Unit 4-Regional Economic

Integration
Economic Integration
⁻ Is the process of removal of economic barriers between two or more nations and the
establishment of cooperation & coordination between them.
⁻ Part of the ongoing process of globalization which is concerned with the growing economic
interdependence of countries

Market Integration
⁻ Is the extent to which one or more separated markets combine to form a single market.
⁻ It leads to increased cross-border flows of goods, services, capital and labour
Free Trade Area
⁻ Is the loosest form of economic integration between nations
⁻ Is an agreement in which member nations remove all trade restrictions among themselves but
may continue to have any number of such restrictions vis-a-vis their other trading partners.
⁻ No discriminatory taxes, quotas, tariffs or other trade barriers are allowed between member
countries but they can be used between non-member countries.
⁻ E.g. USMCA-United States-Mexico-Canada Agreement & ALADI Latin America Integration
Association
⁻ India recently entered into 13 new FTAs with various countries including Australia, Singapore,
Malaysia, Japan & South Korea

Customs Union
⁻ Is characterized by the removal of barriers between member countries and the establishment
of a common trade policy for non-member countries
⁻ Takes the from of an external tariff where exports from non-members are subject to the same
tariff when sold to any member country.
⁻ E.g. CARICOM Caribbean Community & Common Markets, South African Custom Union.
Economic Union
⁻ Is a common market that has unified fiscal and monetary policies
⁻ Requires harmonization of monetary, fiscal, and government policies among member
countries and the adoption of a common currency
⁻ Implies giving up a significant portion of national sovereignty to a supranational authority in
community-wide institutions such as the European Parliament
⁻ Leads to member countries becoming the states of a larger economic community which has
the same features as a country
⁻ E.g. EU European Union since 1999

Political Union
⁻ Is the final stage of integration which requires participating nations to become unified
economically and politically.
⁻ It involves the establishment of a common parliament and other political institutions.
⁻ E.g. the EU European Union has some elements.
Common Market
⁻ At this stage, there are no barriers to trade among members and a common external trade
policy between members and non-members.
⁻ There is free mobility of the factors of production, including labour, capital, and technology
among member countries.
⁻ Restrictions on immigration, emigration, and cross-border investments are abolished.
⁻ Free mobility of the factors of production leads to capital, labour and technology being
employed in their most productive uses, contributing to economic growth.
⁻ Members of a common market need to cooperate regarding fiscal and monetary policies.
⁻ While a common market benefits its members in the aggregate, it has not been proven that it
is also beneficial for individual members.
⁻ e.g. MERCOSUR The Southern Common Market Treaty
Effects of Integration
Trade Creation & Trade Diversion
⁻ Trade creation occurs when lower trade barriers increase trade between member nations, replacing less
efficient domestic production with cheaper imports from member countries.
⁻ Spain's Wheat Exports After EU Membership
⁻ Before joining the EU, Spain and the US were both wheat exporters, with the US having lower
production costs.
⁻ When Spain joined the EU, its wheat exports to EU nations were no longer subject to external
tariffs.
⁻ The cost of wheat from Spain became lower than wheat from the US (which still faced tariffs).
⁻ As a result, Spain’s wheat exports within the EU increased
⁻ This benefit of increased exports to Spain as a result of its EU membership is termed trade creation.
⁻ Trade diversion happens when imports shift from a more competitive external supplier to a higher-cost
supplier within the trade bloc due to the imposition of tariffs on non-member countries.
⁻ US Wheat Exports Declining Due to EU Tariffs
⁻ Before Spain joined the EU, the US was the more cost-efficient wheat exporter to the EU.
⁻ After Spain’s EU membership, wheat from non-member countries like the US faced higher tariffs.
⁻ As a result, EU nations switched to buying more expensive wheat from Spain, causing US exports to
decline.
⁻ The competitive advantage moved from the US (low-cost producer) to Spain (higher-cost producer),
illustrating trade diversion.
⁻ Trade diversion has the negative impact of shifting the competitive advantage away from the once low-
cost producer (US) to the high-cost producer (Spain).
⁻ Hence, while economic integration benefits both the producer and consumers of member nations, it
harms other global producers and their exports. Economic integration is, therefore, beneficial for
members but not for non-members.
Reduced Import Prices
⁻ When a country imposes tariffs on imports, the cost of imported goods rises.
⁻ To compensate, producers raise their prices, making the goods more expensive for consumers.
⁻ As a result, demand falls since fewer people are willing to buy at the higher price.
⁻ The Effect of Tariffs Imposed by a Trade Bloc
⁻ If a single country imposes tariffs, the impact on global trade is limited.
⁻ However, if a trade bloc (e.g., the EU, USMCA, ASEAN) imposes tariffs, the market power shifts
significantly in favor of the bloc.
⁻ The large-scale reduction in demand forces exporters to cut prices to remain competitive.
⁻ The EU imposes higher tariffs on steel imports from a non-member country.
⁻ Steel exporters lower their prices to maintain sales, benefiting EU consumers.
⁻ The EU improves its trade position, while exporting countries suffer revenue losses.
⁻ Tariffs, especially when imposed by a trade bloc, can lead to reduced import prices by forcing exporters
to adjust pricing strategies. This strengthens the bloc’s trade position but harms export-dependent
economies.
Increased Competition and Economies of Scale
⁻ When countries integrate economically, they remove trade barriers and create bigger markets.
⁻ This brings two key benefits:
i. More Competition = Lower Prices
⁻ More companies enter the market → No single company can dominate (no monopoly).
⁻ Firms must improve efficiency → They cut costs and offer better prices to survive.
⁻ Consumers benefit → They get more choices at lower prices.
ii. Economies of Scale = Lower Production Costs
⁻ Larger Market = Larger Production → Companies produce in bulk, reducing costs per unit.
⁻ Industries like Steel & Automobiles gain the most as they need large-scale production to be
profitable
⁻ Free movement of resources (labour, capital, technology) also reduces costs.
⁻ Example: European Car Industry. When European countries integrated, car makers like Volkswagen and
Renault could sell across the EU.
Higher Factor Productivity
⁻ Free movement of factors of production in a common market makes them look for areas of
higher productivity
⁻ This has a two-fold effect
a. The movement of people leads to the movement of ideas, skills, and values embodied in
them, fostering greater cross-cultural understanding
b. Free movement of the factors of production in a common market does not necessarily
benefit all members equally as the needed resources may move to another area of higher
productivity. A poorer country may lose talented workers to better opportunities in other
countries
⁻ Example: Eastern Europe to Western Europe
⁻ Many skilled workers from Poland, Romania, and Bulgaria moved to the UK & Germany for
better wages.This helped Western Europe but caused a skill shortage in Eastern Europe.