economic integration

economic integration, process in which two or more states in a broadly defined geographic area reduce a range of trade barriers to advance or protect a set of economic goals.

The level of integration involved in an economic regionalist project can vary enormously from loose association to a sophisticated, deeply integrated, transnationalized economic space. It is in its political dimension that economic integration differs from the broader idea of regionalism in general. Although economic decisions go directly to the intrinsically political question of resource allocation, an economic region can be deployed as a technocratic tool by the participating government to advance a clearly defined and limited economic agenda without requiring more than minimal political alignment or erosion of formal state sovereignty. The unifying factor in the different forms of economic regionalism is thus the desire by the participating states to use a wider, transnationalized sense of space to advance national economic interests.

Although there are many different forms of economic integration, perhaps the most convenient way to order the concept is to think of a continuum that ranges from loose association at one end to an almost complete merging of national economies at the other end. Although it is far from a given that positive experiences in the simpler forms of economic integration will lead to a deepening of the process to increasingly integrated shared economic spaces, the more-complex forms incorporate and are founded on the substantive elements of the earlier forms. The significant point is that although economic integration is explicitly framed by trading relationships, it acquires an increasingly political character as it reaches deeper forms.

The most basic type of economic integration is a simple free-trade area. In this form, attention is focused almost exclusively on a reduction of the tariffs and quotas that restrict trade. Emphasis is placed almost entirely on increasing the exchange of goods. The articulation of transnationalized production chains, trade in services, labour mobility, and more-sophisticated forms of economic integration are not an explicit goal and emerge as merely tangential to the primary goal of securing access to foreign markets for domestic firms.

In a second-generation free-trade area, the basic nature of simple free trade is expanded to include trade in non-goods such as services. Where a simple free-trade area need only address the question of tariffs and quotas, the trade in services and a widening of trade in goods raises questions of regulatory convergence and the harmonization of rules of operation and governance. At this stage, attention needs to be turned to such things as the transferability of professional certifications as well as questions of labour mobility, particularly for the highly skilled professions such as legal, accounting, technology, and medical services. The increased interdependence between the participating economies that comes with expanded trade in all economic areas and a measure of regulatory convergence can lead to an increased distribution of production chains across national boundaries.

As national production structures transnationalize across the regional space, the next stage is to deepen regulatory harmonization to present a common stance to the extra-regional market. The result is the formation of a customs union relying upon a common external tariff. One of the key attractions of this regulatory convergence between participating economies is that it reduces the challenges of monitoring and taxing external inputs that are used to produce goods and services that circulate within the region. Implicit in the adoption of a common external tariff is a further harmonization of national rules and regulations, particularly those relating to the control and flow of external trade into the regional economic space.

The idea of a common market grows from the possibilities presented by the adoption of a common external tariff. As trade flows increase and factor inputs imported into the integrating economies begin to circulate freely, production chains crossing the intra-regional national boundaries begin to form. This results in sustained pressure to reduce the costs of transporting finished and semi-finished goods between the states participating in the integration project. The solution is the harmonization of border procedures, which in its ultimate form leads to the virtual elimination of national boundaries as internal barriers to trade and the formation of a free-flowing regional economic space. A concomitant change with this complete opening of internal trade is a liberalization of labour mobility, allowing the inhabitants of one member state to work in all the other member states of the region.

With the evolution of a common market and the concomitant surge in intra-regional trade comes a new source of expenses for business: the costs of transnational transactions. Even though borders may be open to the free transit of goods and services, the need to constantly engage in foreign exchange operations to settle payments as well as the differing relative costs caused by different national economic policies impose a constant financial and administrative expense on firms operating within the region. The solution and next stage in the integration progression is some form of monetary union, be it through an agreed fixing of relative exchange rates or the more commonly discussed adoption of a common currency. At this point, the economic aspects of integration also begin to take on a strong political flavour. Adoption of a common currency or monetary policy by all members of the project also requires a strong convergence in macroeconomic policy, which imposes external restraints on the domestic fiscal and expenditure policies that a government may pursue. The result is a gradual blurring of the political as well as economic lines that separate the states participating in the integration project.

In an economic community or union, the logic of common external tariffs, regulatory approximation, and harmonization of macroeconomic policy is taken to its full conclusion through the construction of an overarching governance framework that imposes a common economic policy system on all countries in the region. In effect, the member states surrender a significant degree of economic sovereignty to the whole in the expectation of significantly expanded opportunities presented by a much larger, fully integrated economic space facilitating the full mobility of finished products, factors of production, and labour. The harmonization of regulations and procedures is facilitated through the creation of an overarching legislative and legal system that trumps national laws and rules and also ensures that economic actors will face the same treatment throughout the region.