Chapter 25: Economic Integration.

Economic Integration

a process whereby countries coordinate and link their economic policies. As the degree of integration rises, trade barriers fall and Fiscal & Monetary policies are more closely harmonised.

Bilateral Trade Agreements (BTA)

relating to trade between two countries. aims to reduce/remove tariffs and/or quotas. (A multilateral trade agreement is the EXACT same thing just with more than 2 countries)

Trading Blocs

a group of countries that join together in some form of agreement to increase trade between them and/or gain benefits from cooperation

Preferential Trading Areas (PTA)

a bloc that gives preferential access to certain products from certain countries. This is done by reducing tariffs.

Free Trade Areas

countries agreeing to trade freely between each other, but not exclusively with each other

Example of a Free Trade Area

NAFTA (North American FTA)

• established in Jan 1994

• Tariff free trade by 2003

• >70% of Canadian exports go to the USA

• Mexico’s share of US imports has risen from (7% → 13.5%)

A customs union

An agreement made between countries where the countries agree to trade freely amongst themselves and also to adopt common external barriers against any nation trying to join in (The EU)

Common Markets

A customs union with common policies on product regulation and free movement of goods, services, capital and labour. (The EU and CSME)

Economic and Monetary Union (EMU)

a common market with a common currency and common central bank. (the eurozone)

Pros of an EMU

• efficient domestic firms get access to larger markets

• if there’s increased freedom of movement then workers can move to where they’ll earn the highest wage and firms can find the cheapest labour

• larger markets → larger scales of production and possible EoS

Cons of an EMU

• increased competition will negatively affect domestic firms

• freedom of movement can increase the supply of labour in higher wage paying countries which drives wages down

• brain drain

Complete economic integration

• The end stage

• Individual countries involved have no control over economic policy. It’s a full monetary union and a complete harmonisation of fiscal policy

Pros of being in a trading bloc

• (the extent of the benefits depends on the degree of integration)

• a greater sized market with the potential for larger export markets & EoS as producers increase scale of production

• Increased competition → increased efficiency → increased choice & lower prices for consumers

• Greater employment opportunities if the bloc includes freedom of movement

• Could foster greater political stability & cooperation

(trade would be a lot easier if there were a few big blocs instead of 195 nations)