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. Economic integration aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement.


Economic Integration

Economic Integration Explained

As economies become integrated, there is a lessening of trade barriers and economic and political coordination between countries increases. 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. The final stage represents a complete monetary union and fiscal policy harmonization.

Key Takeaways

  • Regions may agree to economic integration to better serve their citizens.
  • Economic integration can broaden markets, boost employment, and spur political cooperation.
  • Some advantages and disadvantages must be weighed when pursuing economic integration.
  • Trade unions may divert trade from nonmembers even if doing so is detrimental to one or more members.
  • Strict nationalists may oppose economic integration due to feelings of a loss of sovereignty.

Three Categories of Economic Integration Advantages

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 and a 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, technology sharing, 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.

The Costs of Economic Integration

Despite the benefits, economic integration has costs. The disadvantages include trade diversion and the erosion of national sovereignty. For example, trade unions can divert trade from nonmembers, 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 unelected external policymaking body.

Because economists and policymakers believe economic integration leads to significant benefits for society, many institutions 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.

Real World Example of Economic Integration

The European Union (EU) includes 28 member states and formally came into being in 1993. 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, effective March 29, 2019. In the weeks leading up to that date, no deal had been reached to settle on the details of the departure, leaving the impact uncertain.