Economic integration

economic integration

• occurs as countries reduce trading barriers between themselves and become more interdependent

• ways in which this can deepen:

  • development of trade agreements

  • creation of trading blocs

  • formation of monetary union

trade agreements

• preferential trade agreement

  • agreement between 2+ countries providing better terms and conditions of trade to member countries

• bilateral trade agreement

  • preferential trade agreement between 2 countries, aims to reduce/eliminate trade barriers

• regional trade agreement

  • preferential trade agreement between 2+ countries in the same geographical region

• multilateral trade agreement

  • legally binding preferential trade agreement between 2+ countries or trading blocs

  • usually negotiated and overseen by the WTO

trading bloc

• group of countries who come together and agree to reduce or eliminate any barriers to trade that exist between them

types of trade blocs

• free trade area:

  • countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries

• customs union

  • agreement between countries in which all goods/services produced by members are traded tariff free

  • countries agree on common tariff rates on imports from all external counties

• common markets

  • goods traded tariff-free

  • 4 FOP flow freely between member countries

• monetary union

  • all the benefits of a customs union and a common market

  • common central bank is established, issuing a common currency and controls monetary policy of members

trading blocs: pros and cons

• advantages:

  • greater access to markets offer potential for economies of scale (increase in output in an economy results in lower cost per unit)

  • greater employment opportunities due to freedom of labour

  • stronger bargaining power in new multilateral negotiations

  • greater political stability and cooperation between countries due to interdependence

• disadvantages

  • loss of sovereignty, nations increasingly give up their autonomy

  • multilateral trading negotiations become more challenging as countries within a trading bloc have to maintain existing bloc rules when dealing w/ 3rd party country

the role of WTO

• aims to promote free trade

• 2 main roles in liberalising trade:

  1. brings countries together at conferences, encouraging them to reduce or eliminate protectionist trade barriers between them

  2. acts as adjudicating body in trade disputes. member countries can file complaint if they believe an agreement has been violated

• objectives:

  • improving people’s lives

  • promotion of fair competition

  • protecting the environment

• functions:

  • provide a forum for negotiating trade liberalisation

  • implementation and monitoring of trade agreements

  • dispute settlement

factors influencing the WTO

• difficulties in reaching agreement on services and primary products

  • many countries enable protectionism to sustain domestic industries in certain areas where it would be more economical to trade

  • LEDCs can’t do the same as they don’t have the tax revenue

  • firms from LEDCs are frequently blocked from offering services

• unequal bargaining power of members

  • firms and individuals from MEDCs tend to be better networked and will work connections to gain better trading conditions

  • larger, wealthier countries pressurise WTO negotiations to secure favourable outcomes

  • much harder for LEDCs to gain preferential terms due to this power imbalance