ECONOMIC INTEGRATION UNIT

SIX STAGES OF ECONOMIC INTEGRATION

IB CORE CONCEPTS AND NOTES SPECIFICALLY RELATED TO THIS VIDEO

IB Core Concept Standard Level and High Level Concept

Preferential Trade • Distinguish between bilateral and multilateral (WTO) trade agreements.
Agreements • Explain that preferential trade agreements give preferential access to certain
products from certain countries by reducing or eliminating tariffs, or by other
agreements relating to trade.

• Distinguish between a free trade area, a customs union and a common market.
Trading Blocks • Explain that economic integration will increase competition among producers
within the trading bloc.
• Compare and contrast the different types of trading blocs.
• HL Only: Explain the concepts of trade creation and trade diversion in a
customs union.
• HL Only: Explain that different forms of economic integration allow member
countries to gain from economies of scale.

• Explain that a monetary union is a common market with a common currency

Monetary Union and a common central bank.
• Discuss the possible advantages and disadvantages of a monetary union for its
members.

Source: IB Economics Subject Guide

The Six Stages of Economic Integration

1. Preferential Trading Areas (PTA)
• Definition: A preferential trading area is a trading bloc that gives preferential access
to certain products from certain countries.
i. This is usually carried out by reducing, but not eliminating tariffs.
• An example of a preferential trading area is the one between the EU and the
African, Caribbean, and Pacific (the ACP) group states.
▪ Many of the countries were former colonies of EU members.
▪ It enables the EU to guarantee regular supplies of raw materials and the ACP
countries to gain tariff preferences and access to special funds that are used
to try to achieve price stability in agricultural and mining markets.
▪ Since 2008 the arrangement has been a reciprocal trade agreement.
• This means that the EU provides duty-free access to its markets for
exports from the ACP countries and also received duty-free access for
its own exports to the ACP countries.
• However, it is agreed that not all of the ACP countries have to open
up to EU exports.
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 • The least developed countries in the ACP group may opt out for other
arrangements.

2. Free Trade Areas

o Definition: A free-trade area is an agreement made between countries, where the
countries agreed to trade freely among themselves, but are able to trade with other
countries outside of the free-trade area in whatever way they wish.
o This situation is shown in the following diagram:

o In this hypothetical case, countries A, B, and C have signed a free-trade agreement

and are now trading freely among themselves.
o However, under the agreement, each country may trade with any other country in
anyway it sees fit.
o This enables each of the countries to deal with a fourth country in anyway it wishes.
▪ An example of a free-trade area is the North American Free Trade
Agreement or NAFTA.
• Full example: Jocelyn Blink and Ian Dorton. IB Economics: Course Companion,
Second Edition, pg. 310.
▪ Other examples of free trade agreements are the European Free-Trade
Association and the South Asian Free-Trade Agreement.

3. Customs Unions
• Definition: A customs union is an agreement made between countries, where the
countries agreed to trade freely among themselves, and they also agreed to adopt
common external barriers against any country attempting to import into the customs
union.
• This situation is shown in the following figure:

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 • Countries A, B, and C have joined in a customs union, and are trading freely with
each other.
• If country D wishes to export goods to the customs union, the goods will be treated
in the same way, no matter the good.
• If the customs union has agreed to place tariffs on the products of country D, then
those tariffs will be imposed, no matter what the point of entry of the customs
union.
• All common markets and economic and monetary unions are also customs union;
thus, the EU has a customs union.
▪ Other examples would be the Switzerland Liechtenstein customs union,
the East African Community, which is a customs union comprising Kenya,
Ghana, and Tanzania; and Mercosur, which is a customs union between
Brazil, Argentina, Uruguay, Paraguay, and Venezuela.

4. Common Markets
• Definition: A common market is a customs union with common policies on product
regulation, and free movement of goods, services, capital, and labor.
• The best-known example of a common market is the European Union.
• More examples: Jocelyn Blink and Ian Dorton. IB Economics: Course Companion, Second
Edition, pg. 311.

5. Economic and Monetary Union

• Definition: An economic and monetary union is a common market with a common
currency and a common central-bank.
• The best example of economic and monetary union is the Eurozone,
which includes the member countries of the European Union that have
adopted the euro as their currency and have the European Central
Bank (ECB) as their central bank.
• In 2010, the members consisted of: Austria, Belgium, Cyprus, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia, and Spain
• There are a number of advantages of a monetary union for the member countries.
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 • Exchange rate fluctuations that used to exist between countries will
disappear with a common currency, and this should eliminate exchange
rate uncertainty between the countries involved, increasing cross-border
investment and trade.
• A currency which has the enhanced credibility of being used in a large
currency zone should be more stable.
• Business confidence in the member countries tend to improve as there is
less risk involved in trading among the countries. This in turn should lead
to both internal growth and trade growth.
• Transaction costs are eliminated with the monetary union. When countries
have different currencies there is a charge when currencies are exchanged,
but this will not happen with the existence of a single currency.
• A common currency makes price differences more obvious between
countries and should lead to prices equalizing across borders.
• Disadvantages of a monetary union for the member countries:
• When countries enter monetary union, interest rates are decided by the
central bank.
• This means that individual countries are no longer free to set their
own interest rates, and so the tool of monetary policy is no longer an
option to influence the inflation rate, the unemployment rate, and
the rate of economic growth.
• This is especially damaging if one country in the union is experiencing
economic situation that is not being experienced by the other.
a. For example, if one country was experiencing high
inflation due to strong consumer demand, which other
countries or not, it might want to increase interest rates to
reduce the demand.
• While a common central bank is seen as a prerequisite of monetary union,
many argue that without fiscal integration, in the form of a common
treasury, harmonized tax rates, and a common budget, a monetary union
will be weak and vulnerable, since some countries will be more fiscally
responsible than others and this may threaten the stability of the union.
• Individual countries are not able to alter their own exchange rates in order
to affect the international competitiveness of their exports or the cost of
their imports.
• The initial cost of converting the individual currencies into one currency
are very large.

• Judgment (evaluation):
• It is almost impossible to weigh up the advantages and disadvantages of
membership of a monetary union.
• The situation will be very different in different cases.
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 • Perhaps it is best to try to determine when membership would be most
beneficial, and when it would make the least difference.
▪ Examples: Jocelyn Blink and Ian Dorton. IB Economics: Course Companion, Second Edition, pg.
312.
6. Complete Economic Integration
• Definition: This would be the final stage of economic integration at which point the
individual countries involved would have no control of economic policy, full monetary
union, and complete harmonization of fiscal policy.
i. This is what the Eurozone is moving towards.

Judgement (An Evaluation of Trading Blocs):

▪ The extent of the advantages and disadvantages of trading blocs clearly depends on the
degree of integration.
▪ In purely economic terms, the benefits of being a member of a trading bloc are similar to
those of free-trade.
o These include greater size of market with the potential for larger export markets,
increased competition leading to greater efficiency, more choice, and lower prices for
consumers.
o The consequences may not be even: Some domestic producers are likely to gain
from the larger market while others may find themselves unable to compete.
▪ There may be further stimulus for investment due to the larger market size, and foreign
investment might be attracted from outside the bloc as a way of getting a foot in the door
of the larger market.
▪ There is also an argument that, along with the economic gains, a trading bloc will foster
greater political stability and cooperation.
▪ It is also possible that trade negotiations may be easier in the world made up of a number
of large trading blocs, rather than among 149 sovereign countries.
▪ However, by their very nature, trading blocs favor increased trade among members, but
act as a discriminatory policy against non-members, and this can be damaging to the
achievements of the multilateral trading negotiations for the WTO.
▪ There is concern that the breakdown of WTO talks in Geneva in July 2006 will lead to an
increase in the number of individual trade negotiations.
▪ They may undermine the international trade rules and limit the potential gains of trade
achievable with more liberalized world trade.
▪ This may not be much of a problem for large economies as it might be for small or poor
economies that have little bargaining power.

→ This ends the SL section of the chapter.

For the HL information on Economic Integration: Jocelyn Blink and Ian Dorton. IB Economics: Course
Companion, Second Edition, pg. 314-316.

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Source: Jocelyn Blink and Ian Dorton. IB Economics: Course Companion, Second Edition.