Definition of economic integration

What is economic integration?

Economic integration is an arrangement among nations that typically includes the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. Economic integration aims to reduce costs for both consumers and producers and to increase trade between the countries covered by the agreement.

Economic integration is sometimes called regional integration because it often occurs between neighboring countries.

Economic integration explained

When regional economies agree on integration, trade barriers fall and economic and political coordination increases.

Experts in this field define seven stages of economic integration: a preferential trade area, a free trade area, a customs union, a common market, an economic union, an economic and monetary union and full economic integration. The last step represents full harmonization of fiscal policy and full monetary union.

Key points to remember

  • Economic integration, or regional integration, is an agreement between nations to reduce or eliminate trade barriers and agree on fiscal policies.
  • The European Union, for example, represents full economic integration.
  • Strict nationalists may oppose economic integration because of concerns about a loss of sovereignty.

Benefits of economic integration

The benefits of economic integration fall into three categories: trade benefits, employment and political cooperation.

Specifically, economic integration generally leads to a reduction in the cost of trade, better availability of goods and services and a wider choice among them, and efficiency gains that lead to greater power. purchase.

Economic integration can reduce trade costs, improve the availability of goods and services, and increase the purchasing power of consumers in member countries.

Job opportunities tend to improve because trade liberalization leads to market expansion, technology sharing and cross-border investment.

Political cooperation between countries can also improve due to the strengthening of economic ties, which prompts conflict resolution peacefully and leads to greater stability.

The costs of economic integration

Despite the benefits, economic integration has costs. These fall into two categories:

  • Trade diversion. That is, trade can be diverted from non-members to members, even if this is economically detrimental to the member state.
  • Erosion of national sovereignty. Members of economic unions are generally required to abide by rules relating to trade, monetary policy, and fiscal policies established by an external, unelected decision-making body.

Since economists and policymakers believe that economic integration brings important benefits, many institutions attempt to measure the degree of economic integration between countries and regions. The methodology for measuring economic integration typically involves multiple economic indicators, including trade in goods and services, cross-border capital flows, labor migration and others. The economic integration assessment also includes measures of institutional compliance, such as union membership and the strength of institutions that protect the rights of consumers and investors.

Concrete example of economic integration

The European Union (EU) was established in 1993 and included 28 member states in 2019. Since 2002, 19 of these nations have adopted the euro as their common currency.According to the International Monetary Fund (IMF), the EU accounted for 16.04% of the world’s gross domestic product.

The United Kingdom voted in 2016 to leave the EU. In January 2020, British lawmakers and the European Parliament voted to accept the UK’s withdrawal. The goal is to finalize the release by January 2021.

About Michael G. Walter

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