Economic Integration

Updated on January 25, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Economic Integration?

Economic integration 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 neighboring countries, hence sometimes called regional integration. The interconnected global commerce boosts industrial production and generates employment. In addition, more aligned fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more and monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more, lower manufacturing and selling costs, and improved flow of capital, labor, products, and services benefit the integration.

Key Takeaways

  • Economic integration meaning describes the collaboration of two or more economies to lower or remove trade barriers and create a shared market and business opportunities for one another.
  • It encourages coordination of fiscal and monetary policies, leading to lower manufacturing and selling costs, improved movement of capital, labor, products, increased industrial output, and more employment.
  • Economic indicators, such as interconnected global trade, cross-border investment, labor mobility, trade union membership, and coordinated economic policies, can help measure it.
  • The fundamental economic integration levels include economic, monetary, and customs unions, preferential and free trade zones, and shared markets.

How Does Economic Integration Work?

Economic integration strives to harmonize economic policies among member nations to promote mutual trade and economic and political interests. It, along with little government interference, creates more business prospects worldwide. As a result, it is a crucial component of regional and global economic developments. International commerce allows countries to make the best use of their resources while also granting their trading partners access to new markets.

What is Economic Integration

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The member countries agree on fiscal rates, monetary policies, and export and import regulations to achieve a stated economic plan. Economic integration maximizes the benefits for all participating economiesEconomiesAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more by setting the terms of involvement and use. Although it emphasizes trading relations, integration can take many other forms.

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How To Measure Economic Integration?

Since regional economic integration is a part of economic development, economic indicators can help measure it, such as:

Economic Integration Levels

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

Economic Integration Levels

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#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 commoditiesCommoditiesA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units.read more, 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

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.

Advantages & Disadvantages

Let us look at the economic integration advantages and disadvantages –

Advantages

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.

Frequently Asked Questions (FAQs)

What is economic integration?

Economic integration removes all or part of trade barriers between nations for economic, social, and political stability. It enables global markets to operate more consistently with less intervention, allowing countries to make the most of their resources. Furthermore, it helps small countries attract companies, create jobs, and introduce new competition to the market, ultimately improving economic efficiency and productivity.

Is global economic integration good or bad?

It is beneficial as it promotes commercial harmony by eliminating trade barriers, contributing significantly to the upliftment of emerging countries. But, at the same time, it creates some global economic issues, such as depressed regions due to small countries’ reliance on developed nations.

What are the pros and cons of economic integration?

pros and cons of economic integration

This article has been a guide to what is Economic Integration and its definition. Here we explain how economic integration works, its levels, examples & its advantages/ disadvantages. You may learn more about financing from the following articles –

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Comments

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  3. Kevwe Elimimian says

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