ECONOMIC INTEGRATION

GALIN STEFANOV, PHD

D. A. TSENOV ACADEMY OF ECONOMICS, SVISHTOV, BULGARIA
Lecture outline

1. Definition of Economic Integration

2. Objectives of Economic Integration
3. Stages
ECONOMIC INTEGRATION

Economic Integration:

 Agreement among countries in a geographic region to

reduce and ultimately remove, tariff and non tariff
barriers to the free flow of goods or services and
factors of production among each others;
 The process of coordinating the economic, fiscal,
monetary policy of sovereign states.
ECONOMIC INTEGRATION

Two aspects of economic integration:

 Negative aspect – elimination of economic borders
between countries (obstacles for the free movement of
goods services and production factors).
 Positive aspect – coordination and harmonization of
existing policies of independent countries.
ECONOMIC INTEGRATION

Objectives of economic integration:

 Free trade among member states – decreased prices
of goods, increased productivity, higher real and
nominal income, higher production possibility
frontiers.
 Increased economies of scale – larger national
markets mean larger companies, lower cost of final
goods and improved company-level competitiveness at
the international markets. Larger national markets
attract more foreign direct investments.
ECONOMIC INTEGRATION

Objectives of economic integration:

 Common protectionist policies –coordinated
measures increase efficiency of protectionism.
 Improved consumer choice.
 Increased negotiating power – coordinated policies
increase bargaining power and international
significance of individual countries.
 Addressing common economic or political issues –
development of economic infrastructure, regional
environmental, health and security problems.
ECONOMIC INTEGRATION

Stages of economic integration:

Economic integration is considered to be a

iterative process – participants start with
lower levels of integration and gradually
increase their economic interdependence,
adopting consecutively (not mandatory)
higher levels of integration agreements.
ECONOMIC INTEGRATION

Stages of economic integration:

Economic integration is considered to be a

iterative process – participants start with
lower levels of integration and gradually
increase their economic interdependence,
adopting consecutively (not mandatory)
higher levels of integration agreements.
ECONOMIC INTEGRATION

Stages of economic integration:

 Preferential Trade Agreement

 Free Trade Area
 Customs Union
 Common Market
 Monetary Union
 Economic Union
ECONOMIC INTEGRATION

Preferential Trade Agreement:

A preferential trade agreement is the weakest form of
economic integration. In a PTA countries would offer
tariff reductions, though perhaps not eliminations, to a
set of partner countries in some product categories.
Higher tariffs, perhaps non-discriminatory tariffs, would
remain in all remaining product categories. Participating
countries maintain sovereign tariff policy towards third
parties.
ECONOMIC INTEGRATION

Free Trade Area:

A free trade area occurs when a group of countries agree to

eliminate tariffs between themselves, but maintain their own
external tariff on imports from the rest of the world. In FTAs
economic integration is significant, because it provides free
trade, although only within the agreement.
ECONOMIC INTEGRATION

Customs Union:

A customs union occurs when a group of countries agree to

eliminate tariffs between themselves and set a common
external tariff on imports from the rest of the world. A
customs union avoids the problem of developing
complicated rules of origin, but introduces the problem of
policy coordination. Within a customs union, all member
countries must give up a significant part of their economic
sovereignty.
ECONOMIC INTEGRATION

Common Market:

A common market establishes free trade in goods and

services, sets common external tariffs among members and
also allows for the free mobility of capital and labor across
countries. Today, EU citizens have a common passport, can
work in any EU member country and can invest throughout
the union without restriction.
ECONOMIC INTEGRATION

Monetary Union:

Monetary union establishes a common currency among a

group of countries. This involves the formation of a central
monetary authority which will determine monetary policy for
the entire group.
ECONOMIC INTEGRATION

Economic Union:

An economic union will maintain free trade in goods and

services, set common external tariffs among members, allow
the free mobility of capital and labor, and will also develop
additional common economic and social policies: fiscal,
energy, education, social security, environmental etc.
ECONOMIC INTEGRATION

Common Common
Reduced Removed Common Factor
monetary economic
tariffs tariffs tariff mobility
policies policies

PTA

FTA

CU

CM

MU

EU
ECONOMIC INTEGRATION

Economic Effects:
Trade Creation – the elimination of tariffs encourages
trade between partners, decreasing prices of goods,
increasing economic efficiency and real income.
Trade Diversion – the establishment of a customs
union redirects imports from a low-cost (high efficiency)
non-member country towards a high-cost member
country, reducing the overall efficiency and creating
artificial competitive advantages.