Chapter 7: Define the types of economic integration

7.1.      Economic Integration Definition

Before you begin

Before you begin reading, check your understanding of some of the key terms you will read in this chapter:

 

What Is Economic Integration? It refers to the collaboration of two or more countries to limit or eliminate trade restrictions and encourage political and economic cooperation. It allows global markets to function more steadily with less government intervention, giving countries a chance to make the greatest use of their resources.

It usually takes place between neighbouring countries, hence sometimes called regional integration. The interconnected global commerce boosts industrial production and generates employment. In addition, more aligned fiscal policy and monetary policy, lower manufacturing and selling costs, and improved flow of capital, labour, products, and services benefit the integration.

7.2.      Economic Integration Levels

The image depicts a series of steps illustrating different levels of economic integration
Image by Wallstreetmojo Team from Wallstreetmojo

Let us look at different regional economic integration types, including:

#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

#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

Other examples: Let us look at the following economic integration examples to understand the concept better:

Example #1

Russia and Belarus decided to establish a unified energy market for oil, gas, and electricity to address the unwarranted western sanctions on both economies. In addition, the leaders of the two countries intend to strengthen global economic integration by reducing business barriers and assisting one another.

Example #2

The Middle East and North Africa (MENA) countries strive to achieve green growth, efficiency, and diversification. The collaboration will enable these least economically integrated countries to generate employment, attract more investment for the water and energy sector, and recover from the COVID-19 pandemic.

Source (Article)

Wallstreetmojo Team. (2023). What is Economic Integration?

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