCs to concentrate investment within South and S.E.Asian region.

This raises the question where these Asian countries are developing into an informal regional group centred around Japan and to what extent this will lead to reorganization of TNCs production and trade, while reducing the scope for arm's length trade by independent exporters outside affiliation links with major TNCs.

Japanese outward FDI expanded at a record annual 24 percent rate over 1980-1990. Of this though, 30 percent was concentrated annually on developed countries and about 17 percent in developing countries. While Japanese FDI in South and Southeast Asia has grown spectacularly in absolute values, it grew in that region no faster than in other developing regions.

But Japan's FDI impact has been much larger in specific manufacturing industries (electronics, machinery, automobiles and precision instruments) in East and Southeast Asia (similar to that of US in Latin America), exerting proportionally higher impact on trade in these sectors where TNCs have firm-specific advantages in technology and worldwide marketing networks. Japanese FDI has contributed to stimulate exports to Japan by the TNC affiliates, with Japanese imports of these growing faster than any other non-oil imports.

But the overall contribution to regional and Japanese trade, UNCTAD says, should not be exaggerated. The gain of international competitiveness of regional suppliers had permitted a rapid expansion of exports in general and those of these industries in particular to other regional destinations and world markets.

However, developing countries seeking to penetrate Japanese market for machinery, electronics or transport equipment have to enter into cooperation or attract Japanese investment.

Should tendencies towards building up of regional FDI networks persist, formal and investment-led integration could combine to render access for independent third country exports more difficult.

As European experience has shown, integration has stimulated strategic alliances, take-overs and mergers. European integration groupings have recognized the importance of strengthening competition policy and their instruments for control of market behaviour of TNCs.

The rapid expansion of TNC activities beyond national boundaries, the report adds, calls for analogous intensified cooperation among countries at international level to safeguard competition.