economic integration essay

Essay on Economic Integration | Macroeconomics

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Essay # 1. Meaning of Economic Integration:

The modern industrial system rests upon such techniques that can be employed economically only if the production takes place on a very large scale. This requires expanding markets on the one hand and increasing purchasing power with the people on the other.

For the fullest exploitation of the production potential of the modern techniques, certain countries having small internal geographical markets, have attempted to organise themselves into regional groupings. The economic integration, in the broadest sense, means the unification of distinct economies into a single larger economy.

The tariffs and other restrictions upon trade are applied in a discriminatory manner. Such discrimination is of two forms—country- discrimination and commodity-discrimination. The economic integration, according to Salvatore, is the “commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together.”

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Thus the economic integration refers to an arrangement whereby two or more countries combine into a larger economic region through the removal of discontinuities and discriminations existing along national frontiers, while following a common tariff and trade policies against the countries outside the group.

Tinbergen has defined economic integration as “the creation of the most desirable structure of international economy, removing artificial hindrances to the optimum operation and introducing deliberately all desirable elements of co-ordination and unification.” Tinbergen has distinguished-between the negative and positive aspects of integration.

The negative aspects of integration involve the removal of discrimination and restrictions on the movement of goods among the member countries. The positive aspects of integration involve the adoption of such policy measures and institutional arrangements as facilitate the removal of market distortions within the given economic region.

The economic integration can be understood both as a process and as a state of affairs. As a process, it is concerned with the measures which aim at abolition of discrimination between economic units belonging to different nation states. As a state of affairs, it can be treated as an area comprised of different nation states among which there is an absence of various forms of discrimination.

There are two essential features of economic integration:

(i) Re-introduction of free trade among the member nations.

(ii) Imposition of a common external tariff policy against the non-member countries.

From these two features, it follows that economic integration is a synthesis between free trade and tariff protection.

Essay # 2. Benefits of Economic Integration:

The economic integration between two or more countries brings the following main benefits:

(i) Economies of Scale:

The individual countries, having small internal market, have limited capacity to expand production. The economic integration provides an unrestricted access of the products produced by any member country. This gives strong inducement to expand production and exploit fully the economies of scale.

(ii) International Specialisation:

The economic integration enables the member countries to attain a greater degree of specialisation in both products and processes. Specialisation based on comparative cost advantage by a specific geographical region can cause considerably large expansion in production.

(iii) Qualitative Improvement in Output:

The regional economic co-operation among a number of countries leads to rapid technological changes and larger and easier capital movements. The member countries, in such favourable conditions, can bring about qualitative improvement in production.

(iv) Expansion of Employment:

As some countries organise themselves into regional economic groups and allow unrestricted flow of labour within the region, there can be maximisation of employment and income.

(v) Improvement in Terms of Trade:

The economic integration greatly increases the bargaining power of the member countries vis-a-vis the rest of the world. That brings about a significant improvement in their terms of trade.

(vi) Increase in Economic Efficiency:

The economic integration results in increased competition within the region. That helps in maintaining a higher level of economic efficiency of the group as a whole.

(vii) Improvement in Living Standard:

As some countries organise themselves into regional groups, there is easier availability of superior varieties of goods at competitive prices. The increase in employment opportunities and the purchasing power too contributes in improving the living standards of the people.

(viii) Increase in Factor Mobility:

The economic integration leads to dismantling of barriers upon the movement of labour and other factors among the member countries. Increased factor mobility enlarges employment; lowers factor costs; and promotes productive activity in all the member countries.

Essay # 3. Forms of Economic Integration :

The essence of economic integration is the economic co-operation among the participating countries.

On the basis of the degree of co­operation, the economic integration can be of the following main forms:

(i) Preferential Trade Area or Association:

The preferential trade area or association is the most-loose form of economic integration. In this arrangement, the member countries lower tariffs on imports from each other. It means they offer preferential treatment to the member countries.

As regards the outside world, they continue to maintain their individual tariffs. The best instance of preferential trade area or association is the Commonwealth System of Preferences, established in 1932. It is headed by Britain and includes all the Commonwealth countries.

(ii) Free Trade Area:

In this form of economic integration, the member countries abolish completely both tariff and quantitative trade restrictions among themselves. However, each member country is free to maintain its own trade barriers against the non- member countries. An important example of free trade area is the European Free Trade Association (EFTA).

This association was formed in November, 1959. It included such countries as United Kingdom, Austria, Denmark, Norway, Sweden, Portugal, Switzerland and Finland as associate members. Another such association is Latin American Free Trade Association (LAFTA). It was formed in June 1961 by 10 Latin American countries.

(iii) Customs Union:

A more formal type of integration among two or more countries is the customs union. In this form of integration, the member countries abolish all tariffs and other barriers on trade among themselves. As regards the rest of the world, they adopt a common external tariff and commercial policy.

The customs unions and free trade area are similar in respect of abolition of all trade barriers for the member countries. But the customs union is distinct from the free trade area in respect of the common external tariff against the non-member countries.

In case of free trade area, the member countries retain their own tariff and other trade barriers against the non-member countries. Thus customs union is a more closely- knit form of integration than the free trade area. In a customs union, all the member countries act as a single economic unit against the non-member countries.

The customs union has been defined by GATT as the Substitution of a single customs territory for two or more customs territories, so that:

(i) Duties and other regulations of commerce…….. are eliminated with respect to substantially all trade between the constituent territories of the Union or at least with respect to substantially all the trade in products originating in such territories, and

(ii) The same, duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union. J.E. Meade explained that a customs union is characterised by “complete freedom of movement of goods and services within the territories of the member countries or a common tariff applicable to all the member countries of the customs union and a common tariff adopted by all the member countries of the customs union with respect to the rest of the world.”

The most important instance of a customs union is the European Economic Community formed by West Germany, France, Italy, Belgium, the Netherlands and Luxembourg in 1957.

The theory of customs union was first of all given by Jacob, Viner in 1950. According to him, customs union ensures, on the one hand, increased competition among the members and, on the other, an increased measure of protection against trade and competition from the rest of the world. Viner clearly stated that the synthesis of elements of competition and protection might or might not increase the welfare of the member nations.

Jacob Viner’s pioneering work in this field was followed by the contribution made by the writers like J.E. Meade (1955), R. G. Lipsey (1957), H.G. Johnson (1962), J. Vanek (1965), Cooper and Masell (1965), Murry Kemp (1969), J. Bhagwati (1971), P.J. Lloyd (1982) and many others.

(iv) Common Market:

The common market signifies a more unified arrangement among a group of countries than the customs union. The common market involves the abolition of tariff and trade restrictions among the member countries and adoption of a common external tariff. It goes even beyond that and allows free movement of labour and capital among the member nations.

Thus in case of a common market, there is a free and integrated movement of goods and factors among the member countries. The European Common Market (ECM) called also as the European Economic Community (EEC) is the best example of the common market.

(v) Economic Union:

The most advanced form of economic integration involving the greatest degree of co-operation is the economic union. In case of an economic union, two or more countries form a common market. In addition, they proceed to harmonise and unify their fiscal, monetary, exchange rate, industrial and other socio-economic policies. The member countries attempt to have a common currency and banking system.

An example of economic union is BENELUX (including Belgium, Netherlands and Luxembourg) which was formed in 1948 initially as a customs union bat later got converted into an economic union in 1960. These countries have now joined the EU. The European Economic Community (EEC) has transformed itself into an economic union called as European Union (EU) in 1991.

An interesting recent development, based on the principles of integration, has been the duty-­free zones or economic zones. Such areas have been set up in different countries or regions with the object of attracting foreign investment through duty-free imports of raw materials and intermediate products.

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What Is Economic Integration?

Economic integration explained, real-world example of economic integration, the bottom line.

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Economic Integration Definition and Real World Example

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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.

Key Takeaways

• Economic integration, or regional integration, is an agreement among nations to reduce or eliminate trade barriers and to coordinate monetary and fiscal policies.
• The European Union, for example, represents an economic integration among 27 countries.
• Strict nationalists may oppose economic integration due to concerns over a loss of sovereignty.

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, a wider selection of them, and gains in efficiency that lead to greater purchasing power.

Economic integration can reduce the costs of trade, improve the availability of goods and services, and increase consumer purchasing power in member nations.

Employment opportunities tend to improve because  trade liberalization leads to market expansion, technology sharing, and cross-border investment.

Political cooperation among countries also can improve because of stronger economic ties, which provide an incentive to resolve conflicts peacefully and lead to greater stability.

The Costs of Economic Integration

Despite the benefits, economic integration has costs. These fall into three categories:

• Diversion of trade: Trade can be diverted from non-members to members, even if it is economically detrimental for the member state.
• Erosion of national sovereignty: Members of economic unions typically are required to adhere to rules on trade, monetary policy , and fiscal policies established by an unelected external policymaking body.
• Employment shifts and reductions: Economic integration can cause companies to move their production operations to areas within the economic union that have cheaper labor prices. Conversely, employees may move to areas with better wages and employment opportunities.

Because economists and policymakers believe economic integration leads to significant benefits, many institutions attempt to measure the degree of economic integration across countries and regions. The methodology for measuring economic integration typically involves multiple economic indicators including trade in goods and services, cross-border capital flows, labor migration, and others. Assessing economic integration also includes measures of institutional conformity, such as membership in trade unions and the strength of institutions that protect consumer and investor rights.

The European Union (EU) was created in 1993 and included 27 member states in 2024. Since 1999, 20 of those nations have adopted the euro as a shared currency. According to data from the World Bank, the EU accounted for roughly 16.6% of the world's gross domestic product in 2022.

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.

What Are Examples of Economic Integration?

There are numerous examples of economic integration around the world. In North America, the United States–Mexico–Canada Agreement ( USCMA ) is an example of a free trade agreement between the three countries. The Asia-Pacific Economic Cooperation is a forum of 21 Pacific Rim countries aimed at fostering free trade across the region. As mentioned above, the EU is another such example of economic integration, as is the Eurasian Economic Union (EAEU).

What Are Risks of Economic Integration?

Economic integration can come with downsides and risks. Primarily, countries participating in regional integration may have divergent priorities when it comes to fiscal and monetary policy. Resolving such conflicts can be challenging and costly in terms of time and resources. In addition, economic integration can create a system in which a select group of stakeholders reap the economic benefits, such as more revenue from trade, while others bear the costs, such as job market shifts. These are important considerations to weigh when assessing the value of economic integration.

What Are Benefits of Economic Integration?

Economic integration can increase trade, benefiting both producers, consumers, and involved countries. For instance, with the elimination of trade barriers, a firm may be able to produce and sell more products, earning more revenue, and increasing their home country's gross domestic product (GDP) . For customers in other countries, they can count on having more product selection and potentially lower costs, as well.

Economic integration is a form of coordination between different states, in which barriers to trade are eliminated and fiscal and monetary policies are harmonized. These arrangements can lead to increased economic activity, job creation, and stronger political ties. They may also come with drawbacks, such as trade diversion and loss of national sovereignty.

The EU is a well-known example of regional economic integration, as it is comprised of 27 member states, 20 of which use the same currency.

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• Economic Integration

Agreements between countries that usually include the elimination of trade barriers and aligning monetary and fiscal policies

What is Economic Integration?

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.

Comparative Advantage Example

For example, consider a country that happens to possess an abundance of oil sands located within its borders. The country can extract the oil and trade it for other resources that it lacks, perhaps food such as corn or wheat.

Another country may enjoy optimal weather for growing such crops and therefore can specialize in growing corn or wheat and trade it for oil to provide energy for their society. It illustrates how trade can benefit all economies by taking advantage of specialization and comparative advantages.

Stages of Economic Integration

Economic integration is expected to improve the outcomes for all economies by many economists and policymakers. Within economics, there are seven stages that lead to complete economic integration:

• Preferential Trading Area
• Free Trade Area
• Customs Union
• Common Market
• Economic Union
• Economic and Monetary Union

Many countries move in and out of the above stages with other partner countries. The best example of complete economic integration is with the European Union (EU) . The EU is made up of separate member countries, including:

There are also many other countries in the EU, totaling 27 separate nations. However, each country functions separately politically and keeps defined borders, different laws, and government systems. Economically, the 27 countries function as one – with free trade between the countries and unified monetary policies and fiscal policies.

Benefits of Economic Integration

Economic integration is beneficial in many ways, as it allows countries to specialize and trade without government interference, which can benefit all economies. It results in a reduction of costs and ultimately an increase in overall wealth.

Trade costs are reduced, and goods and services are more widely available, which leads to a more efficient economy. An efficient economy distributes capital, goods, and services into the areas that demand them the most.

The movement of employees is liberalized under economic integration as well. Normally, employees would need to deal with visas and immigration policies in order to work in another country. However, with economic integration, employees can move freely, and it leads to greater market expansion and technology sharing, which ultimately benefits all economies.

Lastly, political cooperation is encouraged, and there are fewer political conflicts. Political conflicts usually end with economic losses stemming from trade wars or even military wars breaking out, resulting in extreme costs for all combatants.

Drawbacks of Economic Integration

Nationalists, or people who believe that their country is superior to others, are critical of economic integration. In order to appeal to nationalists, some countries employ forms of protectionism, which leads to higher tariffs and less free trade between other countries.

The notable feature of economic integration is the loss of individual central banks who control monetary policy. It leads to less national sovereignty, and the responsibilities of central banks are delegated to an external body instead. The external control becomes troublesome in terms of managing a cohesive fiscal and monetary policy among many different countries.

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Economic Integration

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• George Tridimas 2  

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Economic integration is the establishment of a unified economic area where consumers and producers of different nations transact freely in a single market. Using the experience of the European Union, this essay offers a bird’s–eye view of the trade–offs encountered when supranational structures pursuing collective objectives of integration may infringe on national sovereignty. The range of issues examined include: (A) Determination of policy with multiple veto players. (B) The advantage and disadvantages from centralising policy making. (C) The welfare effects of a customs union from changing the flows of trade and factors of production across different countries. (D) The costs and benefits from adopting a single currency and its consequences for budgetary policy.

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Theory of Economic Integration: A Review

For textbook expositions, see amongst others Senior Nello ( 2011 ), Baldwin and Wplosz ( 2012 ) and Saurugger ( 2013 ). Detailed analysis of monetary integration can be found in Issing ( 2008 ) and De Grauwe ( 2012 ). The interested reader is also referred to the papers in the volume edited by Artis and Nixson ( 2007 ).

The stock of scholarly work on the economic, political and legal aspects of European integration is enormous and, in view of the fast pace of the changes recent change, expanding rapidly. The following list is only a small sample of some of the most popular texts

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Artis M, Nixson F (2007) Economics of the European Union, 4th edn. Oxford University Press, Oxford

Baldwin R, Wyplosz C (2012) The economics of European integration, 4th edn. McGraw Hill, Maidenhead

De Grauwe P (2012) The economics of Monetary union, 7th edn. Oxford University Press, Oxford

Issing O (2008) The birth of the Euro. Cambridge University Press, Cambridge

Saurugger S (2013) Theoretical approaches to European integration. Palgrave Macmillan, Basingstoke

Senior Nello S (2011) The European Union: economics, policies and history, 3rd edn. McGraw Hill, Maidenhead

For annual scholarly updates on EU developments the reader is referred to the Supplement of the Journal of Common Market Studies, an academic publication dedicated to EU issues, The interested reader may also consult the EU website: http://europa.eu/index_en.htm (in English)

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Department of Accounting, Finance and Economics, University of Ulster, Ulster Business School, Shore Road, Co Antrim, BT37 0QB, Newtownabbey, UK

George Tridimas

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Lehrst. Finanzwissenschaft/ Finanzsoziologie, University of Erfurt, Erfurt, Thüringen, Germany

Jürgen Backhaus

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Tridimas, G. (2014). Economic Integration. In: Backhaus, J. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7883-6_32-1

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DOI : https://doi.org/10.1007/978-1-4614-7883-6_32-1

Received : 26 February 2014

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Published : 20 June 2014

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ECONOMIC INTEGRATION: AN OVERVIEW OF THE THEORETICAL AND EMPIRICAL LITERATURE

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ASEAN Economic Integration: Features, Fulfillments, Failures and the Future

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This paper introduces the Association of Southeast Asian Nations (ASEAN) and traces its evolution focusing on programs for economic integration. It also evaluates past performance and, based on this, examines prospects for the future.

• http://hdl.handle.net/11540/1581

The 10-member Association of Southeast Asian Nations, ASEAN, is arguably the most durable and successful regional grouping in the developing world. Established in 1967, it has contributed greatly to regional harmony and prosperity. ASEAN is characterized by great internal diversity, generally high economic growth, and a reluctance to establish a strong supranational structure. Beginning in 1976—with its five original members—ASEAN began to move toward economic cooperation and integration, initially with a focus on merchandise trade. In the 1990s, it added focus on services, investment, and labor. And in the past decade—now including all of Southeast Asia—ASEAN broadened cooperation on macroeconomic and financial issues, many of these together with its Northeast Asian neighbors—the "Plus 3" of the People's Republic of China, Japan, and the Republic of Korea. Members adopted what may appear to be formal preferential trade arrangements. But in practice these are usually multilateralized. ASEAN informally embraces what is sometimes termed "open regionalism." However, there is little likelihood in the foreseeable future that this will evolve into a deep EU-style economic integration behind a common external trade regime, despite a commitment to forming an ASEAN Economic Community beginning 2015.

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