Meaning: Economic Integration Is The Unification of Economic Policies Between Different States Through

INTRODUCTION
Meaning
Economic integration is the unification of economic policies between different states through
the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them
prior to their integration.
TYPES OF ECONOMIC INTEGRATION

1. Economic Union:
An agreement between two or more countries to remove barriers to trade, allow free flow
of labor and capital and coordinate economic policies.
Sets trade policies through common external tariffs on non-members.
Integration is more intense in an economic union compared to a common market, as

member countries are required to harmonize their tax, monetary, and fiscal policies and to
create a common currency
Example is the European Union(EU) where economic and monetary integration has
created a single market with a common euro currency
2. Customs Union:
An agreement between two or more countries to remove tariffs between themselves and
set a common external tariff on imports from non-member countries
Each country determines its own barriers and maintains its own external tariffs on
imports against non-members.
A customs union has common policies on product regulations and movement of factors of
productions in goods, services, capital and labor amongst members
Unlike FTA, members of a customs union have common policies on external tariffs
against non-members.
3. Free Trade Area:
An agreement between two or more countries to remove all trade barriers between
themselves.
Each country determines its own barriers and maintains its own external tariffs on import
against non-members.
Tariffs and non-tariff barriers include quotas and subsidies on international trade in goods
and services
Examples of FTA are: The ASEAN Free Trade Agreement(AFTA) and the North
American Free Trade Areas(NAFTA).
4. Preferential Trading Agreement (PTA):
The simplest form of economic integration
Offers member countries tariff reductions in certain product categories
Discrimination or preferential treatment for some countries is not allowed as it is against

the principle of Most Favoured Nation (MFN) under the WTO
Represents a unilateral relationship as tariffs would be reduced only in one direction
5. Common Market:
An agreement between two or more countries to remove all barriers to trade and allow
free mobility of capital and labor across member countries.
Harmonize trade policies by having common external tariffs against non-members
Example is the European Union (EU) previously known as European Economic

Community(EEC)
6. Political Union:
An agreement between two or more countries to coordinate their economic monetary and
political systems.
Required to accept a common stance on economic and political policies against nonmembers.
Example is US where each US state has its own government that sets policies and laws.
But each state grant control to the federal government over foreign policies, agricultural
policies, welfare policies and monetary policies. Goods, services, labor and capital can all
move freely without any restrictions among the US states and the government sets a
common external trade policy.
Advantages & Disadvantages of Economic Integration
Advantages :
1.Progress in trade.
All countries that follow economic integration have extremely wide assortment of goods and
services from which they can choose. Introduction of economic integration helps in acquiring
goods and services at much low costs. This is because the removal of trade barriers reduces or
removes the tariffs entirely. Reduced duties and lowered prices save a lot of spare money with
countries which can be used for buying more products and services.
2.Ease of agreement.
When countries enter into regional integration, they easily get into agreements and stick to them
for long periods of time.
3.Improved political cooperation.
Countries entering economic integration form groups and have greater political influence as
compared to influence created by a single nation. Integration is a vital strategy for addressing the
effects of political instability and human conflicts that might affect a region.
4.Opportunities for employment.
The various options available in economic integration help to liberalize and encourage trade.
This results in market expansion due to which high amount of capital is invested in a countrys
economy. This creates higher opportunities for employment of people from all over the world.
They thus move from one country to another in search of jobs or for earning higher pay.
5.Beneficial for financial markets.
Economic integration is extremely beneficial for financial markets as it eases firm to borrow
finances at low rate if interest. This is because capital liquidity of larger capital market increases
and the resultant diversification effect . reduces the risks associated with high investment.
6.IncreaseinForeignDirectInvestments.
Economic integration helps to increase the amount of money in Foreign Direct Investment (FDI).
Once firms start FDI, through new operations or by merger, takeover, and acquisition, it becomes
a international enterprise.
Thus economic integration is a win-win situation for all the firms, people and the economies
involved in the process. Is has become a preferred strategy for most countries of the world.
Disadvantages:
1. Creation of Trading Blocs:
It can also increase trade barriers against non-member countries.
2. Trade Diversion:
Because of trade barriers, trade is diverted from a non-member country to a member country
despite the inefficiency in cost. For example, a country has to stop trading with a low cost
manufacture in a member country which has a higher cost.
3. National Sovereignty:
Requires member countries to give up some degree of control over key policies like trade,
monetary and fiscal policies. The higher the level of integration, the greater the degree of
controls that needs to be given up particularly in the case of a political union economic
integration which requires nations to give up a high degree of sovereignty.

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INTRODUCTION

TYPES OF ECONOMIC INTEGRATION

Sets trade policies through common external tariffs on non-members.

Integration is more intense in an economic union compared to a common market, as

3. Free Trade Area:

4. Preferential Trading Agreement (PTA):

The simplest form of economic integration

Offers member countries tariff reductions in certain product categories

Discrimination or preferential treatment for some countries is not allowed as it is against

Represents a unilateral relationship as tariffs would be reduced only in one direction

Harmonize trade policies by having common external tariffs against non-members

Example is the European Union (EU) previously known as European Economic

Advantages & Disadvantages of Economic Integration

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