Presented by Nandini B.V

Rashmi RPavithra B.R

GOVT. R.C COLLEGE OF COMMERCE AND MANAGEMENT

Presentation on Economic Integration

Meaning of Economic Integration

• An economic arrangement between different regions marked by 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, as well as to increase trade between the countries taking part in the agreement.

Levels of Integration:

Preferential trading agreement Free trade area Customs union Common union Economic union Political union

Levels of economic integration

Preferential Trading Agreement

• A preferential trading agreement is the loosest form of economic integration .Under this a group of countries have a formal agreement to allow each other’s goods and services to be traded on preferential terms. This requires that the tariffs are reduce between the countries or that special quotas allow preferential access for their products.

Free Trade Area:

In a free trade area all barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to determine its own trade policies with regard to nonmembers.

Ex: EFTA and NAFTA

Customs Union:

eliminates trade barriers between member-countries and adopts a common external trade policy.

Ex: Andean Pact

Common Market:

• The theoretically ideal common market has no barriers to trade between member-countries and a common external trade policy. Unlike in a customs union, in a common market factors of production also are allowed to move freely between member-countries. Thus, labour and capital are free to move, as there are no restrictions on immigration, emigration, or cross-border flows of capital between member-countries.

Economic Union :

An Economic Union involves the free flow of products and factors of production between member-countries and the adoption of a common external trade policy. A full economic union also requires a common currency, harmonization of the member-countries tax rates and a common monetary and fiscal policy.

Political Union• While some degree of political integration often

accompanies economic integration, political union implies more formal political links between countries. A limited form of political union may exist where two or more countries share common decision making bodies and have common polices . In its fullest sense, it involves the unification of previously separate nations.

Examples for Levels of Integration:Type

(Level) Example Membership Principal features

Free Trade Area

North American Free Trade Agreement (NAFTA) Closer Economic Relations (CER)

United States Canada ,Mexico

Australia New Zealand

No internal tariffs. Each country determines its own trade policies toward non-members.

Customs Union

Andean Pact Bolivia ,Colombia Ecuador

Peru

As for FTA above. Common external tariff on goods imported from outside.

Common Market

European Community (EC) before January 1994. There has not been another.

12 European countries.

As for customs union above. Labour and capital free to move. No restrictions on migration.

Economic Union

European Union (EU) as from January 1999.

25 European countries.

As for common market above. Common currency - European Monetary Unit (called the 'Euro') Harmonisation of tax rates. Common monetary and fiscal policies.

Political Union

EU has some elements; see previous level. The ultimate aim is a United States of Europe.

25 European countries, but may include 28 countries by 2007.

European parliament, directly elected by citizens of EU countries. Council of Ministers: government ministers for each EU country. An administrative bureaucracy. Court of Justice: the official interpreter of EU law.

Impacts of economic integration

• Short-term effects (shift of production)• Trade creation: production shifts to more efficient member

countries from inefficient domestic or outside countries. • Trade diversion: production shift to inefficient member

countries from more efficient outsiders.

• Dynamic effects: Long-term effects• Cost reduction due to economies of scale • Cost reduction due to increased competition.

Impact on business

Creation of single markets• Protected markets, now open• Lower costs doing business in single market

• Differences in culture and competitive practices make realizing economies of scale difficult

• More price competition• Outside firms shut out of market