Economic Integration

IB Economics HL
• Economic integration is a process whereby countries coordinate and link
their economic policies

A trading bloc is a group of countries that

join together to increase trade between
themselves and to gain economic benefits
Economic Integration
 There are 6 stages of economic integration

 1. Preferential Trading Areas – a bloc that give

preferential access to certain products from
certain countries (removing tariffs)
 The EU has an agreement with the ACP (African,
Caribbean and Pacific Group of States) which
guarantees supplies of raw materials
 They give each other duty free access
Economic Integration Free Trade Area – an agreement between
 Second stage of economic countries there they freely trade amongst
integration themselves but can trade with others
 2. Free Trade Area – the outside the area in whatever way they
diagram shows how this wish
works
 Country A, B and C all trade
freely with each other but
each has a different way of
trading with country D who is
outside of the area
 USA, Canada and Mexico
(NAFTA) are a free trade area
 Over 75% of Canadian total
exports now go to the USA
 Mexico’s share of US imports
has grown from 7% to 12%
 ASEAN and SAARC
Economic Integration Customs Union – an agreement between
 Third stage of economic countries where they freely trade amongst
integration themselves and also have the same trade
 3. Customs Union – the arrangements with outside countries
diagram shows how this
works
 Country A, B and C all trade
freely with each other
 They all trade in the same
way with country D for
example they may all have an
agreed % tariff or may all
trade freely
Economic Integration Common Market – an agreement
 Fourth stage of economic between countries where they freely trade
integration but also have common policies on product
 4. Common Market regulation and free movement of capital
 The best known example is and labour
the EU
 CARICOM is another –
Barbados, Belize, Guyana,
Jamaica, and many Caribbean
countries
Economic Integration Economic and Monetary union (EMU) –
 Fifth stage of economic free trade (common market), common
integration currency and common central bank
 5. Economic and Monetary
Union
 The best known example is
the Eurozone
 19 European countries
belong to the Eurozone
 The UK does not belong to
the Eurozone but it does
belong to the common
market
 It has kept the UK pound
Economic Integration Economic and Monetary union
 Advantages of a monetary union? (EMU) – free trade (common
 Exchange rate fluctuations are gone market), common currency and
which removes uncertainty common central bank
 Currency may be more stable than the
individual currencies
 Trade tends to increase within the areas
as risk reduces
 Transaction costs are eliminated (no
charge for exchanging currencies)
 Common currency makes price
differences more obvious which may
lead to price equalising
Economic Integration Economic and
 Disadvantages of a monetary union? Monetary union (EMU)
 Within the EMU the central bank sets the interest – free trade (common
rate which means that individual countries lose market), common
their monetary policy as a tool to fight inflation currency and common
 Many argue that you cannot have monetary union central bank
without fiscal integration (Eurozone does not have
this)
 Individual countries cannot alter their own
exchange rates to make themselves more
competitive
Complete economic
 Initial costs of converting to the new currency are integration – free
high trade, common
Evaluation currency, common
 Difficult to say whether advantages outweigh the central bank and fiscal
disadvantages integration
 It will be different in every case
 The Eurozone has not worked well without fiscal
integration
Evaluation of trading blocs
 The extent of the advantages and
disadvantages depend on the level of
integration
 The benefits of a trade bloc are similar
to those of free trade – larger export
markets, greater competition leading to
greater inefficiency, more choice and
lower prices
 Some may gain more than others –
depends if they are able to compete
 Foreign investment may be attracted to
the larger market size
 There may be more political stability
and cooperation
 However the fact that non members are
being discriminated against is against
the WTO aims of liberalizing throughout
the world
Trade creation
 When a country joins a customs
union there are advantages and
disadvantages
 The advantage is trade creation
 This occurs if the production of a
good or service transfers from a high
cost producer to a low cost producer
 Theoretical example - When the UK
joined the EU it had a comparative
advantage over France in the
production of lawnmowers
 As a non-member there would have
been tariffs placed on exports of
lawnmowers
 With the tariff the French would
produce Q2 and the UK would
produce Q2Q3
Trade creation
 When the tariff is
removed the French
would produce less at Q1
and UK more at Q4
 The UK is producing more
and it is more efficient
therefore there is
regained world efficiency
 The price has come down
therefore there is
regained consumer
surplus
 This should be a two way
process where perhaps
France produces more
wine!
Trade diversion
 Trade diversion occurs when the
entry of a country into a
customs union leads to the
production of a good or service
transferring from a low cost
producer to a high cost
producer
 This is an increase in
inefficiency - a disadvantage
 Lets say that the UK had been
creating textiles and also
importing them from Thailand
 When it joined the EU, it had to
place a tariff on Thai textiles
because they already had one in
place
 Before entry the UK would have
made Q1 and Thailand Q1Q4
Trade diversion
 After the entry into the
EU the UK would make
Q2 but the imports
from Thailand would
reduce to Q3
 Although this would be
an advantage to the UK
this would be a
disadvantage to
Thailand
 In addition the price
has increased therefore
there is loss of
consumer surplus
 Because the higher cost
producer is now
creating more there is a
loss of world efficiency