Forms of economic integration

Economic integration: The process of countries becoming more interdependent and economically unified. It can be achieved by dissolving trade barriers through preferential trade agreements between goverments.

There are three different of economic integration to remember:

• Preferential trade agreements
• Trading blocs
  • Free trade area (FTA)
  • Customs union
  • Common market
• Monetary union

Preferential trade agreements

These are trade deals between two or more countries that gives favourable terms and conditions regarding trade. E.g tax exemptions

Bilateral trade agreement: Trade agreement between two countries.

Multilateral trade agreement: Trade deals between more than two countries. 

Trading blocs

This is a group of countries that agree to economic integration

1. Free trade area: Group of countries agree to have free trade (on all products) between member countries. However they still have seperate trade deals with non-member countries
2. Customs union: Group of countries engage in free trade and impose a common external tariff between non member countries. 
3. Common market: They have free trade and common external tariffs as well as free movement of goods, services and capital and labour between member countries. Hence why it is called a free market.This is the most integrated trading bloc.

Trade creation and trade diversion

Trade creation: Shifting deals to low cost producers within trading bloc rather than high-cost outside trading bloc. 

Trade diversion: Shifting deals to high cost producers inside trading bloc and away from low-cost producers outside trading bloc. 

Monetary union

This exists when member states of a common market adopt a single currency and thus a common central bank that oversees monetary policy.

E.g The EuroZone, where 17 member states use the euro, as there currency.

Advantages

• Exchange rate is more stable and it fluctuates less as it is spread over many countries. 
• Trade creation can occur.
• Attracts inward investment due to stable exchange rate.
• More price transparency as everyone has same currency.

Disadvantages

• Loss of economic freedom and flexibility as every country must adhere to same monetary policy.
  • Different countries need different policies, there is no one policy fits all.
• Actions taken by central bank effect countries differently depending on circumstances.
• Members can't use exchange rate policy

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