What Is Economic Integration?

Economic integration is an arrangement among nations that typically includes the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. Economic integration aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement.

Economic integration is sometimes referred to as regional integration as it often occurs among neighboring nations.

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Economic Integration

Economic Integration Explained

When regional economies agree on integration, trade barriers fall and economic and political coordination increases. 

Specialists in this area define seven stages of economic integration: a preferential trading area, a free trade area, a customs union, a common market, an economic union, an economic and monetary union, and complete economic integration. The final stage represents a total harmonization of fiscal policy and a complete monetary union.

Key Takeaways

  • Economic integration, or regional integration, is an agreement among nations to reduce or eliminate trade barriers and agree on fiscal policies.
  • The European Union, for example, represents a complete economic integration.
  • Strict nationalists may oppose economic integration due to concerns over a loss of sovereignty.

Advantages of Economic Integration

The advantages of economic integration fall into three categories: trade benefits, employment, and political cooperation.

More specifically, economic integration typically leads to a reduction in the cost of trade, improved availability of goods and services and a wider selection of them, and gains in efficiency that lead to greater purchasing power.

Economic integration can reduce the costs of trade, improve the availability of goods and services, and increase consumer purchasing power in member nations.

Employment opportunities tend to improve because trade liberalization leads to market expansion, technology sharing, and cross-border investment.

Political cooperation among countries also can improve because of stronger economic ties, which provide an incentive to resolve conflicts peacefully and lead to greater stability.

The Costs of Economic Integration

Despite the benefits, economic integration has costs. These fall into two categories:

  • Diversion of trade. That is, trade can be diverted from nonmembers to members, even if it is economically detrimental for the member state.
  • Erosion of national sovereignty. Members of economic unions typically are required to adhere to rules on trade, monetary policy, and fiscal policies established by an unelected external policymaking body.

Because economists and policymakers believe economic integration leads to significant benefits, many institutions attempt to measure the degree of economic integration across countries and regions. The methodology for measuring economic integration typically involves multiple economic indicators including trade in goods and services, cross-border capital flows, labor migration, and others. Assessing economic integration also includes measures of institutional conformity, such as membership in trade unions and the strength of institutions that protect consumer and investor rights.

Real-World Example of Economic Integration

The European Union (EU) was created in 1993 and included 28 member states in 2019. Since 2002, 19 of those nations have adopted the euro as a shared currency. According to the International Monetary Fund (IMF), the EU accounted for 16.04% of the world's gross domestic product.

The United Kingdom voted in 2016 to leave the EU. As of late August 2019, no firm agreement on the terms of its departure had been settled. A best-case scenario was for a transition period to avoid severe disruption, delaying the full impact of the departure until late 2020.