economic integration, process in which two or more states in a broadly defined geographic area

reduce a range of trade barriers to advance or protect a set of economic goals.

The level of integration involved in an economic regionalist project can vary enormously from loose
association to a sophisticated, deeply integrated, transnationalized economic space. It is in its
political dimension that economic integration differs from the broader idea of regionalism in general.
Although economic decisions go directly to the intrinsically political question of resource allocation,
an economic region can be deployed as a technocratic tool by the participating government to
advance a clearly defined and limited economic agenda without requiring more than minimal
political alignment or erosion of formal state sovereignty. The unifying factor in the different forms
of economic regionalism is thus the desire by the participating states to use a wider,
transnationalized sense of space to advance national economic interests.

Investopedia

Economic integration is an arrangement among nations that typically includes the reduction or
elimination of trade barriers and the coordination of monetary and fiscal policies.

Economic integration aims to reduce costs for both consumers and producers and to increase trade
between the countries involved in the agreement.

Economic integration is sometimes referred to as regional integration as it often occurs among

neighboring nations.

Economic Integration Explained

When regional economies agree on integration, trade barriers fall and economic and political
coordination increases.

Specialists in this area define seven stages of economic integration: a preferential trading area, a
free trade area, a customs union, a common market, an economic union, an economic and monetary
union, and complete economic integration.

The final stage represents a total harmonization of fiscal policy and a complete monetary union.

Advantages of Economic Integration

The advantages of economic integration fall into three categories: trade creation, employment
opportunities, and consensus and cooperation.

More specifically, economic integration typically leads to a reduction in the cost of trade, improved
availability of goods and services and a wider selection of them, and gains in efficiency that lead to
greater purchasing power.

Schlumb
erger-
Private
Real-World Example of Economic Integration

The European Union (EU) was created in 1993 and included 27 member states in 2022.

Since 1999, 19 of those nations have adopted the euro as a shared currency.

According to data from The World Bank, the EU accounted for roughly 18% of the world's gross
domestic product in 2020.

The United Kingdom voted in 2016 to leave the EU. In January 2020 British lawmakers and the
European Parliament voted to accept the United Kingdom's withdrawal. The UK officially split from
the EU on January 1, 2021.

Economic integration involves agreements between countries that usually include the elimination of
trade barriers and aligning monetary and fiscal policies, leading to a more inter-connected global
economy. Economic integration is consistent with the economic theory, which argues that the global
economy is better off when markets can function in unison with minimal government intervention.

Understanding Economic Integration

Economic integration, like the name implies, involves the integration of countries’ economies.
Another term to describe it is globalization, which simply refers to the inter-connectedness of
businesses and trading among countries. An economy is defined as a set of inter-related activities
that determine how limited resources are allocated. In the modern economy, all economies feature
a form of a market system. A market-based economy utilizes the economic forces of demand and
supply in order to distribute these limited resources.

Traditionally, economies were thought of as separate for each region or country, with each country
managing its own separate economy and largely unrelated to other countries. However,
globalization allows the movement of goods, services, capital between countries and blurred the
distinctions between economies.

Today, there is no economy that functions completely isolated from other economies. There is a
simple reason for such an occurrence – trade benefits all economies in most cases. It allows for
specializations of economies with comparative advantages and can trade with other economies that
possess alternative comparative advantages.

Schlumb
erger-
Private
Level

#1 – Free Trade Area

It entails the partial or complete elimination of trade tariffs on goods and services between member
countries. Increased cross-border trade, access to foreign markets, the formation of interconnected
manufacturing chains, and labor migration are among its goals. However, each country retains
control over its trade policy, making this form the least restrictive.

Example – European Free Trade Association and North American Free Trade Agreement

#2 – Preferred Trade Area

It assures a better and preferred offering to member countries by cutting tariffs on imports for one
another.

Example – Commonwealth System of Preferences

#3 – Monetary Union

It concerns agreeing on fixed relative exchange rates and introducing a common currency to
participate in foreign exchange and settle international transactions.

#4 – Economic Union

It involves the coordination of monetary, fiscal, and taxation policies and government expenditure to
promote the free flow of commodities

, services, and production inputs.

Example – Belgium, Netherlands, and Luxembourg (BENELUX)

#5 – Customs Union

It establishes common external trade tariffs on imports from non-member nations, making external
production factors easier to track and tax within the region. Other features of this shared trade
policy include free trade of goods and services and adoption of common customs and commercial
laws between member countries.

Example – European Economic Community

Schlumb
erger-
Private
#6 – Common Market

It is similar to free trade zones and customs unions. It facilitates the free movement of production
factors between member countries and liberalizes cross-border labor mobility and investment. Its
features include the reduction of tariff obstacles to internal commerce and the coordination of
economic policy.

#7 – Complete Economic Integration

It combines coordination of fiscal policies with comprehensive monetary unification.

Example – European Union

Advantages & Disadvantages

Let us look at the economic integration advantages and disadvantages –

Advantages

 Helps developing nations take advantage of economies of scale

 by integrating with developed nations.
 Expands production capacity and creates new opportunities.
 Supports international specialization.
 Leads to the development of new products with quality output.
 Free flow of labor, capital, and goods.
 Increases bargaining power, efficiency, and productivity levels of small countries.
 Creates political harmony between member countries.

Disadvantages

 Trade diversions may deflect small countries’ economies and land and contribute to member
countries.
 Developing countries become dependent on more developed nations, thus becoming
depressed regions.
 Member nations must follow trade regulations and monetary and fiscal policies set by non-
member nations.
 Increased competition may harm high-cost producers.
 Can lead to a political disturbance and rivalry between two nations.

Schlumb
erger-
Private
Schlumb
erger-
Private