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
