Economic Integration

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What is 'Economic Integration'

Economic integration is an economic arrangement between different regions, marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, and to increase trade between the countries taking part in the agreement.

BREAKING DOWN 'Economic Integration'

There are varying levels of economic integration, including preferential trade agreements (PTA), free trade areas (FTA), customs unions, common markets, economic and monetary unions, and political unions. The more integrated the economies become, the fewer trade barriers exist, and the more economic and political coordination there is between the member countries.

Pros and Cons of Economic Integration

As with most things in economics, there are potential benefits and costs of economic integration. The advantages of economic integration tend to fall into three categories: (1) trade benefits, (2) employment, and (3) political cooperation. More specifically, economic integration typically leads to a reduction in the cost of trade; improved availability and wider selection of goods and services; and efficiency gains that lead to greater purchasing power. Employment opportunities tend to improve as trade liberalization leads to market expansion, sharing of technology, and cross-border flows of investment. Political cooperation can also improve with stronger economic ties, which can help resolve conflicts peacefully and lead to more stability.

Despite the benefits, however, economic integration can also have a cost. Some of the potential downsides include trade diversion and the erosion of national sovereignty. For example, trade unions could divert trade away from non-members even if it were a more economically efficient outcome. Also, members of economic unions are typically required to adhere to rules on trade, monetary policy and fiscal policy, which are established by an external policymaking body not elected by citizens of a particular country. Sovereignty, in fact, was one of the key debates in the United Kingdom's decision to leave the European Union (EU) in 2016.

Measuring Economic Integration

Because economists and policymakers believe economic integration leads to significant benefits for society, there are many institutions that attempt to measure the degree of economic integration across countries and regions. The methodology for measuring economic integration typically involves the combination of multiple economic indicators, including trade in goods and services, cross-border capital flows, labor migration and others. It also includes measures of institutional conformity, such as membership in trade unions and the strength of institutions that protect consumer and investor rights. A standardized ranking of European Union countries shows that Finland, Austria, Spain and France are the most integrated into the EU.