Economic Integration

Some historians contend that WW2 was a war for resources. Germany and Japan sought to expand to create self-sufficient economies, leading to devastating consequences. In response to this, efforts toward economic integration happened after the war to prevent aggressive competition between countries, raise living standards, and promote stability. Learn about the concepts of economic integration and how it was implemented in Europe here.

Economic Integration Economic Integration

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Contents
Table of contents

    Economic Integration Definition

    Economic integration is two or more countries cooperating on economic policy. Usually, trade barriers such as tariffs are reduced or removed to make trade easier.

    Tariffs

    Taxes on imports and/or exports.

    Countries practicing economic integration may also cooperate on monetary and fiscal policy or even adopt a common currency.

    Economic Integration Trade and Money StudySmarterFig 1 - Economic integration involves removing trade barriers.

    Levels of Economic Integration

    Economists define 7 levels of economic integration.

    1. Preferential Trade Area: Tariffs are generally lowered at this level of economic integration. An example is the Trans-Pacific Partnership.
    2. Free Trade Area: A group of countries eliminates tariffs between them. An example is NAFTA.
    3. Customs Union: A customs union not only eliminates tariffs between the member countries, but the countries also agree to adopt a single external tariff policy, operating as a single bloc for trade between them and with other countries. The European Union, or EU, is primarily a customs union.
    4. Common Market: A common market goes one step further and allows the free movement of goods, services, and labor among the member countries. Most of the EU countries also operate as part of a single market.
    5. Economic Union: An economic union is when countries in a common market adopt across-the-board fiscal policies.
    6. Monetary Union: A common currency is adopted. The Euro is an example.
    7. Full Economic Integration: This level represents complete integration. There is free trade among members and a common currency, and the members have standard fiscal and monetary policies. The arrangement of the United States with state governments that have sovereignty over many internal affairs but grant the national Congress power over economic policy could be seen as a form of complete economic integration.

    Defining Forms of Economic Integration

    There are also different types and forms of economic integration.

    FormCharacteristics
    Regional Economic IntegrationOccurs between countries within the same geographic area or region.
    Multinational Economic IntegrationEconomic integration between sovereign nation-states anywhere in the world.
    Social Economic IntegrationSeeks to move beyond simple economic integration to include social policy such as education.

    Advantages and Disadvantages of Economic Integration

    There are pros and cons to economic integration.

    Pros

    The primary benefit of economic integration is better economic outcomes.

    Generally, free or minimally restricted trade will lead to more competition and, by extension, lower costs for goods.

    These lower prices result from reducing or eliminating tariffs on imported goods, which increase prices on imported goods. This allows consumers to choose the best and/or lowest priced goods, whether they are produced domestically or not.

    This also allows countries to focus on producing goods for which they have a comparative advantage, meaning they can specialize and produce more of what they are best at producing, leading to more production, trade, and income for all countries involved.

    Comparative Advantage

    The ability of a particular nation to engage in a particular economic activity more efficiently than other activities and more efficiently than other nations. For example, one country may have a comparative advantage in producing corn due to environmental factors and another beef. With each focusing on the other and trading, their populations will have access to better and cheaper corn and beef rather than each trying to produce both.

    A significant indirect benefit of economic integration among nations is the promotion of better relations.

    In essence, countries that rely on each other for trade are less likely to go to war, and cooperation on trade will lend itself to more cooperation in other areas.

    Economic Integration G20 summit StudySmarterFig 2 - A Group of 20 (G20) meeting.

    Disadvantages of Economic Integration

    The main arguments against economic integration concern national sovereignty.

    Sovereignty

    Sovereignty is the authority of a country to govern itself.

    For example, reducing trade barriers and specializing in certain goods may reduce prices, limiting countries' ability to make their own decisions. Tariffs allow domestic industries to develop when they cannot effectively compete with foreign industries. Without them, they may never develop.

    As long as positive relations and cooperation continue, that's fine.

    However, if the two countries have a falling out and stop trading, people could lose access to imported goods they rely on since there are no domestic producers. Also, economic integration means economic problems in one country could cause problems in another. For example, if there is a drought in one country, people in another might face food shortages.

    Likewise, specialization might make countries too reliant on producing one good or product. If the prices of that good fall, they may face more economic difficulty than if they were more diversified.

    Controversy also surrounds economic integration that includes a monetary union. By adopting a common currency, countries give up the freedom to control the value of their money. This gives countries less flexibility to respond to inflation and deflation.

    Inflation and Deflation

    Inflation occurs when prices rise, and the value of money declines. Deflation occurs when prices fall and the value of money increases.

    Countries can encourage inflation by printing more money or reducing taxes, or spending on social policies and infrastructure to put more money into the overall economy.

    They can encourage deflation by removing money from circulation, raising taxes, or reducing government spending to reduce the amount of money in the economy.

    Maintaining control over the money supply is one of the arguments against levels of economic integration that include using common currencies since countries lose independent control over these methods to manipulate the currency's value.

    History of Economic Integration in Post WW2 Europe

    Since WW2, Europe has seen increased economic integration.

    Economic Integration in the Communist Bloc

    The term communist bloc refers to the communist countries of Eastern Europe and their allies.

    Bloc

    Used to describe a group of countries that operate as a group, perhaps with some degree of global economic integration.

    COMECON

    The communist bloc countries engaged in economic integration through COMECON.

    COMECON

    The Council for Mutual Economic Assistance was created in 1949 to promote trade and economic coordination among communist countries.

    At first, COMECON focused primarily on fostering trade agreements similar to a preferential trade area.

    However, later it began to promote specialization and operate more similarly to a common market.

    Economic Integration in the Capitalist Bloc

    COMECON was less successful in achieving economic integration than its Western European counterparts.

    Organization of European Economic Cooperation

    The Organisation of European Economic Cooperation, or OEEC, was created in 1948 to help plan the administration of Marshall Plan aid from the US to Europe and promote cooperation in the rebuilding of Europe more broadly.

    By the late 1950s, its job was essentially done, and the body was reconstituted as the Organisation for Economic Co-operation and Development, or OECD, in 1961.

    The OECD looked to continue to promote economic integration in Europe and globally, and the US, Canada, Japan, Australia, and New Zealand were all made members by 1973.

    After the fall of communism, many Eastern European countries joined. In the 2010s, several Latin American countries joined, marking its transition from regional economic integration to proper multinational economic integration.

    Although the OECD has never advanced to more full economic integration, it was an essential forerunner to other European economic integration efforts.

    Economic Integration in Europe Map StudySmarterFig 3 - Map showing the original OECD and EEC members in green and countries joined by 1992 in blue.

    European Economic Community

    The European Economic Community, or EEC, was created by the 1957 Treaty of Rome.

    Its goal was to promote more complete economic integration, including creating a customs union and a common market.

    There were only six founding members, but its membership gradually expanded.

    The Treaty of Rome also created a European Parliament, which laid some foundations for social-economic integration.

    The European Union

    In 1993, the Maastricht Treaty created the European Union or EU.

    It essentially absorbed and replaced the EEC. It has created the highest level of economic integration among independent sovereign states.

    The European Union is a customs union and common market, although a few member states only participate in one or the other.

    It currently has 27 member states.

    The European Parliament, under the umbrella of the EU, continues to promote social-economic integration through many common laws between member states.

    Economic Integration Flag of Europe StudySmarterFig 4 - The Flag of Europe was adopted as the European Union's emblem.

    Euro Zone

    The Euro Zone refers to the countries of the European Union that adopted the common currency known as the Euro, created in 1999.

    Currently, 19 of the 27 EU participants use the Euro.

    Economic Integration Regional Economic Integration Euro currency StudySmarterFig 5 - Euro bills and coins.

    Towards More or Less Economic Integration in the 21st Century?

    The EU and Eurozone have generally been regarded as highly successful in promoting better economic outcomes, prosperity, and peace in post-WW2 Europe.

    However, the 2008 financial crisis and the resulting fallout, the exit of the UK from the EU (commonly referred to as Brexit), debates over the socioeconomic integration of immigrants, and renewed conflict in Europe are all challenges that continued and expanded economic integration faces in the first decades of the 21st Century.

    Economic Integration - Key takeaways

    • Economic integration reduces trade barriers.
    • There are different levels of economic integration.
    • There are both advantages and disadvantages to economic integration.
    • After WW2, there were efforts toward economic integration in Europe's capitalist and communist countries.
    • Since 1993, the European Union has further advanced economic integration, including many countries sharing the Euro as a currency.
    • This economic integration has primarily led to economic prosperity and peace in Europe but faces some challenges in the early 21st Century.
    Frequently Asked Questions about Economic Integration

    What is economic integration?

    Economic integration is cooperation between countries to reduce or eliminate barriers to trade, thereby integrating their economies.

    What are the four types of economic integration?

    There are many different forms of economic integration. Four of the forms of economic integration include preferential trade agreements, full free trade agreements, single market systems, and monetary unions.

    What are the five levels of economic integration?

    Five levels of economic integration include preferential trade agreements, free trade agreements, customs unions, single markets, and monetary unions.

    What are three methods of economic integration?

    Three methods of economic integration include regional economic integration, multinational economic integration, and the creation of single markets or full monetary unions.

    Is economic integration good or bad?

    Economic integration can be both good and bad. Advantages include increased competition and lower prices for consumer goods. Disadvantages include the loss of full sovereignty over economic policy.

    Test your knowledge with multiple choice flashcards

    What best defines economic integration?

    Which best describes the difference between a custom union and single market?

    What was the organization that promoted economic integration among the communist countries?

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