Economic Integration

Loading the player...

What is 'Economic Integration'?

Economic integration is an arrangement between different regions that often includes 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 involved in the agreement.

BREAKING DOWN 'Economic Integration'

The more integrated economies become, the fewer the trade barriers and the more economic and political coordination there is between countries. There are seven stages of economic integration: preferential trading area, free trade area, customs union, common market, economic union, economic and monetary union and complete economic integration. In the final stage, the integrated entities have little control over economic policy, a complete monetary union and fiscal policy harmonization.

The Pros and Cons of Economic Integration

There are potential costs and benefits of economic integration. The advantages of economic integration 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 because trade liberalization leads to market expansion, sharing of technology, and cross-border investment flows. Political cooperation among countries can improve because of stronger economic ties, which can help resolve conflicts peacefully and lead to greater stability.

Despite the benefits, however, economic integration has a cost. The disadvantages include trade diversion and the erosion of national sovereignty. For example, trade unions can divert trade away from non-members even if it is economically detrimental for them to do so. Additionally, 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. 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. The EU and the United States have the largest bilateral trade and investment relationship and the most integrated economic relationship in the world.