Ch 25 - Economic Integration

• Economic Integration: a process whereby countries coordinate and link their economic policies
  • As economic integration increases, trade barriers increase, monetary/fiscal policies are harmonised

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• Preferential trade agreements: give preferential access to certain products by reducing or eliminating tariffs, or by other agreements related to trade

• Two types:

  • Bilateral agreements: between two countries → easier to implement
  • Multilateral agreements: between two or more countries → beneficial to more people

• Trading bloc: an agreement where trade barriers ar reduced or eliminated among participating members

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• Trade bloc advantages:

  • Free trade within the bloc
  • Easier access to other market
  • Firms can expand
  • More employment due to growth in exports
  • Trade creation

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• Trade bloc disadvantages:
  • Trade diversion
  • Reduced benefits of free trade
  • Inefficiencies
  • Common external tariffs may cause others to retaliate

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• Trade creation: occurs when the entry of a country into a custom union leads to the production of a good or service transforming from a high-cost producer to a low-cost producer

  • Beneficial since cheaper supplies from abroad allows for lower prices that benefit the consumer

  

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• Trade diversion: when the entry of a country into a customs union leads to the protection of a good or service

  • Trade is diverted from a more efficient exporter to a less efficient one, rather than creating new trade. Due to the common external tariff that the country agrees to.
  • May not be the best at promoting free trade

  

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• Monetary union: agreement between two or more countries creating a single currency

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• Monetary union advantages:

  • Transparency: International price of goods can be easily compared
  • lower transaction costs: single currency, no need to change currency
  • certainty: price changes are more predictable
  • better for the job market as it leads to more employment

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• Monetary union disadvantages:

  • Loss of economic sovereignty: individual countries cannot set their own interest rates
  • Inefficiencies firms within the union are favoured more over efficient firms outside the union

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