Economic Integration

What is Economic Integration?

Economic integration is an arrangement between different regions that often includes the
reduction or elimination of trade barriers and the coordination of monetary and fiscal policies.
The aim of economic integration is to reduce costs for both consumers and producers and to
increase trade between the countries involved in the agreement.
The more integrated economies become, the fewer the trade barriers and the more
economic and political coordination there is between countries.
The degree of economic integration can be categorized into five stages:
1. Free trade area
2. Customs union
3. Single market
4. Economic and monetary union
5. Complete integration (political union)

1. A free trade area (FTA) is formed when at least two states partially or fully abolish
custom tariffs on their inner border. Free trade area is a type of trade bloc, a designated
group of countries that have agreed to eliminate tariffs, quotas on most (if not all) goods
traded between them.
2. A customs union introduces unified tariffs on the exterior borders of the union
(common external tariffs). A customs union is a type of trade bloc which is composed of
a free trade area with a common external tariff. The participant countries set up common
external trade policy.
3. A common market is a type of trade bloc which is composed of a customs union
with common policies on product regulation, and freedom of movement of the factors of
production (capital and labour) and of enterprise. The goal is that the movement of
capital, labour, goods, and services between the members is as easy as within them.
4. An economic and monetary union is a type of trade bloc which is composed of a
single market with a common currency.
5. Complete economic integration is the final stage of economic integration. After
complete economic integration, the integrated units have no or negligible control of
economic policy, including full monetary union and complete or near-complete fiscal
policy harmonisation.
The Pros and Cons of Economic Integration
Despite the benefits, however, economic integration has a cost. The disadvantages
include trade diversion and the erosion of national sovereignty. For example, trade unions
can divert trade away from non-members even if it is economically detrimental for them
to do so. Additionally, members of economic unions are typically required to adhere to
rules on trade, monetary policy and fiscal policy, which are established by an external
policy making body not elected by citizens of a particular country. Sovereignty, in fact,
was one of the key debates in the United Kingdom's decision to leave the European
Union (EU) in 2016.

Conclusion
The formation and pursuit of economic integration can also present new
international challenges for participating states. Developing states engaged in a defensive
regionalist project to improve their collective negotiating power with predominant states
in the global political economy can be faced with a divide-and-conquer strategy in
interregional and multinational negotiations. This places additional strains on the anchor
state to maintain the solidity of the region.
In some instances this is not a particularly significant challenge, because the
benefits of collective negotiation in international forums quickly outweigh the economic
benefits offered by the group.
In some respects, this reflects the EU’s quiet strategy of encouraging economic
integration and regionalism as a strategy for internally driven development
and enhanced political stability in developing areas.

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