ECONOMIC INTEGRATION

ECONOMIC INTEGRATION

1. Economic integration

   • Process whereby countries coordinate and link their economic policies.
   • Bilateral trade
     • Agreement relating to trade between the two countries in order to reduce or remove tariffs.
   • Multilateral trade
     • Agreement relating to trade between multiple countries in order to reduce or remove tariffs.

2. Trading bloc

   • Group of countries that join with an agreement in order to increase trade and to gain economic benefits

3. STAGES

   • 1. Preferential trading areas
     • Gives preferential access to certain products from certain countries, it reduces tariffs.
   • 2. Free trade areas
     • Countries agree to trade freely among themselves, nut are able to trade with other countries outside of the free trade area.
   • 3. Customs unions
     • Countries agree to trade freely among themselves and they also agree to adopt common external barriers
   • 4. Common markets
     • Customs union with common policies on product regulations, and free movement of goods.
   • 5. Economic and monetary union
     • Common market with a common currency and common central bank.
       • Advantages:
         • Rate fluctuations disappear.
         • Stable currency against speculation
         • Business confidence increase
         • Transaction costs are eliminated
         • Equal prices across borders
       • Disadvantages
         • Individual countries aren't free to set interest rates.
         • Fiscal irresponsability from one member of the union affects the stability of the union.
         • Individual countries can’t alter their own exchange rates.
         • Costs for a large currency
   • 6. Complete economic integration
     • Individual countries involved would have no control of economic policy.

4. An evaluation of trading blocs

   • A trading bloc will foster greater political stability and cooperation.
   • Trading blocs favour increased trade among members , but enact discriminatory policies against non-members

5. Trade creation

   • Entry of a country into a customs union leads to the production of a good or service transferring from a high-cost producer to a low-cost producer.
     • Advantage

6. Trade diversion

   • 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.
     • Disadvantage