ECONOMIC INTEGRATION.

Instructions
1. Read the text and highlight in yellow (or the colour of your preference) the most important
ideas
2. Draw a comparison chart in your notebook. Please include the four types of economic
integration according to the article.
3. Take a picture and paste it in the final page of this document.
4. Upload your assignment on classroom.

Economic integration, is the process in which two or more states in a broadly defined geographic
area reduce a range of trade barriers to advance or protect a set of economic goals.

The level of integration involved in an economic regionalist project can vary enormously from loose
association to a sophisticated, deeply integrated, transnationalized economic space. It is in its political
dimension that economic integration differs from the broader idea of regionalism in general. Although
economic decisions go directly to the intrinsically political question of resource allocation, an
economic region can be deployed as a technocratic tool by the participating government to advance a
clearly defined and limited economic agenda without requiring more than minimal political alignment
or erosion of formal state sovereignty. The unifying factor in the different forms of economic
regionalism is thus the desire by the participating states to use a wider, transnationalized sense of
space to advance national economic interests.

Forms of Economic Integration

Although there are many different forms of economic integration, perhaps the most convenient way to
order the concept is to think of a continuum that ranges from loose association at one end to an
almost complete merging of national economies at the other end. Although it is far from a given that
positive experiences in the simpler forms of economic integration will lead to a deepening of the
process to increasingly integrated shared economic spaces, the more-complex forms incorporate and
are founded on the substantive elements of the earlier forms. The significant point is that although
economic integration is explicitly framed by trading relationships, it acquires an increasingly political
character as it reaches deeper forms.

Simple free-trade area

The most basic type of economic integration is a simple free-trade area. In this form, attention is
focused almost exclusively on a reduction of the tariffs and quotas that restrict trade. Emphasis is
placed almost entirely on increasing the exchange of goods. The articulation of transnationalized
production chains, trade in services, labour mobility, and more-sophisticated forms of economic
integration are not an explicit goal and emerge as merely tangential to the primary goal of securing
access to foreign markets for domestic firms.

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Second-generation free-trade area

In a second-generation free-trade area, the basic nature of simple free trade is expanded to include
trade in non-goods such as services. Where a simple free-trade area need only address the question
of tariffs and quotas, the trade in services and a widening of trade in goods raises questions of
regulatory convergence and the harmonization of rules of operation and governance. At this stage,
attention needs to be turned to such things as the transferability of professional certifications as well
as questions of labour mobility, particularly for the highly skilled professions such as
legal, accounting, technology, and medical services. The increased interdependence between the
participating economies that comes with expanded trade in all economic areas and a measure of
regulatory convergence can lead to an increased distribution of production chains across national
boundaries.

Customs union

As national production structures transnationalize across the regional space, the next stage is to
deepen regulatory harmonization to present a common stance to the extra-regional market. The result
is the formation of a customs union relying upon a common external tariff. One of the key attractions
of this regulatory convergence between participating economies is that it reduces the challenges of
monitoring and taxing external inputs that are used to produce goods and services that circulate
within the region. Implicit in the adoption of a common external tariff is a further harmonization of
national rules and regulations, particularly those relating to the control and flow of external trade into
the regional economic space.

Common market

The idea of a common market grows from the possibilities presented by the adoption of a common
external tariff. As trade flows increase and factor inputs imported into the integrating economies begin
to circulate freely, production chains crossing the intra-regional national boundaries begin to form.
This results in sustained pressure to reduce the costs of transporting finished and semi-finished
goods between the states participating in the integration project. The solution is the harmonization of
border procedures, which in its ultimate form leads to the virtual elimination of national boundaries as
internal barriers to trade and the formation of a free-flowing regional economic space. A concomitant
change with this complete opening of internal trade is a liberalization of labor mobility, allowing the
inhabitants of one member state to work in all the other member states of the region.

Monetary union

With the evolution of a common market and the concomitant surge in intra-regional trade comes a
new source of expenses for business: the costs of transnational transactions. Even though borders
may be open to the free transit of goods and services, the need to constantly engage in foreign
exchange operations to settle payments as well as the differing relative costs caused by different
national economic policies impose a constant financial and administrative expense on firms operating
within the region. The solution and next stage in the integration progression is some form
of monetary union, be it through an agreed fixing of relative exchange rates or the more commonly
discussed adoption of a common currency. At this point, the economic aspects of integration also
begin to take on a strong political flavour. Adoption of a common currency or monetary policy by all
members of the project also requires a strong convergence in macroeconomic policy, which imposes
external restraints on the domestic fiscal and expenditure policies that a government may pursue. The
result is a gradual blurring of the political as well as economic lines that separate the states
participating in the integration project.

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