The process of globalization has facilitated discussions about whether countries are prepared and are compatible for viable regional integration. Studying the phenomenon of globalization is essential for discovering differences between various aspects of the process (e.g., economic globalization, free trade agreements, etc.). The Gulf region has been especially relevant within the discussion about globalization and free trade agreements in particular because the majority of countries belonging to the region share a common long-term trend of combining their fiscal policies, financial markets, and macro economies.
This paper will explore two articles: “On the Path of Integration in the Gulf Region” by Darrat and Al-Shamsi and “Theories and Methods of Regional Integration and Free Trade Agreements” by Estupinan. Key learnings from both articles will be discussed, the validation of studies will be addressed. In addition, the article will be compared and contrasted in terms of academic knowledge and practical application of data. It has also been planned to discuss the gap between the prescribed ethical norms and practices.
Theories and Methods of Regional Integration and Free Trade Agreements
Key Findings of the Study
The purpose of Estupinan’s research was to provide an introduction into the most important variations of regional integration as well as the most relevant methods targeted at the assessment of the implications of Free Trade Agreements (FTAs) (225). The concept of FTAs appeared when countries began interacting on a worldwide scale to regulate the way states exercises their international agendas after World War II. For decades, globalization and interaction between countries through trade agreements have been subjected to extensive research due to the interest in effects and theories linked to regional integration.
The Bretton Woods conference held in 1944 gave a start to the emergence of three key organizations: the World Bank, the International Monetary Fund, and the World Trade Organization (Estupinan 225). As a result, other agreements, including those involving trade were created to address the demand for the liberalization of trade and regional integration. Types of agreements ranged from partial trade agreements to political unions. The strongest argument that supported the existing international trade theories was linked to the idea that the intensive trade between countries on an international level will enhance the levels of welfare as well as balance taxing capacities (Estupinan 227). For some researchers, the enforcement of international trade agreements is a viable solution for avoiding possible trade wars between countries when political disagreements occur (Maggi and Rodriguez-Clare 1375). Overall, the purpose of trade agreements is to optimize trade relationships between countries and maximizing the national income of states even at times of political instability.
Free Trade Agreements implies the removal of tariffs across member states while sustaining independent regimes on imported goods from countries that are not included in such agreements. The process of economic integration that is guided by FTAs is characterized by growth and improved welfare due to the reduction of spending on quotas and tariffs on imports (Estupinan 232). Importantly, when such agreements are established between developed and developing countries, there is an enhanced move of inputs and outputs that subsequently benefit the situation in the market when there are adverse outcomes for less developed states.
In the discussion about the long-term effects of FTAs, it is essential to mention several outcomes. First, the establishment of free trade leads to the creation of economies of a variety of scale that can facilitate the improvement of technical capabilities and efficiency of states in the large-scale production of products for export. Second, the transfer of technology, as well as the implementation of foreign direct investment (FDI), will facilitate the creation of new markets and niches due to the division of labor on a regional basis. Third, trade agreements are more likely to encourage changes and reforms in structural policies, which will subsequently mean the unification and harmonization of economic policies of member states. Fourth, when countries participate in FTAs, they will learn how to develop healthy competition and therefore contribute to the improvement of productivity and efficiency of member-states. Overall, Estupinan provided an extensive overview of relevant theories related to economic integration and Free Trade Agreements in particular. It was found that the involvement of countries in FTAs facilitates healthy competition and provides them with opportunities for financial gain associated with technological advancement and the elimination of spending on quotas and tariffs.
Validation of the Study
Estupinan’s research did not only provide a theoretical exploration of Free Trade Agreements but also paid attention to describing methodologies for impact assessments of such agreements. Gravity and Computable General Equilibrium Models were identified as the most useful for helping theorists understand what effect do trade agreements have on the global economy. The study is valid because it underlined the importance of using practical models that can apply for varying levels of economic integration and examining the effects of financial burdens (e.g., tariffs) or liberalization on the development of state members.
The study can be useful for getting a general idea about the nature of free trade relationships between countries and how different researchers approach this subject. The attention to the history of regional integration and liberalization of trade allowed Estupinan to develop a cohesive paper that explores relevant economic models that have developed gradually based on key events that shaped modern society. The researcher acknowledged the fact that scholars that explore the notion of free trade agreements usually develop econometric models targeted at the assessment of the impact of such agreements. The development of economic models is necessary for determining the extent of economic growth and social welfare of parties that sign free trade agreements. Methods of approaching the existing models are vast and depend on different types of analysis (e.g., computable general equilibrium or gravity analysis). The use of the mentioned models can help researchers understand the long- and short-term effects of Free Trade Agreements between countries.
Overall, the study by Estupinan provided a valuable contribution to the existing body of research on the topic of FTAs. Even though the research provided an extensive look at the development of free trade relations between countries in the wake and progression of globalization, it lacked some specific examples from real life to explain the relationships that countries established for facilitating free trade. For example, the author could have elaborated more on the existence of such agreements as the Gulf Cooperation Council (GCC), Greater Arab Free Trade Area (GAFTA), Central European Free Trade Agreement (CEFTA), East African Community (EAC), South Asia Free Trade Area (SAFTA), or others. It could have been beneficial to provide more examples in the discussion to illustrate the fact that free trade agreements are diverse and that countries that participate in them can be of different developmental levels.
Comparing and Contrasting Theory and Practice
Modern theories that explain the processes involved in globalization or free trade agreements have all been targeted at exploring the economic prosperity of nations under the beneficial fiscal environment. Even though FTAs have been supported for their positive implications for member states even at times of political turmoil, it is evident that such agreements still hurt the way countries cooperate as well as how the overall global environment changes.
In practice, FTAs contribute to environmental destruction because free trade leads to many nations moving their manufacturing facilities to countries with little to no environmental regulations and therefore increasing the use of natural resources in those countries (Robinson). For example, before the enforcement of the North American Free trade Agreement in 1993, Mexico did not experience a demand for metal ores and timber. However, the latest reports showed that the country was suffering from an ineffectively regulated and extremely destructive mining industry that would never have existed had it not been for the trade agreement (Robinson).
It is widely accepted that environmental destruction will inevitably lead to significant financial problems for governments that failed to establish effective regulations for preventing the adverse influence of free trade. This problem is something that many researchers overlook because the effects of environmental destruction are not apparent at the present moment. A similar overlook associated with the negative impact of Free Trade Agreements refers to unethical labor practices (Robinson). The use of cheap labor by developed countries has been a massive problem often disregarded by researchers because it has an overall positive impact on the enforcement of free trade among countries. Both the environmental impact and unfair labor practices tie in with the idea that some of the ethical standards of FTAs do not align with the real practices. This issue will be explored in the next section.
Gap Between Prescribed Ethical Norms and Practices
The ethical norms of free trade agreements have been set to be sustainable, fair, and transparent to ensure that member-states collaborate in a way that will not limit the effectiveness of agreements. The United Nations (UN) is among the key organizations that guide the core of international law through providing necessary frameworks that promote the practice of just and efficient trade between countries (Robinson). Main areas that need the careful guidance of international ethical standards include the protection of human rights, fair labor norms, sustainable agreements on environmental and climate protection, as well as effective goals associated with the development of countries as international players.
Countries that ratify and comply with the UN conventions and guidelines on the mentioned areas are more likely to have a more respectable position in the global market of trade in comparison with non-compliers and non-ratifiers (Felber). Solutions for solving the issue of countries not following ethical UN standards for trade include the enforcement of customs on imports from countries that have not ratified human rights agreements (20% fee), environmental sustainability regulations (10% fee), and fair labor standards developed by the International Labor Organization (3% fee for each violation) (Felber). Such a system of tariffs on violating ethical standards will incentivize countries to stop unfair practices and comply with the existing regulations that promote the establishment of trusting and transparent relations between countries.
Within the framework of existing ethical norms of free trade, commitment to even trade balances is among important regulations that promote the existence of global justice. The introduction of the “Clearing Union” market the creation of a global reserve for complementing the existing national currencies that are used for the international exchange of currencies (Felber). The purpose of such a reserve is to ensure that all countries that participate in free trade have equal balances, which means avoiding deficit surpluses or deficits. In addition to establishing financial reserves, the ethics of free trade also take into account the extent of the power of transnational corporations that have become threats to democratic and free relations between countries.
The existing norms and practices that take place in the sphere of free trade can often be far from the established ethical standards. For instance, opponents of free markets have always underlined the fact that such relationships between countries are harmful to workers’ profits, which are usually taken away. The fact that the contribution of the labor force is undervalued may suggest that trade relations between countries are not as free as seems. To be more specific, free trade should imply the absence of intentional harm or restrictions on what people can produce, purchase, and sell. However, how some countries limit the rights of their workers means that there is a lack of freedom in trade relations between states. A market is not free to the extent to which people are forced to produce commodities at dictated qualities and prices. In addition, free markets can be seen as drivers for unequal pay distribution of wealth despite the premise that such relations between countries should enforce an equal distribution of power.
Overall, there is a tremendous gap between the established ethical standards that guide FTAs and real practices that nations implement. By definition, trade is free because there is no coercion, and free markets are ethical due to the absence of moral wrong. If some states feel that there is a wrong allocation of goods in a specific free market, they are entitled to their opinion but are not entitled to imposing the opinion on others through the use of force. Ranging from unfair labor practices to the lack of attention to environmental protection, nations fail to follow the established standards due to inconvenience or the absence of a moral decision to do so. However, despite the presence of several issues associated with ethics, free markets remain the most ethical type of market relationship between countries because of the absence of coercion.
On the Path of Integration in the Gulf Region
Key Findings of the Study
The purpose of the research conducted by Darrat and Al-Shamsi was to fill the gap in existing studies as to determining the nature and presence of economic and financial integration between Oman, Kuwait, Bahrain, the United Arab Emirates, Saudi Arabia, and Qatar (all of which are classified as Gulf countries) (1061). Through the implementation of unit root tests, the researchers came to several conclusions. First, it should be mentioned that the macro economies, monetary policy actions, and financial markets of the identified Gulf countries were linked together and relied on each other in the long run.
However, these findings do not mean that economic activities did not differ. Rather, the researchers pointed out that there was a common trend shared by the countries; when short-term events and departures took place, there were forces that had to correct the misalignments between countries and make their economies return to their “long-run equilibrium path” (Darrat and Al-Shamsi 1059). Therefore, the researchers found that there was enough relevant evidence to support the existence of stable and continuous connections that bind the financial integration of states within the Gulf region. The existence of such connections is not to be blamed on the absence of the financial and economic compatibility between the six countries of the Gulf. The findings of the research suggest that the genuine integration between Gulf countries is supported by financial and economic compatibility. This means that countries should implement more efforts for resolving arising differences that limit the progress associated with genuine integration in the Gulf region.
Validation of the Study
The study conducted by Darrat and Al-Shamsi is relevant for its contribution to the existing body of literature that examines long-term relations between economic and financial processes taking place in the Gulf region. The research proved that there should be more efforts targeted at unifying Gulf Cooperation Council (GCC) countries for establishing an effective environment to facilitate the region’s improvement. It must be mentioned that researchers have previously stated that the existence of GCC as an alliance could not have a beneficial contribution in the process of integration and thus encouraged its dismantling (Dar and Presley 1176). Despite the presence of this sentiment, Darrat and Al-Shamsi’s contribution, which was built on extensive cointegration testing of important economic variables, showed that the lack of economic or financial compatibility should not be blamed as the reason for the inconsistent processes associated with integration within the region.
While the research provided a valuable contribution to the existing body of literature on the topic of the economic integration of the GCC, it lacked the exploration of ethical problems that prevent countries in the region from establishing effective relationships with each other. As found in the analysis of existing models and theories of Free Trade Agreements, countries should be prepared to create transparent and fair environments to facilitate the equal development of nations from the economic perspective (Darrat and Al-Shamsi 1059). Darrat and Al-Shamsi’s study failed to address this issue even though there is a glaring difference in power among countries included in the GCC. While Saudi Arabia is seen as the dominant force in contributing to the prosperity of the Gulf region, countries such as Qatar are seen as less important despite its high scores in free-market economy ratings. In addition to this, the researchers did not pay attention to the issue of nepotism that prevails the majority of business relations in the Gulf Region. The fact that close relationships (e.g., relatives, friends) are highly valued when companies make hiring decisions can be another component that contributes to the failure of GCC of ensuring fair economic and financial integration (Al Ubaydli). As governments see no benefit in facilitating a no-nepotism environment, the route toward effective integration in the region remains stagnant.
It is important to mention that the reviewed research was conducted thirteen years ago and even though its results are valid, they should be considered dated. When discussing the validity of the study, several directions for future research should be explored. As mentioned previously, there was a critique associated with the existence of GCC because the presence of the alliance did not improve the level of integration between countries. However, the results of the conducted testing showed that this negative view should not be regarded as relevant because, throughout the years, GCC has shown to improve the operations between countries and to establish clear policy actions for promoting the agenda of integration (Darrat and Al-Shamsi 1061). However, the opposition of views on the economic and financial integration of Oman, Kuwait, Bahrain, the United Arab Emirates, Saudi Arabia, and Qatar should be subjected to further testing from a practical perspective.
Comparing and Contrasting Theory and Practice
To point out similarities and differences between the way economic and financial integration of GCC is seen in the article and the way it was in practice, it is essential to mention several aspects. First, in comparison with other Regional Trade Agreements (RTAs), the Gulf Cooperation Council has been much slower in its efforts to integrate member states. Despite the spike in operations in 2001, the countries are still experiencing some limitations in integrating relevant policies (Copper). Several issues will be addressed for identifying how theoretic knowledge presented in current research differs from practice.
When it comes to the comparison of theory and practice, it can be concluded that factors vital to the development of GCC as an entity have been extensively overlooked by researchers. This implies the possibility of bias guiding some studies. Regarding Darrat and Al-Shamsi’s research, there is a lean toward the exploration of only economy-related factors, disregarding the role geopolitical relationships play in the establishment of effective procedures associated with integration. Dismissing the contribution of political reasons means disregarding the real explanation of why integration within GCC is not moving at the rate it should. Vital points that can explain the relations between GCC countries on a deeper level include the role of centralized political systems, the composition of the labor force, and unique means of interdependence that are different from the way the Western world operates.
Centralized political systems that exist in the Gulf region are based on favoritism or family relationships that oppose the influence of supranational institutions (Copper). The nature of the labor force in GCC is also different because the government is often unaccountable to labor and thus restricts the demand of citizens to support economic or financial integration. Interdependence between countries is also unique in its progression because governments are usually the ones that lead the way for joint ventures and investments, which means that there is no high need for seeking the support of other countries. In addition, the common approach that researchers have is to only study trade flows on the intraregional arena and thus disregard interactions that take place in no-tradable sectors (e.g., real estate sales, retail, construction, and infrastructure of cities).
Another important point that should be discussed in connection to how theory perceives GCC integration is associated with the idea that Saudi Arabia is the dominant force in the region and therefore the role of others is not as significant (Darrat and Al-Shamsi 1061). This approach is inherent to Western analysts that usually ignore the relevance of various social, political, and economic events that take place not only in Saudi Arabia but also in other countries that interact on multiple levels. The researchers have underlined this problem and suggested that separating Saudi Arabia as the key player in the economic and financial integration of the GCC was a biased approach (Darrat and Al-Shamsi 1061). Overall, there is a problem with how researchers review the integration of GCC countries and how this process occurs in reality. The region is unique in its internal approaches to economic relations. There is a common trend of governments engaging in nepotism and corruption to capitalize on economic opportunities, which means that the public does not have a great role in deciding whether integration is necessary or not.
Gap Between Prescribed Ethical Norms and Practices
When countries in the Middle East are subjected to research with regards to financial and economic integration, the cultural and religious components as ethical norms are often overlooked because they are considered not relevant. However, as concluded in the previous section, disregarding such vital components of countries’ social lives is ineffective and therefore makes the research biased. This oversight is vital to point out because the Middle East has been the first region to think about the importance of ethics in trade and other activities. However, the current business practices in the Middle East have been subjected to several challenges. The efforts to advance the standards have yet been ineffective; importantly, there were some gaps between ethical standards and real practices (“Fighting Corruption in the GCC” 23). It must be mentioned that in their article, Darrat and Al-Shamsi did not explain the role of ethics in the discussion about the integration of the GCC region. This points to the fact that the gap between prescribed ethical norms and practices is large and needs to be addressed in future studies on similar subjects.
The majority of ethical principles in Middle Eastern countries have been developed based on religious beliefs of Muslims similar to the Golden Rule (treating others the same way in which one would like to be treated). However, although most entities in the GCC follow the Golden Rule and the Ethic of Reciprocity, the region struggles with bribery and corruption, which goes against the mentioned rule. While GCC countries are aware of the need to effectively withstand corruption, the reality is that most of them have not passed the necessary legislation for implementing the United Nations Convention Against Corruption (“Fighting Corruption in the GCC” 24). The status of anti-bribery regulations and actual efforts targeted at the elimination of unethical practices remains unknown because governments in the region are nepotistic and thus regard such legislation as harmful to their interests. As reported by Al Ubaydli for The National, “family businesses are the backbone of the private sector in Arabian Gulf countries, as they continue to offer many advantages over conventional firms […] the most commonly cited downside of family ownership is nepotism – favoring kinsfolk in hiring, especially in important positions.” this suggests that most businesses in the region follow the practice of favoring friend or family relationships more than professional expertise. Therefore, there is a significant gap between the expected ethical standards in the GCC region and the real practices that take place.
It is important to mention that unethical practices that occur in both private and governmental organizations hinder the progress associated with the financial and economic integration of GCC countries. The fact that the practice of favoritism dominates the business environment means that there is a lack of interest (of both business people and government officials) to implement necessary policies for establishing effective relationships between states and enacting their integration.
Conclusion
The analysis of articles “Theories and Methods of Regional Integration and Free Trade Agreements” by Estupinan and “On the Path of Integration in the Gulf Region” by Darrat and Al-Shamsi showed that the topic of economic integration and the creation of trade connections between countries to facilitate the overall improvement of the global economy. While the first article explored the existing theories and approaches to trade agreements in a general manner, the second was more case-based and specifically studied the role of the GCC in integrating countries-members of the Gulf Region. It is important to mention that the discussion about economic integration between countries found several gaps between the existing ethical norms and practices that countries implement. In the context of the economic integration of the GCC, bribery was found to be an important problem for the region. When it comes to the general exploration of free trade theories, it was found that the notion of free markets implies the equal distribution of power and resources (natural, monetary, and others) between members that signed an agreement; however, in reality, this is far from being true.
Works Cited
Al Ubaydli, Omar. “When Family Ties and Good Governance Come Into Conflict.”The National. 2017, Web.
Copper, Robert. “Understanding Regional Integration in the GCC.” E-IR. 2013, Web.
Dar, Humayon, and John Presley. “The Gulf Cooperation Council: A Slow Path to Integration?” World Economy, vol. 24, 2001, pp. 1161-1178.
Darrat, Ali, and Fatima Al-Shamsi. “On the Path of Integration in the Gulf Region.” Applied Economics, vol. 37, 2005, pp. 1055-1062.
Estupinan, Joan Miguel. “Theories and Methods of Regional Integration and Free Trade Agreements.” Revista de Economia Mundial, vol. 47, 2017, pp. 223-242.
Felber, Christian. “A Framework for Ethical International Trade.”Huffington Post. 2018, Web.
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Maggi, Giovanni, and Andres Rodriguez-Clare. “A Political-Economy Theory of Trade Agreements.” The American Economic Review, vol. 97, no. 4, 2007, pp. 1374-1406.
Robinson, Nick. “Disadvantages of Free Trade Agreements.”Bizfluent. 2017, Web.