definitions of economic integration

8/10/2019 Definitions of Economic Integration

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DEFINITIONS OF ECONOMIC INTEGRATION

Economic Integration, according to investopedia.com, is an economic arrangement between

different regions marked by 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, as well as to increase trade between the countries taking part in the

agreement.

Economic Integration, according to bussinessdictionary.com, is the elimination of tariffand

nontariff barriers to theflowofgoods, services, and factors of productionbetween a group

of nations, or differentpartsof the same nation.

Economic Integration, according to Carbaugh (2!", is the process of eliminating restrictions on

international trade, payments and factor mobility.

Economic integration, according to #ongman Economics for C$C, can be defined as a situation

where several sites or countries seek to increase or e%pand the e%tent of their economic

relationship to facilitate trade so that each will benefit from access to a larger market etc and a

possibly higher overall level of economic growth.
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STAGES OF ECONOMIC INTEGRATION

&s international trade and investment levels continue to rise, the level of economic integration

between various groups of nations is also deepening. The most obvious e%ample of this is the

European 'nion, which has evolved from a collection of nations to become a fully integrated

economic unit. &lthough it is rare that relationships between countries follow so precise a

pattern, formal economic integration takes place in stages, beginning with the lowering and

removal of barriers to trade and culminating in the creation of an economic union. These stages

are summaried below.

Free Trade Agreements

The first level of formal economic integration is the establishment of free trade agreements

()T&s" or preferential trade agreements (*T&s". )T&s eliminate import tariffs as well as import

+uotas between signatory countries. These agreements can be limited to a few sectors or can

include all aspects of international trade. )T&s can also include formal methods to resolve trade

disputes. The orth &merican )ree Trade &greement (&)T&" is an e%ample of such an

arrangement.

&side from a commitment to a mutual trade liberaliation schedule, )T&s place few limitations

on member states. &lthough )T&s may contain provisions in these areas if the signatory

countries agree to do so, no further harmoniation of regulations, standards or economic policies

is re+uired, nor is the free movement of capital and labour a necessary part of a free trade


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agreement. )T& signatory countries also retain independent trade policy with all countries

outside the agreement.

-owever, in order for an )T& to function properly, member countries must establish rules of

origin for all thirdparty goods entering the free trade area. /oods produced within the free trade

area (and sub0ect to the agreement" may cross borders tarifffree, but rules of origin re+uirements

must be met to prove that the good was in fact produced in the e%porting country. In the absence

of rules of origin, thirdparty countries seeking trade access to the )T& area will choose the path

of least resistance 1 the country where they face the lowest opposing tariff 1 in order to gain

effective entry to the entire )T& region.

Customs Union

& customs union (C'" builds on a free trade area by, in addition to removing internal barriers to

trade, also re+uiring participating nations to harmonie their e%ternal trade policy. This includes

establishing a common e%ternal tariff (CET" and import +uotas on products entering the region

from thirdparty countries, as well as possibly establishing common trade remedy policies such

as antidumping and countervail measures. & customs union may also prohibit the use of trade

remedy mechanisms within the union. embers of a C' also typically negotiate any

multilateral trade initiative (such as at the 3orld Trade 4rganiation" as a single bloc. Countries

with an established customs union no longer re+uire rules of origin, since any product entering

the C' area would be sub0ect to the same tariff rates and5or import +uotas regardless of the point

of entry.


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The elimination of the need for rules of origin is the chief benefit of a customs union over a free

trade area. To maintain rules of origin re+uires e%tensive documentation by all )T& member

countries as well as enforcement of those rules at borders within the free trade area. This is a

costly process and can lead to disputes over interpretation of the rules as well as other delays. &

C' would result in significant administrative cost savings and efficiency gains.

In order to gain the benefits of a customs union, member countries would have to surrender some

degree of policy freedom 1 specifically the ability to set independent trade policy. 6y e%tension,

because of the increased importance of trade and economic measures as foreign policy tools,

customs unions place some limitations on independent foreign policy as well.

Common Market

& common market represents a ma0or step towards significant economic integration. In addition

to containing the provisions of a customs union, a common market (C" removes all barriers to

the mobility of people, capital and other resources within the area in +uestion, as well as

eliminating nontariff barriers to trade, such as the regulatory treatment of product standards.

Establishing a common market typically re+uires significant policy harmoniation in a number of

areas. )ree movement of labour, for e%ample, necessitates agreement on worker +ualifications

and certifications. & common market is also typically associated 1 whether by design or

conse+uence 1 with a broad convergence of fiscal and monetary policies due to the increased

economic interdependence within the region and the effect that one member country7s policies

can have on other member countries. This necessarily places more severe limitations on member

countries7 ability to pursue independent economic policies.


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The principal advantage of establishing a common market is the e%pected gains in economic

efficiency. 3ith tangential mobility, labour and capital can more easily respond to economic

signals within the common market, resulting in a more efficient allocation of resources.

Economic Union

The deepest form of economic integration, an economic union adds to a common market the

need to harmonie a number of key policy areas. ost notably, economic unions re+uire

formally coordinated monetary and fiscal policies as well as labour market, regional

development, transportation and industrial policies. 8ince all countries would essentially share

the same economic space, it would be counterproductive to operate divergent policies in those

areas.

&n economic union fre+uently includes the use of a common currency and a unified monetary

policy. Eliminating e%change rate uncertainty improves the functioning of an economic union by

allowing trade to follow economically efficient paths without being unduly affected by e%change

rate considerations. The same is true of business location decisions.

8upranational institutions would be re+uired to regulate commerce within the union to ensure

uniform application of the rules. These laws would still be administered at the national level, but

countries would abdicate individual control in this area

Complete Economic Integration

The complete economic integration is the final stage of the economic integration. *olitical

integration is re+uired, and in order to be effective and it is necessary for all provinces to be at


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the same stage of the economic cycle. )or effectiveness of the government policy to be

ma%imied, it is best for the economic microcosms to be at the same stage of the economic cycle.

In order to achieve economic harmoniation, increasing central control would be necessary to

pursue an economic area wide policy of combating inflation and promotion of stability. & loss of

provincial political sovereignty is often scrutinied, but it is necessary to remove disparities. &n

e%ample of complete economic integration is the 'nited 8tates which has federalist system of

governance as it re+uired political union to function as a single economy.

6elow is a table which summaries the basic elements of the various stages in economic

integration

Basic Elements of the Stages

of Economic Integration

)ree Trade &greement ()T&" 9ero tariffs between member countries andreduced nontariff barriers

Customs 'nion (C'" )T& : common e%ternal tariff

Common arket (C" C' : free movement of capital and labour,

some policy harmoniation

Economic 'nion (E'" C : common economic policies and

institutions

Complete Economic Integration Countries have no control over

economic policy and there is fullmonetary policy and complete

harmoniation of fiscal policy


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BENEFITS OF ECONOMIC INTEGRATION

The formation of an economic integration could be beneficial in the light of the following

aspects;

Enlarged market size: evelopment 6ank to

serve all the three countries rather than each country maintaining its own.

Specialisation: Each member country concentrates on production of those goods which

it can produce more efficiently. 8urpluses are e%changed and resources utilisation is increased

1 comparative advantage.

Increased emploment opportunities and su!se"uent reduction in income

ine"ualities: )ree mobility of labour leads to people moving from areas where incomes are


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low to areas of high labour incomes. This becomes even more beneficial if such incomes are

invested back in respective countries. )urthermore, firms will have to pay highly in order to

retain factor services (economic rent", thereby enhancing productivity.

Impro#ement of !alance of paments $B%&': increased market implies more e%ports

than before and given fairly low priced imports (from member countries" relative to imports

from nonmember countries, balance of payments position is most likely to improve. )oreign

e%change savings also arise from this situation i.e. hard currencies such as the '8 dollar will

only be re+uired to import what cannot be produced from within the region.

Competiti#e !usiness en#ironment: &bsence of trade barriers allows for free flow of

goods and services which develops an upward pressure on competition and the driving force

for relatively lower prices for higher +uality products. This helps reduce or even eliminate

monopoly practices, since firms can only ac+uire and maintain a market base by producing as

efficiently as possible. 4verall, there is increased variety of goods and services their

consumption of which enhances living standards5development

Indigenisation of economies:


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COST OF ECONOMIC INTEGRATION

Creation %f Trading Blocs; It can also increase trade barriers against nonmember

countries.

Trade (i#ersion; 6ecause of trade barriers, trade is diverted from a nonmember country to

a member country despite the inefficiency in cost. )or e%ample, a country has to stop

trading with a low cost manufacture in a nonmember country and trade with a

manufacturer in a member country which has a higher cost.

)ational So#ereignt;


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CARICOM AND ECONOMIC TRADE

The Caribbean Community is composed of ?@ Afull membersA. ost member countries are

islands or island chains located in the Caribbean 8ea, although some members are located on the

mainland of Central &merica or 8outh &merica. embers of C&ominica, /renada, /uyana, -aiti, =amaica, 8t. Bitts and

evis, 8t. #ucia, 8t. incent and the /renadines, 8uriname, Trinidad and Tobagoand ontserrat

(not an independent country, but a possession of the 'nited Bingdom".

There are also five Aassociate membersA of C&


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Structure of CA+IC%M

C&


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6enefit from free trade agreements it has with countries such as Canada, eneuela, and

Cuba

Control e%change rates and devise a single currency for C&


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aking travel and immigration to other member countries easier through a common

passport

Challenges for CA+IC%M

C&


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INTRODUCTION

This pro0ect is about the topic Economic Integration. &fter the completion of this pro0ect the

reader will have a clear understanding of what is economic integration, the stages of economic

integration, the cost and benefits of economic integration as well as the relationship between

C&

definitions of economic integration

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