Economic Integration involves agreements among countries to establish links through the movements of goods, services, and factors of production across borders. For example, the functioning of the internal market, which can be considered one of the corner stones of the European Union, is based on the four freedoms laid down in the Treaty establishing the European Community, i.e. the free movement of goods, services, capital and persons. A trading bloc is a preferential economic arrangement among a group of country. Some predict, however, that the regional trading block of the new economic world order will divide into a handful of protectionist super states that, although liberalization trade among members, may raise barriers into external trade, such as Jacob Viner said that either negative or positive effects may result when a group of countries trade freely among themselves but maintain common barriers to trade with nonmembers.
These links may be weak or strong depending on the level of integration. Levels of integration include the free trade area, customs union, common market, and full economic union. This is forms of international economic integration:
Stage of Integration Abolition of Tariffs and Quotas Among Members Common tariffs and Quotas System Abolition of Restrictions on Factor Movements Harmonization and Unification of Economic Policies and Institutions
Free Trade Area Yes No No No
Customs Union Yes Yes No No
Common Market Yes Yes Yes No
Economic Union Yes Yes Yes Yes
Source: Franklin R. Root
The benefit derived from economic integration include trade creation, economies of scale, improved terms of trade, the reduction of monopoly power, and improved cross cultural communication. However, a number of disadvantages may also exist. Most important, economic integration may work to the detriment of non members by causing deteriorating terms of trade, and trade diversion. Imports of agricultural products from Spain or the United States had the same tariff applied to their products 20 percent. During this period, the United States was a lower cost producer of wheat compared to Spain. US exports to EU members may have cost $3 per bushel plus a 20 percent tariff of $0,60, for a total of $3,6 per bushel. If Spain at the same time produced wheat at $3,2 per bushel, plus a 20 percent tariff of $0,64, for a total of $3,84 per bushel, its wheat was more expensive and therefore less competitive. But Spain joined the EU as a members, its product is no longer subject to the common external tariffs. Spain had become a member of the “club” and therefore enjoyed the benefits. Spain was now the low cost producers of wheat at $3,2 per bushel, compared to the price of $3,6 from the United States. Trade flows changed as a result. The increased export of wheat and other products by Spain to the EU. As a result of its membership is termed trade creation. The elimination of the tariff literally created more trade between Spain and the EU. At the same time, because the United States was still outside of the EU, its products suffered the higher price as a result of tariffs application. U.S exports to the EU fell. When the source of trading competitiveness is shifted in this manner from one country to another, it is termed trade diversion. The biggest impediment to economic integration is nationalism. There is strong resistance to surrendering autonomy and self-determinism to cooperative agreements.
The most successful example of economic integration is the European Union. The EU has succeeded in eliminating most barriers to the free flow of goods, services, and factors of production. In addition, the EU has made progress toward the evolution of a common currency and central bank, which are fundamental requirement of an economic union.
A number of regional economic alliances exist in Africa, Latin America, and Asia, but they have achieved only low levels of integration. Political difficulties, low levels of development, and problems with cohesiveness have impeded integrative progress among many developing countries. However, many nations in these areas are seeing economic integration as the only way to prosperity in the future. For example, Indo-Pakistani wars and conflicts, that integrated at South Asian Association for Regional Coorperation(SAARC).
International commodity price agreements and cartels represent attempts by producers of primary products to control sales revenues and export earnings. The former involves an agreement to buy or sell a commodity to influence prices. The latter is an agreement by suppliers to fix prices, set production quotas, or allocate sales territories. OPEC for example, has had inestimable influence on the global economy during the past 40 years.