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A brief analysis of the economic integration



“In the hierarchy of the obscure and unnatural words whose economic discussions clutter our language, the term integration stands at a high rank”.

Integration is a difficult term to define, and, as François Perroux affirmed, “In the hierarchy of the obscure and unnatural words whose economic discussions clutter our language, the term integration stands at a high rank”. The act of integration brings together elements which help to build a whole - for example, the EU integration started with six countries which decided to create an economic union together – or, it increases the coherence of an already existing entity.

As a general definition, one can affirm that economic integration is an economic agreement between countries which includes the reduction or elimination of trade barriers – usually under the form of tariffs, namely the taxes paid while importing or exporting goods – as well as the coordination of monetary and fiscal policies. Integration aims at decreasing costs for both consumers and producers, and increasing trade between the countries taking part in the agreement.

Focusing on the international context, trade liberalisation started with GATT (General Agreement on Tariffs and Trade), which provided an international forum that encouraged free trade between signatory states, and  regulated and reduced tariffs on traded goods by providing a common mechanism for resolving trade disputes. This agreement evolved and became the WTO (World Trade Organisation), the only global international organisation dealing with the rules of trade between nations. Its goal is to help producers of goods and services, exporters, and importers conduct their business.

Some advantages of economic integration

Being aware of the context when the first trade liberalisation happened, after the tremendous world wars, it is important to highlight that economic integration has an impact in preventing wars and mediating dialogues between countries.

It fosters a better use of existing resources. In fact, it improves economic specialisation, which means that each country should focus on what it can produce best, something on which it has a comparative advantage. It has price effects because when tariffs are removed, national producers face an intensified competition with other countries, therefore, they have to lower the price of their goods which in turn benefits consumers. Moreover, economic integration has quantity effects, providing a larger market across which to sell, and location effects, providing economies of scale and larger networks.

Other advantages concern growth effects, which allow growth in investments and higher GDPs thanks to the accumulation ofmore resources, and increases employment opportunities as people can easily look for suitable jobs in other countries. Finally, strategic effects relate to a greater negotiating power with “external” countries, and better Terms of Trade, getting relatively higher export prices in relation to import prices.

Few drawbacks of economic integration

Economic integration has also some disadvantages to keep in mind. The first of all is trade diversion. Trade Union could divert trade away from non-members even if it would have given a moreeconomically efficient outcome, while looking for new markets where there are tariffs and where they have a higher power of decision of the goods' prices. The second is the erosion of national sovereignty, which is a feeling usually used by far-right parties which feel somehow deprived of their true national identity. In fact, members of economic unions are typically required to adhere to a series of rules on trade, monetary policy and fiscal policy, which are established by an external policymaking body, not elected by citizens of a particular country.

The levels of Economic Integration

When two or more countries within a geographic region form an alliance aimed at reducing barriers to trade and investment, and the result is a growing economic interdependence between them, the process going on is a regional economic integration. It has different levels as defined by Bela Balassa in 1961.

The first is the Preferential Trade Agreements (PTA) in which some tariffs are reduced or removed.

The second is the Free Trade Area (FTA), a formal arrangement between two or more countries to reduce or eliminate tariffs, quotas, and other barriers to trade in products and services (two freedoms, i.e. free movement of products and services), but maintain their own trade barriers with nonmember countries. Some examples are NAFTA, EFTA, ASEAN, Australia and New Zealand Closer Economic Relations Agreement (CER).

The third is the Customs Union (CU) which is the sum of a FTA with the common external tariffs (CET), as it is for MERCOSUR. This meansthat member states harmonize their external trade policies and adopt common tariff, and nontariff barriers on imports from nonmember countries.

The fourth is the Common Markets (CM) which is the sum of the CET with the four freedoms – free movement of products, services, capitals and people – as it was in the pre-1992 European Economic Community. In this stage,member countries establish a common market (also know as a single market), in which trade barriers are reduced or removed, common external barriers are established, and products, services, and factors of production such as capital, labor, and technology are allowed to move freely among the member countries. Like a customs union, a common market also establishes a common trade policy with nonmember countries – the EU is an example of common market.

The fifth is an Economic Union, based on Common Policies (CP) that do not necessarily apply to every single field. Member countries of this kind of integrationenjoy all the advantages of early stages but also strive to have common fiscal and monetary policies regulated by a central authority. At the extreme, each member country adopts identical tax rates. The bloc aims at standardized monetary policy, which requires establishing fixed exchange rates and free convertibility of currencies among the member states, in addition to allowing the free movement of capital. For example, inside the EU the regulation of the agricultural, common trade, and monetary policies is common, while the foreign policy is intergovernmental – and, as a consequence, it is difficult to elaborate and negotiate between twenty seven states.

Finally, the last is a Political Union (PU), which is a perfect unification of all policies by a common organization, and which requires the subordination of all separate national institutions, which no countries have yet achieved.

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