The Economic Integration between two countries is a measure of how much two or more countries work together, or give preference to eachother. Economic Integration is typically broken up into six categories, with varying levels of economic integration associated with each. They are as follows:
  1. Preferential Trading Area.
  2. Free Trade Area (FTA).
  3. Customs Union.
  4. Single Market.
  5. Economic and Monetary Union.
  6. Complete Economic Integration.

Economic Integration causes both trade creation and trade diversion at every level. Trade is created between the countries in the customs union or other. And Trade is diverted from countries not participating. This all stems from trade barriers. The countries within the customs union (or any other level of economic integration) have lowered or eliminated barriers to trade between themselves, and can therefore trade much more freely between themselves, trade creation. The opposite occurs for countries outside the customs union, trade is stripped from them to other countries within the customs union, this is trade diversion. Another way to think about this is in terms of efficiency. When all barriers are equal between countries (aka no economic integration exists) the country that produces goods the most efficiently will get more of the exports. However if economic integration occurs, and trade barriers are let down to certain countries, the exporting can be done by countries that were unable to before. Trade creation if being able to trade even though you are less efficient that other countries, and trade diversion is when trade gets diverted from you despite the fact that you are more efficient than other countries producing the same good. Again this all comes down to trade barries (or lack of them) between countries, and what comes about because of this relationship.

Preferential Trading AreaEdit

A Preferential Trading Area is an agreement between two countries that limits trade barriers between the two countries on specified goods. This is the most elementary type of trading block to see between two countries, and is the first step of Economic Integration. An example of this is the European Union.

Free Trading Area (FTA)Edit

A Free Trade Area (FTA) is the next level of Economic Integration, and is simply a Preferential Trading Area that completely removes tariffs and other trade barriers between participating countries, for most if not all goods. However Each country can make independent decisions regarding how they trade with other countries outside of the Free Trade Area. (Different from a Customs Union.) An example of this is NAFTA, the North American Free Trade Agreement, containing Mexico, the USA, and Canada.

A FTA is created when countries form a trading area within which they move goods and services freely but each individual country retains its own barriers to outside countries.

Customs UnionEdit

A Customs Union is a combination of a Free Trade Agreement, and a common External Teriff. They are not seen terribly often, because doing so doesn't really benefit the countries involved, beside becoming closer political allies.

Customs Unions cause either trade creation (a shift of production from high cost to low cost) or trade diversion (a shift in production from low cost countries outside the union to high cost to countries inside the union).

Single MarketEdit

A single Market is a Customs Union with essentially no borders between countries involved, in the sense that there is the same regulation on goods being produced regardless of the country it is produced in. The main goal of a Single Market is to allow the free movement of the factors of production between the countries involved, which can decrease costs.

Economic and Monetary UnionEdit

A trading block with a Single Market, which shares a common currency between the countries involved. The most well known example of this is the Euro, used in the European Union by countries that have agreed. There exists such a thing called a Monetary Union, where only the currency is shared, but a Single Market does not exist between the countries. This, however, s much less common.

Complete Economic IntegrationEdit

Individual countries involved have no control over economic policy, full monetary union, and complete harmonization of fiscal policy.  

Obstacles to Achieving IntegrationEdit

The major obstacles to trading blocks is that for various reasons they are simply not economically logical. Trading blocks let other countries trade with you efficiently without competing with other countries, making money gained from tariffs and other trade barriers much less. This also can be a good thing, because it works the other way around as well. However in the long run, purely economically (as opposed to economically or politically,) this lack of competition will not yeild any incentive to better the market, because they country is assured the export to other countries in the trading block, due to the reduced trade barriers. Another obstacle to trading clocks is fear of specialization. A country in danger of becoming over dependant on one or two goods (specializing) will not want to enter into a trading block, because this will only specialize them further, due to a lack of incentive to change what they produce. This can also inhibit local industries, because another country in the trading block may have an absolute advantage over another in many goods. This hurts the latter country because they can no longer produce as many of those goods. Another obstacle to trading blocks is the desire to preserve currently instated trade barriers. This is typically a legislative desire, because things like tariffs benefit the government in question more than the consumers, more directly at least. Trading blocks can also lead to the destruction of industries in a country, if they were previously protected by trade barriers. As stated earlier, this can lead a country closer to becoming overly specialized in the production of very few goods or services. = =

Reluctance to Surrender Political SovereigntyEdit

"Hell hath no fury like a bureaucrat scorned" ~Milton Friedman

The necessity of surrendering, at least a small, degree of political sovereignty when economic integration occurs is inevitable, just as a reluctance to do so is also inevitable. The problem which arises is similar to the that which occurs when a group of people decide to live together for the first time, each person must give up a degree of control and a degree of their individuality to allow for peace in the house and a lower rent check because the alternative is to live alone. For the same reason countries feel reluctant to enter into REA (Regional Economic Associations), like the EU or NAFTA. To do so each country gains the advantages of economic integration above but must also share the power of governing with others to set up regulations for a variety of issues; including re-export tariffs, and rules of origin in the FT, co-ordinated taxes and labor laws in customs union/ common market and setting up a single currency with a the central bank. While sovereignty is lost by an individual country over their own actions they also gain control over the actions of other countries and therefor power is not lost but just redistributed. The three core issues on giving up political sovereignty are as follows.


Countries as a whole deal with the same issues in their policy making however how they choose to deal with these issues can be very different. When countries enter into REA's they must bring together their laws and legislations so that there are not problematic contradictions. The best modern day example is the the EU where legislation must come together so as to act economically as one country, almost. A difficulty with this concept is shown in the recent problems with Greece and how the European Union feels a need to restore Greece to financial stability for their own well-being.


When countries form REAs the amount of money being spent in other countries increases as a general rule. This creates a situation in which prices even out between the two countries and lower, as a whole and assuming geographical closeness, for this reason if one country raises taxes there is a human capital migration from one country to another in the REA. For these reasons taxation of good being traded within the REA become a moot point and little to no profit is generated form them.

Social Policies Edit

For the same reasons that taxation on goods from one country to another becomes moot the amount of control that a country can maintain over domestic social policies becomes a moot point. The lower tax revenues cause problems with maintaining the qualities of schools and welfare programs, for example, because there is no way to control what is going in or out of the country.

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