Economic Integration?

Economic integration is a dynamic process that involves the coordination of trade, fiscal or monetary policies. It has both advantages and disadvantages. The goal of regional integration is to enhance the economic outcome of the countries involved. Deciding who whether or not equal power over policies can sometimes be an obstacle that countries run into.

The scale and competition effect removes trade barriers and essentially enlarges the regional market. It is an essential step to any countries endeavor to integrate the regional market.  Companies are able to benefit from the greater scale and increased size of the market. It increases the amount of competition and forces companies to become much more efficient.

The trade and location effect involves a regional agreement upon preferential reduction in tariffs. This results in purchases switching their demand more towards supply from the countries that they are entering into the agreement with. It leaves domestic product as well as imports from countries not included in the agreement at a loss. Essentially, it is trade creation and diversification. Government revenue from tariffs is decreased and alternative source costs can increase or decrease dependent upon supply.  A disadvantage of economic integration is “determining how to deal with economic disruptions and/or redistribution of resources” (Suranovic, 1998).

Increased returns coupled with increased competition are an advantage of regional economic integration. When you have a smaller market, you can run into “a trade-off between economies of scale and competition” (Worldbank, 2005). A larger economy removes the trade-off and makes the existence of bigger companies with greater productivity possible. It also results in lower prices due to increased competition. Governments should keep external tariffs low to allow a higher degree of import competition from outside companies to help smaller businesses compete after the formation of trade blocs.

Suranovic, S. (1998). International Trade Theory and Policy. Retrieved from http://internationalecon.com/Trade/Tch110/T110-2.php.

Worldbank. (2005). Regional Integration: Concepts, Advantages, Disadvantages and Lessons of Experience. Retrieved from http://siteresources.worldbank.org/EXTAFRREGINICOO/Resources/Kritzinger.pdf.