ECONOMIC INTEGRATION

An economic arrangement between different regions marked by the reduction or

elimination of trade barriers and the coordination of monetary and fiscal policies.

The aim of economic integration is to reduce costs for both consumers and

producers, as well as to increase trade between the countries taking part in the

agreement.

There are varying levels of economic integration, including preferential trade

agreements (PTA), free trade areas (FTA), customs unions, common markets and

economic and monetary unions. The more integrated the economies become, the

fewer trade barriers exist and the more economic and political coordination there is

between the member countries.

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.

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).

Free Trade Areas (FTAs) are created when two or more countries in a region

agree to reduce or eliminate barriers to trade on all goods coming from other

members. The North Atlantic Free Trade Agreement (NAFTA) is an example of

such a free trade area, and includes the USA, Canada, and Mexico.

A customs union involves the removal of tariff barriers between members, plus the

acceptance of a common (unified) external tariff against non-members. This means

that members may negotiate as a single bloc with 3rd parties, such as with other

trading blocs, or with the WTO.

A common market is the first significant step towards full economic integration, and

occurs when member countries trade freely in all economic resources – not just

tangible goods. This means that all barriers to trade in goods, services, capital, and

labour are removed. In addition, as well as removing tariffs, non-tariff barriers are

also reduced and eliminated. For a common market to be successful there must

also be a significant level of harmonisation of micro-economic policies, and

common rules regarding monopoly power and other anti-competitive practices.

There may also be common policies affecting key industries, such as the Common

Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European

Single Market (ESM).

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 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 policy, 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.

A fiscal union is an agreement to harmonise 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 fiscal compact in early 2012,

which is a less binding version of a full fiscal 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.

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 harmonisation of all

policies, rates, and economic trade rules.

The stages of integration in increasing order are:

Independent economy.

Preferential Trade Area.

Free Trade Area.

Custom Union.

Common Market.

Monetary Union.

Fiscal Union.

Political Union.

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.