What Is Economic Integration?
Economic integration is an arrangement among nations that typicallyincludes 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 producersand to increase trade between the countries involvedin the agreement.
Economic integration is sometimes referred to as regional integration, as it often occurs among neighboring nations.
Key Takeaways
- Economic integration, or regional integration, is an agreement among nations to reduce or eliminate trade barriers and to coordinate monetary and fiscal policies.
- The European Union, for example, represents an economic integration among 27 countries.
- Strict nationalists may oppose economic integration due to concerns over a loss of sovereignty.
Economic Integration Explained
When regional economies agree on integration, trade barriers fall and economic and political coordination increases.
Specialists in this area define seven stages ofeconomic integration: a preferential trading area, a free trade area, a customs union, a common market, an economic union, an economic and monetary union, and complete economic integration. The final stage represents a total harmonization of fiscal policy and a completemonetary union.
Advantages of Economic Integration
The advantages of economic integration fall into three categories: trade creation,employment opportunities,and consensus and cooperation.
More specifically, economic integration typically leads to a reduction in the cost of trade,improved availability of goods and services,a wider selection of them, and gains in efficiency that lead to greater purchasing power.
Economic integration can reduce the costs of trade, improve the availability of goods and services, and increase consumer purchasing power in member nations.
Employment opportunities tend to improve becausetrade liberalization leads to market expansion, technology sharing,and cross-border investment.
Political cooperation among countries also can improve because ofstronger economic ties, which provide an incentive to resolve conflicts peacefully and lead to greaterstability.
The Costs of Economic Integration
Despite the benefits, economic integration hascosts. These fall into three categories:
- Diversion of trade: Trade can be diverted from non-members to members, even if it is economically detrimental for the member state.
- Erosion of national sovereignty: Members of economic unions typically are required to adhere to rules on trade, monetary policy, and fiscal policies established by an unelected external policymaking body.
- Employment shifts and reductions: Economic integration can cause companies to move their production operations to areas within the economic union that have cheaper labor prices. Conversely, employees may move to areas with better wages and employment opportunities.
Because economists and policymakers believe economic integration leads to significant benefits, many institutions attempt to measurethe degree of economic integration across 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. Assessing economic integration also includes measures of institutional conformity, such as membership in trade unions and the strength of institutions that protect consumer and investor rights.
Real-World Example of Economic Integration
The European Union (EU) was created in 1993 and included 27 member states in 2024. Since 1999, 20 of those nations have adopted the euro as a shared currency. According to data from the World Bank, the EU accounted for roughly 16.6% of the world's gross domestic product in 2022.
The United Kingdom voted in 2016 to leave the EU. In January 2020, British lawmakers and the European Parliament voted to accept the United Kingdom's withdrawal. The UK officially split from the EU on January 1, 2021.
What Are Examples of Economic Integration?
There are numerous examples of economic integration around the world. In North America, the United States–Mexico–Canada Agreement (USCMA) is an example of a free trade agreement between the three countries. The Asia-Pacific Economic Cooperation is a forum of 21 Pacific Rim countries aimed at fostering free trade across the region. As mentioned above, the EU is another such example of economic integration, as is the Eurasian Economic Union (EAEU).
What Are Risks of Economic Integration?
Economic integration can come with downsides and risks. Primarily, countries participating in regional integration may have divergent priorities when it comes to fiscal and monetary policy. Resolving such conflicts can be challenging and costly in terms of time and resources. In addition, economic integration can create a system in which a select group of stakeholders reap the economic benefits, such as more revenue from trade, while others bear the costs, such as job market shifts. These are important considerations to weigh when assessing the value of economic integration.
What Are Benefits of Economic Integration?
Economic integration can increase trade, benefiting both producers, consumers, and involved countries. For instance, with the elimination of trade barriers, a firm may be able to produce and sell more products, earning more revenue, and increasing their home country's gross domestic product (GDP). For customers in other countries, they can count on having more product selection and potentially lower costs, as well.
The Bottom Line
Economic integration is a form of coordination between different states, in which barriers to trade are eliminated and fiscal and monetary policies are harmonized. These arrangements can lead to increased economic activity, job creation, and stronger political ties. They may also come with drawbacks, such as trade diversion and loss of national sovereignty.
The EU is a well-known example of regional economic integration, as it is comprised of 27 member states, 20 of which use the same currency.
