Introduction

The elimination of tariff and nontariff barriers to the flow of goods, services, and factors

of production between a group of nations, or different parts of the same nation.

 Is the unification of economic policies between different states through the partial or full

abolition of tariff and non-tariff restrictions on trade taking place among them prior to

their integration. This is meant in turn to lead to lower prices for distributors and

consumers with the goal of increasing the level of welfare, while leading to an

Increase of economic productivity of the states.

Economic integration has been one of the main economic developments affecting

international trade in the last years. Countries have wanted engage in economic

cooperation to use their respective resources more effectively and to provide large

markets for member-countries of the resulting integrated areas. There are mainly four

levels of economic integration:

The trade stimulation effects intended by means of economic integration are part of the

contemporary economic Theory: where, in theory, the best option is free trade, with free

competition and no barriers whatsoever. Free trade is treated as an idealistic option,

and although realized within certain developed states, economic integration has been

thought of as the "second best" option for global trade where barriers to full free trade

exist.

Concept of Economic Integration

Economic integration is a new and striking idea for the expansion of foreign trade

among developing countries. Regional economic integration implies the creation of the

most desirable structure of inter-regional economy through the formation of a customs

union or of a free, trade within the region and deliberately introducing all desirable

elements of coordination and unification.

Generally, such an economic integration would have to pass through three distinct but

inter-dependent stages of cooperation, co-ordination and finally, of full integration. So,

economic integration may be identified as liberalization of trade as well as factor

movements. Complete economic integration involves a single economic market, a

common trade policy, a single currency, a common monetary policy (EMU) together

with a single fiscal policy, tax and benefit rates – in short, complete harmonization of all

policies, rates, and economic trade rules.

By integrating the economies of more than one country, the short-term benefits from the

use of tariffs and other trade barriers is diminished. At the same time, the more

integrated the economies become, the less power the governments of the member

nations have to make adjustments that would benefit themselves. In periods

of economic growth, being integrated can lead to greater long-term economic benefits;

however, in periods of poor growth being integrated can actually make things worse.

Benefits of Economic Integration

1. PROGRESS IN TRADE All countries that follow economic integration have extremely wide assortment of

goods and services from which they can choose. Introduction of economic

integration helps in acquiring goods and services at much low costs. This is because

the removal of trade barriers reduces or removes the tariffs entirely. Reduced duties

and lowered prices save a lot of spare money with countries which can be used for

buying more products and services.

2. EASE OF AGREEMENT .

When countries enter into regional integration, they easily get into agreements and

stick to them for long periods of time.

3. IMPROVED POLITICAL COOPERATION .

Countries entering economic integration form groups and have greater political

influence as compared to influence created by a single nation. Integration is a vital

strategy for addressing the effects of political instability and human conflicts that

might affect a region.

4. OPPORTUNITIES FOR EMPLOYMENT .

The various options available in economic integration help to liberalize and

encourage trade. This results in market expansion due to which high amount of

capital is invested in a country’s economy. This creates higher opportunities for

employment of people from all over the world. They thus move from one country to

another in search of jobs or for earning higher pay.

5. BENEFICIAL FOR FINANCIAL MARKETS .

Economic integration is extremely beneficial for financial markets as it eases firm to

borrow finances at low rate if interest. This is because capital liquidity of larger

capital market increases and the resultant diversification effect reduces the risks

associated with high investment.

6. INCREASE IN FOREIGN DIRECT INVESTMENTS .

Economic integration helps to increase the amount of money in Foreign Direct

Investment (FDI). Once firms start FDI, through new operations or by merger,

takeover, and acquisition, it becomes an international enterprise. Thus economic

integration is a win-win situation for all the firms, people and the economies involved

in the process.

Objectives of Economic Integration

There are economic as well as political reasons why nations pursue economic

integration. The economic rationale for the increase of trade between member states of

economic unions that it is meant to lead to higher productivity. This is one of the

reasons for the global scale development of economic integration, a phenomenon now

realized in continental economic blocks such as ASEAN, NAFTA, SACN, the European

Union, and the Eurasian Economic Community; and proposed for intercontinental

economic blocks, such as the Comprehensive Economic Partnership for East Asia and

the Transatlantic Free Trade Area.

Comparative advantage refers to the ability of a person or a country to produce a

particular good or service at a lower marginal and opportunity cost over another.

Comparative advantage was first described by David Ricardo who explained it in his

1817 book On the Principles of Political Economy and Taxation in an example involving

England and Portugal.[3] In Portugal it is possible to produce both wine and cloth with

less labor than it would take to produce the same quantities in England. However the

relative costs of producing those two goods are different in the two countries. In

England it is very hard to produce wine, and only moderately difficult to produce cloth. In

Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in

Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade

that for English cloth. Conversely England benefits from this trade because its cost for

producing cloth has not changed but it can now get wine at a lower price, closer to the

cost of cloth. The conclusion drawn is that each country can gain by specializing in the

good where it has comparative advantage, and trading that good for the other.

Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.[4] Economies of scale is also a justification for economic integration, since some economies of scale may require a larger market than is possible within a particular country — for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market. A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local market.

Increase of Trade

When foreign products are subject to tariffs, exporters either have to accept the

extra cost of trade or make do with a lesser volume of exported products. A basic

element of economic integration policies is the abolition of part of the extra fees or

even the full amount of them, making trade cheaper and giving exporters a bigger

incentive to do business with integrated economies.

Allowing Consumers to Spend More

Economic integration reduces or eliminates customs duties, which in turn results in

cheaper imported products for consumers. This way, the purchasing power of

consumers grows, and with it, activity in the market. The public can start buying

more imported products or spend former duty expenses on other products or

services. In addition, goods that are not produced in sufficient quantities in one

country can be imported and distributed in the market with low cost.

Movement of Capital

Movement of capital refers to the transfer of business or individual assets among

countries. The benefits of capital movement is the investment in new markets,

leading to their eventual development. Economic integration removes barriers to

foreign investors, minimizing or abolishing extra tax, while advanced integration

policies, such as a monetary union, can even eliminate the cost of currency

exchange. Movement of capital is recognized as an essential element of economic

integration by associations such as the European Union and the Caribbean

Community.

Economic Cooperation

The concepts of economic cooperation and equitable economic development are the

basis of economic unions. When economies within the integrated area encounter

problems, it is the duty of other members to help, not only as a moral obligation, but

because a failing economy can have serious effects in the whole integration

process. For this reason, European Union countries have offered to bail out the

troubled economies of Greece, Ireland and Portugal.

Types of Economic Integration

Preferential Trading, Free Trade Area, Custom union Common market Economic Union, Economic &Monetary Union Complete Economic Integration

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc. Agreements may be made between two countries (bi-lateral), or several countries (multi-lateral).

Economic Union

Economic Union is a term applied to a trading bloc that has both a common market between members, and a common trade policy towards non-members, but where members are free to pursue independent macro-economic policies.

Monetary Union

Monetary union is the first major step towards macro-economic integration, and enables economies to converge even more closely. Monetary union involves scrapping individual currencies, and adopting a single, shared currency, such as the Euro for the Euro-16 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean. This means that there is a common exchange rate, a common monetary, including interest rates and the regulation of the quantity of money, and a single central bank, such as the European Central Bank or the East Caribbean Central Bank.

Fiscal Union

A fiscal union is an agreement to harmonize tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses. The majority of EU states agreed a compact in early 2012, which is a less binding version of a full fiscal union.

Economic and Monetary Union

Economic and Monetary Union (EMU) is a key stage towards compete integration, and involves a single economic market, a common trade policy, a single currency and a common monetary policy

Free Trade Area

In this case, tariff barriers to the trade of goods between member states are eliminated, but each country retains control over its own commercial policy; this means that certain types of barriers are effectively maintained. There are certain limitations imposed by “rules of origin”: only goods that have either been completely produced in one of the member countries, or which have mainly been produced in them are allowed to circulate freely.

Characteristics of Free Trade

TariffsThe most common characteristic of free trade is the lack of state tariffs on imports. A tariff is a tax placed on incoming goods by the host country. it makes foreign goods, therefore, artificially more expensive than domestically produced goods, giving the latter a competitive edge.

MarketsMarkets, not the state or even powerful economic actors, are empowered to make decisions in free trade systems. If foreign goods are priced according to market norms, then the winner in economic competition is who makes the best product at the lowest price. In protected trade, it often is the actor with the most political power who gets its economic interests protected.

StatesFree trade takes the state out of the economic equation. States are disempowered to make any kind of economic decision concerning the global economy. Consumers and companies are then empowered to make these decisions based on their preferences rather than state policy.

ContractsMarkets are based on contracts between buyers and sellers. Therefore, the removal of the state from economic decision-making means the dominance of contracts over state regulations in global economics. In this case, free contracts are an important characteristic of free trade. Protected trade, on the other hand, is international economic activity controlled, at least in part, by the state.

EconomicsEconomics is at the center of free trade thinking. Politics is at the center of protected trade. Therefore, any free trade regime thinks in terms of economic categories: efficiency, markets and contracts. Protectionism thinks in terms of political categories: domestic producers, powerful interests, state power.

GlobalismFree trade demands a world without borders. In an economic sense, the states of the globe are irrelevant, only the demands of the global market have any economic relevance. Hence, under free trade, the globe becomes progressively smaller as corporations and bankers serve a global, rather than a national, market.

CUSTOM UNION

Agreement between two or more (usually neighboring) countries to remove trade barriers, and reduce or eliminate customs duty on mutual trade. A customs union (unlike a free trade area) generally imposes a common external-tariff (CTF) on imports from non-member countries and (unlike a common market) generally does not allow free movement of capital and labor among member countries.

Characteristics of Custom Union

Free Trade One of the defining features of the customs union is a policy of free trade between member states. Free trade is the economic term for the elimination of import and export tariffs between states. As David Ricardo outlined in his theory of Competitive Advantage, free trade is generally desirable because it maximizes total economic efficiency by allowing competition to run its natural course. Under free trade, if nation A can produce a product more cheaply than nation B, consumers in nation B can buy the product from nation A without paying an additional tax. Without free trade, the government of nation B might impose a heavy tariff on imports of the product in question, forcing consumers in nation B to purchase nation B's products at a higher price.

Common External Tariff A common external tariff is the agreement between the parties of the customs union that stipulates that all member states maintain the same tariffs, import quotas, non-tariff trade barriers and preferential policies towards non-member states. This prevents the practice of re-exportation within the customs union, which occurs if one member charges lower tariffs to attract foreign imports, and then re-exports those products to other members of the customs union for a profit under the internal free trade policy. The common external tariff is also useful in that it allows the members of the customs union to combine their economic power in enacting punitive or favorable tariffs towards non-member states.

A Building Block of Economic Cooperation Perhaps the most important advantage to forming a customs union is that it represents an important step in the process of economic integration. In today's globalized economy, economic integration is more important than ever, as advancements in transportation technology have made international trade increasingly viable, and economic interdependency has emerged as a tool to facilitate cooperation and conflict resolution. The European Union Customs Union is a prime example; established in 1958 as a feature of the European Economic Community,

Common Market Economics

A common market, also called a single market, refers to an economic agreement

between two or more countries that stipulates that the signatory countries establish a

free trade area, share a single currency and have the same tariffs on goods

imported from non-member countries. Primary example of common markets

includes the European Union, or EU, and the European Economic Area, or EEA.

Characteristics of Common Market

Efficient Allocation of Resources A bigger market more efficiently allocates resources than a smaller one. As goods, services, capital and workers move across borders as if there were no borders, resources move from places of abundance to where they are needed most. A notable example is high unemployment in one country or region and a shortage of qualified labor in another. As a result of the common market, people from one place can easily move to another place, helping to boost productivity and increase their living standards.

Economies of Scale

A common market is good for business. Selling products or services in a country of 1

million people differs greatly from operating in a market with 350 million potential

customers, for example. As companies do not need to comply with a multitude of

national regulators but only have to satisfy one common regulator, doing business

becomes easier. Consumers benefit, too, through lower prices and higher quality as

a result of greater competition between producers.

Shared Currency Another important aspect of a common market is a single currency. Single currency

lowers transaction costs by eliminating the exchange risks and currency conversion

fees. Furthermore, a shared currency also allows easier cross-border investments

and price comparisons by consumers between countries. For example, if a person in

country A goes online and finds a cheaper car in country B, he can order the car

from that country, without paying any additional taxes or levies.

Problems

A common market has a number of theoretical as well as practical problems. First,

as of February 2011 the implementation of a common market in its pure form has

never taken place in any country. The Euro zone comes close, but it still faces many

hurdles, and some states still protect their markets from foreign competition,

particularly cross-border takeovers. In addition, there are also problems that would

be present even in a pure common market. For example, a common market cannot

be fully integrated unless people speak a common language, which is difficult

provided countries' unique cultural and linguistic heritages. Technical problems also

exist. As different regions of the common market may experience different stages of

economic cycle, no single monetary policy, such as interest rates, can fully

accommodate them. For example, Germany may have high inflation, demanding

high interest rates, while Ireland can have deflation and may need low interest rates.

ECONOMIC UNION An economic union typically will maintain free trade in goods and services, set

common external tariffs among members, allow the free mobility of capital and labor,

and will also relegate some fiscal spending responsibilities to a supra-national

agency. The European Union's Common Agriculture Policy (CAP) is an example of a

type of fiscal coordination indicative of an economic union.

MONETARY UNION Monetary union establishes a common currency among a group of countries. This

involves the formation of a central monetary authority which will determine monetary

policy for the entire group. Perhaps the best example of an economic and monetary

union is the United States. Each US state has its own government which sets

policies and laws for its own residents. However, each state cedes control, to some

extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to

the federal government. Goods, services, labor and capital can all move freely,

without restrictions among the US states and the Nations sets a common external

trade policy.

POLITICAL UNION

Represents the potentially most advanced form of integration with a common

government. The level of Economic integration as opposed to its complexity is

illustrated in the graph below:

Other Types

Vertical integration In microeconomics and management, vertical integration is an arrangement in which the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership, but also into one corporation (as in the 1920s when the Ford River Rouge Complex began making much of its own steel rather than buying it from suppliers).

Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly.

A simple example of backward vertical integration strategy is an ice cream company that buys a dairy farm. The company requires milk to make ice cream and either can buy milk from a dairy farm or other milk supplier or could own the dairy farm itself. This ensures that it will have a steady supply of milk at its disposal and that it will pay a reasonable price. This can protect the ice cream maker in the event that there are several other buyers vying for the same milk supply.

Another example

Let's assume XYZ Company, which manufactures frozen french fries, wants to vertically integrate. By purchasing a potato farm and a potato processing plant, XYZ could engage in upstream integration (also known as backward integration) and control the quantity, cost, and quality of the product's raw materials. Likewise, XYZ Company could engage in downstream integration (also known as forward integration) to control the distribution of the company's products by purchasing a packaging plant and a fleet of delivery trucks. Ultimately, XYZ could also use balanced integration, which incorporates both upstream and downstream integration, to control the cost and quality of the entire production and distribution process.

Advantages

One of the biggest advantages of vertical integration is that it often creates economies of scale and lowers production costs because it eliminates many of the price markups in each production step. Vertically integrated companies also achieve cost efficiencies by controlling quality at each step, which reduces repair costs, returns, and downtime. In addition, vertically-integrated companies do not have to allocate resources to pricing, contracting, paying, and coordinating with third-party vendors.

Vertical integration can ultimately create barriers to entry for potential competitors, especially if the company controls access to some or all of a scare resource involved in production. This is why in some cases a company may control so much of the market or supply of raw materials that vertical integration can raise antitrust concerns.  A company must have expertise in each step of the production and distribution process in order to maximize the advantages of vertical integration. Using the example above, XYZ Company must know how to farm potatoes as well as it knows how to manufacture French fries. Another considerable risk is that XYZ will need to modify its infrastructure significantly to accommodate technological changes and other industry innovations. This investment in infrastructure can be very expensive and limit the company's flexibility. By controlling the value chain, the company also becomes responsible for innovation and product variety.

Horizontal integration

In business, horizontal integration is a strategy where a company creates or acquires production units for outputs which are alike - either complementary or competitive. One example would be when a company acquires competitors in the same industry doing the same stage of production for the creation of a monopoly. Another example is the management of a group of products which are alike, yet at different price points, complexities, and qualities. This strategy may reduce competition and increase market share by using economies of scale. For example, a car manufacturer acquiring its competitor who does exactly the same thing.

Horizontal integration is orthogonal to vertical integration, where companies integrate multiple stages of production of a small number of production units.

Horizontal integration is related to horizontal alliances (horizontal cooperation). However, in the case of a horizontal alliance, the partnering companies set up a contract, but remain independent. For example, Rue& Wieland (2015) describe the example of legally independent logistics service providers who cooperate. Such an alliance relates to competition.

An example

An example of horizontal integration would be McDonalds buying out Burger King. Obviously, this has not happened, but is an example of what a horizontal integration would be like. Another example that actually did happen was the Heinz and Kraft Foods merger. On March 25th, 2015, Heinz and Kraft merged into one company.

Benefits of horizontal integration

Benefits of horizontal integration to both the firm and society may include economies of scale and economies of scope. For the firm, horizontal integration may provide a strengthened presence in the reference market. It may also allow the horizontally integrated firm to engage in monopoly pricing, which is disadvantageous to society as a whole and which may cause regulators to ban or constrain horizontal integration.

Today’s Best Companies are Horizontally IntegratedIn big companies, management teams focus on achieving the right level of vertical integration. The pendulum has swung from Henry Ford’s buying ships and railroads and even a rubber plantation in Brazil to ensure his supply of tires to Boeing’s radical outsourcing of Dream liner components, and more recently, back to greater ownership of upstream and downstream assets by companies as different as Pepsi and Oracle.

With every degree of virtualization now made possible by information and communications technologies, the right scope of operations for any given firm is an open question. Let me suggest, however, that it is the wrong question to obsess about. Efficient production through whatever combination of ownership and partnering is now table stakes. Customers assume you can cobble together an offering without defects at low cost. Meanwhile, what they really respond to is a brand experience that is coherent and consistently pleasurable. Today, your management team should be giving more thought to horizontal integration.

Customers’ expectations have been raised by the handful of sellers, such as Amazon, Virgin Atlantic, and Apple, that manage to provide integrated experiences that are so distinctive and pervasive as to be branded—that is, uniquely associated with their names. But most companies aren’t able to deliver such satisfying experiences because they’re too “soloed” internally. Brand experience is the outward expression of what goes on inside an organization, and it’s hard to wallpaper over structures split by inconsistent goals and cultures that do not value collaboration.

Decades of tweaking levels of vertical versus horizontal integration have left deep impressions on organizations. When your goal is to optimize sourcing, clean internal separations make the puzzle easier for managers: engineers do the engineering, marketers do the marketing, the designers do the designing, and so forth. A lack of overlap makes it easier to shift any given piece inside or outside the company’s walls. When your organization is so compartmentalized, each group learns to do its own job according to its own metrics, without worrying about the folks down the hall. Managers describe their workflows as “waterfalls but for the customers interacting with the company, the handoffs don’t seem so fluid.

This kind of fragmentation commonly results from growth. In a tiny startup, the hand-picked team of coworkers collaborates naturally. Everyone is communicating and working toward a common purpose, or they would not be there in the first place. This was certainly true in the early days of Ziba, when it was just me, an engineer, three designers, and a project manager. We sat together in a single room and everyone knew what everyone else was doing, and why we were there. Now there are 110 of us in a dozen different disciplines, handling 25 complex projects simultaneously, and collaboration takes effort. Our ability to provide a client with an integrated experience used to be something I took for granted. Now my horizontal concerns keep me awake nights.

Backward integration  

Backward integration refers to a company buying or internally producing parts of its supply chain. They did backward integration and I found that to be a little bit strange, because that was not how it was normally done. The company decided to purchase one of their major suppliers to hopefully reduce material costs through backward integration and improve profits. One way to improve the logistics of you company is to use backward integration buy purchasing the supply chain from one or more of your suppliers. Backward integration is when a firm buys a company who previously supplied raw materials to the firm. It is a type of vertical integration, but specifically refers to the merging with firms who used to supply the firm.

Example of Backward integrationA car firm buys the company who used to sell it tyres for its cars. A coffee retailer like Nescafe mergers with coffee growers thereby controlling supply of coffee beans. Backward integration may be beneficial if it helps secure a reliable source of supplies. It will be harmful if it leads to increased monopoly power and new competitors have difficulty accessing raw materials.

Benefits

Increased control: Through the process of integrating backward, companies can control their value chain in a more efficient manner. When retailers take the decision to develop or acquire a manufacturing business, they attain increased control over the production segment of the distribution phase.

Cost Control: Through backward integration, costs can be considerably controlled all along the distribution process. In the conventional distribution process, each phase of product movement includes mark-ups to enable the reseller to earn profit.

By direct sale to end buyers, manufacturers are able to do away with the middle man through removal of one or more mark-up steps in the course. In other words, a single entity controlling the entire distribution process brings in enhanced capability leading to optimization of resource utilization. Transportation costs are lowered, and other wasted costs can be avoided.

Competitive Advantages:

Some companies adopt backward integration in order to block competitors from gaining any access to important markets or scarce resources. For instance, a retailer might purchase a manufacturing company and have access to proprietary technology as well as resources or patents that are solely available in the local area of the firm.

Obstacles to Economic Integration

Obstacles standing as barriers for the development of economic integration include the desire for preservation of the control of tax revenues and licensing by local powers, sometimes requiring decades to pass under the control of supranational bodies. The experience of 1990-2009 has shown radical change in this pattern, as the world has observed the economic success of the European Union. So now no state disputes the benefits of economic integration: the only question is when and how it happens, what exact benefits it may bring to a state, and what kind of negative effects may take place.

The two most common reasons that stated against economic integration are

Economic Integration takes away a country’s political sovereignty. Economic Integration takes away a country’s Economic sovereignty

SUCCESS FACTORS

Among the requirements for successful development of economic integration are

"permanency" in its evolution (a gradual expansion and over time a higher degree of

economic/political unification); "a formula for sharing joint revenues" (customs duties,

licensing etc.) between member states (e.g., per capita); "a process for adopting

decisions" both economically and politically; and "a will to make concessions" between

developed and developing states of the union.

A "coherence" policy is a must for the permanent development of economic unions, being also a property of the economic integration process. Historically the success of the European Coal and Steel Community opened a way for the formation of the European Economic Community (EEC) which involved much more than just the two sectors in the ECSC. So a coherence policy was implemented to use a different speed of economic unification (coherence) applied both to economic sectors and economic policies. Implementation of the coherence principle in adjusting economic policies in the member states of economic block causes economic integration effects.

GLOBAL ECONOMIC INTEGRATION

With economics crisis started in 2008 the global economy has started to realize quite a

few initiatives on regional level. It is unification between the EU and US, expansion of

Eurasian Economic Community (now Eurasia Economic Union) by Armenia and

Kirgyzstan. It is also the creation of BRICS with the bank of its members, and notably

high motivation of creating competitive economic structures within Shanghai

Organization, also creating the bank with many multi-currency instruments applied.

Engine for such fast and dramatic changes was insufficiency of global capital, while one

has to mention obvious large political discrepancies witnessed in 2014-2015. Global

economy has to overcome this by easing the moves of capital and labor, while this is

impossible unless the states will find common point of views in resolving cultural and

politic differences which pushed it so far as of now.

Globalization refers to the increasing global relationships of culture, people, and

economic activity.

Advantages Of Economic Integration

Trade Creation:

Member countries have (a) wider selection of goods and services not previously

available; (b) acquire goods and services at a lower cost after trade barriers due to

lowered tariffs or removal of tariffs (c) encourage more trade between member countries

the balance of money spend from cheaper goods and services, can be used to buy

more products and services

Greater Consensus

Unlike WTO with hugh membership (147 countries), easier to gain consensus amongst

small memberships in regional integration

Political Cooperation:

A group of nation can have significantly greater political influence than each nation

would have individually. This integration is an essential strategy to address the effects

of conflicts and political instability that may affect the region. Useful tool to handle the

social and economic challenges associated with globalization.

Employment Opportunities: 

As economic integration encourage trade liberation and lead to market expansion, more

investment into the country and greater diffusion of technology, it create more

employment opportunities for people to move from one country to another to find jobs or

to earn higher pay. For example, industries requiring mostly unskilled labor tends to shift

production to low wage countries within a regional cooperation.

Disadvantages Of Economic Integration

Creation Of Trading Blocs:

It can also increase trade barriers against non-member countries.

Trade Diversion:

Because of trade barriers, trade is diverted from a non-member country to a member

country despite the inefficiency in cost. For example, a country has to stop trading with

a low cost manufacture in a non-member country and trade with a manufacturer in a

member country which has a higher cost.

 

National Sovereignty:

Requires member countries to give up some degree of control over key policies like

trade, monetary and fiscal policies. The higher the level of integration, the greater the

degree of controls that needs to be given up particularly in the case of a political union

economic integration which requires nations to give up a high degree of sovereignty.

Levels of Economic Integration

Free trade. Tariffs (a tax imposed on imported goods) between member countries are abolished or significantly reduced. Each member country keeps its own tariffs in regard to third countries. The general goal is to develop economies of scale and comparative advantages, which promotes economic efficiency.

Custom union. Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries. Custom unions are particularly useful to level the competitiveness playing field and address the problem of re-exports (using preferential tariffs in one country to enter another country).

Common market. Factors of production, such a labor and capital, are free to move within member countries, expanding scale economies and comparative advantages. Thus, a worker in a member country is able to move and work in another member country.

Economic union. Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro).

Political union. Represents the potentially most advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.

Interactions Among the Fundamental Factors Driving Economic Integration

Although technology, tastes, and public policy each have important independent influences on the pattern and pace of economic integration in its various dimensions, they clearly interact in important ways. Improvements in the technology of transportation and communication do not occur spontaneously in an economic vacuum. The desire of people to take advantage of what they see as the benefits of closer economic integration—that is, the taste for the benefits of integration—is a key reason why it is profitable to make the innovations and investments that bring improvements in the technology of transportation and communication. And, public policy has often played a significant role in fostering innovation and investment in transportation and communication both to pursue the benefits of closer economic integration (within as well as across political boundaries) and for other reasons, such as national defense.

The tastes that people have and develop for the potential benefits of closer economic integration are themselves partly dependent on experience that is made possible by cheaper means of transportation and communication. 2For example, centuries ago, wealthy people in Europe first learned about the tea and spices of the East as the consequence of limited and very expensive trade. The broadening desire for these products resulting from limited experience hastened the search for easier and cheaper means of securing them. As a by-product of these efforts, America was discovered, and new frontiers of integration were opened up in the economic and other domains. More recently, if less dramatically, it is clear that tastes for products and services produced in far away locations (including tastes exercised through travel and tourism), as well as for investment in foreign assets, depend to an important degree on experience. As this experience grows, partly because it becomes cheaper, the tastes for the benefits of economic integration typically tend to rise. For example, it appears that as global investors have gained more experience with equities issued by firms in emerging market countries, they have become more interested in diversifying their portfolios to include some of these assets.

Public policy toward economic integration is also, to an important extent, responsive to the tastes that people have regarding various aspects of such integration, as well as to the technologies that make integration possible. On the latter score, it is relevant to note the current issues concerning public policy with respect to commerce conducted over the internet. Before recent advances in computing and communications technology, there was no internet over which commerce could be conducted; and, accordingly, these issues of public policy simply did not arise. Regarding the influence of tastes on public policy, the situation is complicated. Reflecting the general desire to secure the perceived benefits of integration, public policies usually, if not invariably, tend to support closer economic integration within political jurisdictions. The disposition of public policy toward economic integration between different jurisdictions is typically more ambivalent. Better harbors built with public support (and better internal means of transportation as well) tend to facilitate international trade—both imports and exports. Import tariffs and quotas, however, are clearly intended to discourage people from exercising their individual tastes for imported products and encourage production of domestic substitutes. Sadly, the mercantilist fallacy that seems to provide common-sense support for these policies often finds political resonance. Even very smart politicians, such as Abraham Lincoln (who favored a protective tariff, as well as public support for investments to enhance domestic economic integration) often fail to understand the fundamental truth of Lerner’s (1936) symmetry theorem—a tax on imports is fundamentally the same thing as a tax on exports.

It should be emphasized that the interactions between public policy and both tastes and technology in their effects on economic integration can be quite complex and sometimes surprising. Two examples help to illustrate this point. First, for several centuries, there has been active trade between Britain and the Bordeaux region of France, with Britain importing large quantities of Bordeaux wine. This trade, however, was seriously interrupted (if not completely suppressed) during various periods of hostility between the two countries when one side or the other wished to suppress trade with the enemy. Partly as a result of being cut off from Bordeaux wines, and partly as a means of strengthening its alliance with Portugal, Britain sought to develop imports of Portuguese wines. The existing Portuguese wines, however, did not meet British requirements. A solution was found in creating a new product—Portuguese red wine from the Duoro region, fortified with grape brandy that gave the wine an extra alcoholic kick, retained some of the fruit sugar that would otherwise have been absorbed in fermentation, and helped protect the wine during shipment in hot weather. The result of this technological innovation was a new product—modern Port—that developed and retained a considerable market, especially in Britain, even after barriers to the acquisition of French wines were reduced.

The second example concerns U.S. public policy toward international trade in sugar which, in a bizarre way, is partly the consequence of policies pursued by Napoleon Bonaparte and Admiral Lord Nelson. For many years, the United States has maintained tight import quotas on sugar to keep the domestic price typically at roughly three times the world market level. The domestic political interests that support this policy include some sugar refiners, some producers of cane sugar in the deep south and Hawaii, and a few thousand sugar beet farmers primarily in the upper midwest. Production of sugar from beets is a “new” technology, dating back to the Napoleonic period. Before that time, sugar was produced from cane grown primarily in the West Indies. Admiral Lord Nelson’s establishment of naval supremacy over the French enabled Britain to cut off Napoleon’s empire from imports of West Indian sugar. In response, Napoleon established a prize for finding a substitute for cane-based sugar which could be produced within his empire. The sugar beet was discovered, and has been with us ever since.

This story becomes even more complicated when we consider reactions to the U.S. governments’ sugar policy. Responding to the high domestic price of sugar, users have searched for alternatives. High fructose corn syrup is a cheaper and attractive alternative, especially for producers of soft drinks who are major users of sweeteners. A key by-product of high fructose corn syrup is corn gluten meal which can be used as animal feed and which the U.S. both uses domestically and exports, notably to the European Union. Thus, through this round-about channel of public policies and product innovations, what was started by Napoleon and Nelson has come back to European shores.

Conclusion

• There are many regional trade agreements (RTAs) in the world.

• We also distinguish FTAs, customs union, common market, economic union.

• RTAs in general increase welfare through trade creation, but the discriminatory

nature of an RTA may make the net welfare effect negative.

• Increased popularity of Regionalism rather than Multilateralism may be bad for the

world economy.

• EU is most successful and powerful economic integration scheme; many CEE

countries want to join; EU’s political decision process needs to be revised.

There are essentially two factors that define the economic integration between states:

NEGATIVE INTEGRATION : this implies the elimination of barriers that restrict

the movement of goods, services and factors of production.

POSITIVE INTEGRATION : this refers to the creation of a common sovereignty through the modification of existing institutions and the creation of new ones.

Bibliography

www.google.com

www.wikipedia.com

www.economicsonline.co.uk

www. g lobalnegotiator.com

Manan Prakashan Book of Economics