BRIAN ROPI A LEVEL ECONOMICS NOTES ECONOMIC INTEGRATION

ECONOMIC INTEGRATION
Economic integration refers to economic co-operation between countries and co-
ordination of their economic policies, leading to increased economic links between them.
It occurs because of numerous benefits that may be derived by the co-operating
countries. There are various degrees of integration, depending on the type of agreement
made between the co-operating countries, and the degree to which barriers between
them are removed.
 Can be described as a form of collective action among countries in order to obtain a
certain goal.
 A practice whereby a group of countries agree on certain terms as far as trade is
concerned.
 A process whereby several states sharing certain commodities coordinate their basic
economic and social programmes creating federation of one type/ another.
 Integration is one way in which countries their resources for economic growth.
 Economic integration refers to a situation when different countries in different parts of
the world are organising themselves into economic and political blocs.
 It can be described as “encompassing measures which are designed to abolish
discrimination between economic units belonging to different national states.”
 Economic integration aims at liberalising trade between countries – either generally or
with specific countries.
 Regional blocks have played a major role in international and economic, political,
social and environmental development.
 Most countries belong to one or more regional groups
 Regional blocks have removed tariffs and other barriers to international trade
resulting in deep integration.

EXPLAIN FACTORS A COUNTRY SHOULD CONSIDER BEFORE JOINING A

TRADING BLOCK.
Consideration before forming or joining a regional block
(a) Proximity
 This factor looks at the geography of the block as this affect the transportation of
goods and communication

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 Countries that are closely located can easily form a block.

(b) Historical considerations
 Some countries form a group because they share the same history for example SADC
formed by former colonies of western countries.
(c) Homogenity
o Relates to similarities of system such as political economic, social values, way of life,
level of development etc.
o Member countries should be at roughly similar levels of economic development.

(d) Inter-connectedness
 Relates to the fact that countries depend on each other in terms of economics that is
trade, production of goods, tourism, etc.

(e) Broader dimensions

 Countries may seek to form trading blocks in order to attain broader goals such as
strong collective bargaining in international business.

 A number of common factors stand out as necessary for successful economic

integration. Among them is that,

o Each member country must be satisfied that it is benefiting from the

arrangements.
o Governments must be prepared to cede some sovereignty to a supranational
institution.
o Political conflict between members must be containable.

Preferential trade agreements

A preferential trade agreement (PTA) is an agreement between two or more countries to
lower trade barriers between each other on particular products. Trade barriers may remain on
the rest of the products, and on imports from non-member countries.
The result is that a member of the agreement has easier access to the markets of other
members for the selected products than countries that are not members.

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PTAs sometimes involve co-operation between members on other issues, such as labour
standards, environmental issues, or intellectual property. They can take several forms,
including free trade areas, customs unions and common markets, and they may be
bilateral (involving two countries) or regional (involving several countries).

Bilateral, regional and multilateral (WTO) trade agreements

A bilateral trade agreement is an agreement between two countries, whereas a multilateral
trade agreement involves an agreement between many countries. Another distinction
involves regional trade agreements, which as the term suggests involves agreements
between a group of countries that are within a geographical region. The main objective of
bilateral, regional and multilateral trade agreements is to promote trade liberalisation, which
is free (or freer) trade by reducing or eliminating trade barriers between members.

EXPLAINTHE FEATURES OF DIFFERENT TRADING BLOCS [15]

TYPES OF TRADING BLOCS
A trading bloc is a group of countries that have agreed to reduce tariff and other barriers to
trade for the purpose of encouraging free or freer trade and cooperation between them.
Beginning with the lowest degree of economic integration, we can distinguish between the
following trading blocs.

FREE TRADE AREA (FTA)

A free trade area (FTA) consists of a group of countries that agree to gradually eliminate
trade barriers between themselves, and is the most common type of trading bloc. Each
member country retains the right to pursue its own trade policy towards other non-member
countries (i.e. to impose its own trade barriers). In trade relations between members, there
may be free trade in some products, and some protection in other products.
Examples of free trade areas are NAFTA (North American Free Trade Agreement), including
Canada, Mexico and the United States, ASEAN (Association of Southeast Asian Nations)
and SAARC (South Asian Association for Regional Cooperation).

One problem that arises in free trade areas is that a product may be imported into the FTA by
the country that has the lowest external trade barriers, and then sold to countries within the
FTA that have higher external trade barriers. This problem arises because each country has its

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own individual barriers toward non-members. It creates difficulties for those countries with
higher barriers because they may end up importing more of the good than they would like.
To deal with this problem, FTAs make complicated ‘rules of origin’ for imports, designed to
prevent goods from entering countries with lower external barriers.

CUSTOMS UNION
A customs union consists of a group of countries that fulfils the requirements of a free trade
area (elimination of trade barriers between members) and in addition adopts a common policy
towards all non-member countries. Each country in a customs union is no longer free to
determine its own trade policy towards non-member countries, but must adopt the policy
agreed upon by the customs union.

Also, the member countries of the customs union act as a group in all trade negotiations and
agreements with non-members. A customs union therefore involves a higher degree of
economic integration than a free trade area.
Examples of customs unions include CEFTA (Central European Free Trade Agreement),
SACU (South African Customs Union), PARTA (Pacific Regional Trade Agreement), and
others.

Customs unions have the advantage over FTAs in that they avoid having to create
complicated ‘rules of origin’ for imports, since they all have the same common external
barriers, usually a common external tariff. However, customs unions must co-ordinate their
policies toward non-members. This gives rise to the possibility of disagreements, as they may
not all agree on what are appropriate levels of tariff and other barriers for non-members.

COMMON MARKET
A common market is an even higher degree of economic integration, in which countries that
have formed a customs union proceed further to eliminate any remaining barriers to trade
between them. They continue to have a common external policy (as in a customs union), and
in addition, they agree to eliminate all restrictions on movements of any factors of production
within the common market. The factors of production of importance are labour and capital,
which in a common market are free to cross all borders and move, travel and find
employment freely within all member countries.

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The best-known common market is the European Economic Community (EEC, the precursor
of the present European Union), formed in 1957. Another example is the Caribbean
Community (CARICOM) Single Market and Economy (CSME).

A common market offers major advantages to its members compared to FTAs and customs
unions. Members enjoy free trade and all its advantages (lower prices, greater consumer
choice, etc.). Workers are free to move and work in any member country without restrictions,
and capital can also flow from country to country without restrictions. This results in a better
use of factors of production. For example, there may be high unemployment in one country,
and a high demand for labour in another country. This encourages unemployed workers to
seek work in the country facing labour shortages.

Similarly, if the profitability of investing is greater in one country than in another, capital
gravitates to the more profitable country, making better use of capital resources. Factor
mobility across countries improves the allocation of resources.

However, the development of a common market requires even greater policy co-ordination
among members than in a customs union, and requires the willingness of member
governments to give up some of their policy-making authority to an organisation with powers
over all the member governments. Both these requirements can be difficult to accomplish,
and need a long time for all countries to make the necessary policy changes to achieve co-
ordination. For this reason there are far fewer common markets in the world than free trade
areas and customs unions.

Economic union
 Free trade amoung member countries.
 Common external tariff
 Free movement of FOP between member countries
 Use of single currency e.g. European Union
 Have common passport
 Can work in any EU member country
 Can also invest.
 There is a central bank for the group which monitors financial aspects of the group.

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 Today EU has moved a step further to what is called economic and monetary union.

Economic and monetary union

 It considers an aspect of harmonising and unifying monetary and fiscal policies of
member countries.

EVALUATE THE BENEFITS OF ECONOMIC INTEGRATION TO DEVELOPONG

COUNTRIES SUCH AS ZIMBABWE [25]
Advantages of economic integration
a) Integration creates a wider market for trade and movement of goods. Member
countries massively produce and make use of excess. In addition regional cooperation
can create a ready market for a member country’s produce
b) Integration promotes cooperation for resources that are vital for the development such
as rivers, rail links, roads, electricity, etc. Such as SADC provides support for regional
exchange of electrical (the Southern African Power pool SAPP).
c) Increased investment in member countries by reducing distortions of economic,
political and social variables and enhance economic and social political reforms. It
encourages foreign investors to practice tariff jumping that is foreign invest in
member countries and trade freely with all the other member countries, expanding
investments.
d) It encourages foreign investors to practice tariff jumping. Foreigners invest in member
countries and trade freely with all the other member countries, expanding
investments.
e) Promote knowledge and technology transfers and spill overs, thus raising productivity
in member countries.
f) Enables countries in one geographical area to have a platform to discuss and deal with
issues and problems that directly affect them. In this way they are able to come up
with appropriate home grown solutions which are practical and well informed.
g) Regional authority also has a obligation to assist member states in crisis. Member
countires help each other be it political or macro economic challenges e.g. SADC
appointed Thabo Mbeki as a member which helped putting in place the Government
of National Unity (GNU) in March 2009.

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h) Economic blocks solves specific problems important for development of the region
e.g. key objectives of SADC are :-
 Promote equitable, self switching economic growth
 Alleviate poverty
 Cultivate common cultural, social and political values
 Maintain peace, security, stability and democracy.
i) A regional block is able to speak with one voice and create global influence e.g. the
world bank is giving priority to sign financial agreements with regional blocks than
individual states. E.g.2 Zimbabwe won its Kimberly process case of selling diamonds
through backing of AU.
j) Regional blocks contribute to effective income distribution in favour of women. Free
trade, free movement of people, etc has resulted in employment and business
opportunities especially in textiles, cloth, traditional agriculture and service sectors.
This enhanced the status of women in society and within houses e.g. around 2006 –
2008 in Zim it is estimated that 80% of cross boarder activities were carried out by
women.
k) Has resulted in lower consumer prices this is as a result of:-
 removal of tariffs. Ensures uplifting of tariffs between member countries, thus
enhancing trade links.
 Increase efficiency in production as trade is based on comparative advantage
e.g. South Africa is producing a wide variety of dairy products available to
SADC member countries at reasonably low prices thus increased
specialisation.
l) Promotes peace, security and political stability.
m) Expanded markets both to sellers and buyers.
n) Improved welfare to the members of the region.
o) A stronger bargaining position with the rest of the world.
p) Accelerated rates of investments in the region.

CHALLENGES AND COSTS OF ECONOMIC INTEGRATION

a) Trade diversion

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 emphasis on trade with members countries can deny a country a chance to

enjoy advantages of specialisation and division of labour (Comparative
advantage).
 A regional block expects a country to trade with members other than non
member countries, a member country can lose better offers with non members.
b) A problem of big brotherhood
 Countries in a block have huge disparaities in size and influence and therefore the
distribution of benefits has led to concerns by other member contries.
 There is an argument that one or a few countries dorminate decisions of the
grouping to the detriment of weaker members.
 Economic domination by those countries which are better than the others e.g.
South Africa in the SADC region.
c) Too many regional organisations
 A multiple regional blocks has led to a country belonging to many blocks
 Different blocks have overlapping, or conflicting objectives which slows down the
effectivieness of blocks
 In Africa SADC, COMESA, ECOWAS do not appear to have been successful in
generating trade expansion and benefits citizens of member countries.
d) A member country must be prepared to give up some political social and economic
sovereignity so as to conform to the goals and objectives of the regional economic
group.
 Vision and goals of individuals member states are superceded the visions and
goals of the trading blocks.
e) Individual governments lack the political will to meet the obligation of regional
blocks when at home.
 This is shown by poor preparation before meetings, failure to implement what is
agreed on, lack of follow up by sectorial ministries on decisions taken at regional
meetings by heads of state.
 As result regional goals are achieved.

f) Lack of support of regionalism by the private sector and general public.

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 Regionalism is driven from above but participation by the public sector is limited
this is partly by lack of resources and also by failure by government to involve
everyone in regional issues.
g) Contagion effect
 A problem that arises in one member country quickly and easily spreads to other
member countries. E.g. spread of diseases, political crisis and economic crises.
 Member countries may follow economic policies that can threat co-operational
e.g. the land redistribution in Zimbabwe in the SADC region.
h) There will be increased competition that may injure domestic industries.
i) Loss of state revenue if tariffs are uplifted.
j) Countries that are better than others may dump goods in poor member countries.
Trade creation and trade diversion
Any type of trading bloc can lead to trade creation, or trade diversion, or both, depending on
the particular country and the particular product.
Trade creation
When a trading bloc is established, patterns of trade between countries change, since trade
between the members is encouraged through the lowering of trade barriers, while trade with
non-members is discouraged through the maintenance of trade barriers.

Trade creation refers to the situation where higher cost products (imported or domestically
produced) are replaced by lower cost imports after the formation of a trading bloc.
Consider an example. Suppose Zimbabwe and Zambia both produce cotton. Zimbabwe has a
comparative advantage in cotton; it has a lower cotton price, and therefore Zambia imports
cotton from Zimbabwe. Initially, Zambia imposes tariffs on its cotton imports, this way
protecting its own cotton producers. Then Zimbabwe and Zambia form a bilateral trade
agreement, and tariffs on cotton are abolished. Zambia’s cotton imports increase
(corresponding to an increase in Zimbabwe’s cotton exports), and its domestic production of
cotton decreases. This is a case of trade creation, because higher cost domestic cotton
production in Zambia is partly replaced by lower cost imports of cotton.

Trade diversion
Trade diversion refers to the situation where lower cost imports are replaced by higher cost
imports from a member after the formation of the trading bloc. Trade diversion occurs when

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an importing country is forced to import from a higher cost producer within a trading bloc,
whereas before it joined the trading bloc it was importing from a lower cost producer
elsewhere. If all countries reduce their barriers at the same time, it is not possible for lower
cost imports to be replaced by higher cost imports; the importing country will simply import
from lower cost producers who sell at lower prices.

Trade creation has the effect of increasing social welfare, while trade diversion reduces it.
Therefore, whereas a trading bloc creates free trade for the members, it may or may not
improve the allocation of resources. Resource allocation will improve only if trade creation
effects are larger than trade diversion effects.

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