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INTRODUCTION

Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state. This is meant in turn to lead to lower prices for distributors and consumers (as no customs duties are paid within the integrated area) and the goal is to increase trade. The trade stimulation effects intended by means of economic integration are part of the contemporary economic Theory of the Second Best: where, in theory, the best option is free trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist. Economic integration is a process where barriers to trade are reduced or eliminated to facilitate trade between regions or nations. There are varying degrees of economic integration ranging from

theoretically completely free trade to the use of preferential trade agreements to stimulate relationships between specific trade partners. Removing trade barriers comes with costs and benefits, depending on the degree of economic integration and the level of cooperation between member regions or nations. Many economies have attempted some degree of economic integration. Some nations use free trade zones, for example, to stimulate trade with partners. Others sign free trade agreements like the North American Free Trade Agreement (NAFTA). In the European Union (EU), a high degree of economic and monetary integration has been accomplished between member nations. Various EU nations may also have trade agreements with nations outside the union. Reducing barriers to trade has the tendency to cut costs associated with economic activities. Not having to pay taxes, tariffs, fees, and other expenses can be beneficial for trading partners. This causes the volume of trade to increase, as trading partners actively seek out deals in regions where some degree of economic integration has been achieved. For

nations outside integration agreements, however, barriers to trade can be created as they may not be able to compete with preferred trading partners. When economies are strong, economic integration has benefits for all members, and every member of an agreement, union, or treaty can experience economic growth. The same holds true of economic downturns. When individual members of a trade agreement start to be dragged down, their economic problems can spread. This was notably seen in the European Union during the economic crises of the early 2000s, when bad debt in nations like Greece and Portugal caused problems across the EU, including in nations with relatively strong economies, like Germany. As regions and nations embark on economic integration programs, they weigh the costs and benefits of integration carefully to see if it is the right choice for their needs. Some nations may prefer to avoid the risks, even though barriers to trade may pose a problem. Others may be willing to take on the risks in exchange for increased trade and foreign

exchange. Growing nations are often particularly eager to engage in economic integration, as trade with foreign nations can contribute to rapid economic growth. They may use incentive programs to attract foreign trade and investment.

OBJECTIVE
An increase of welfare has been recognized as a main objective of economic integration. The increase of trade between member states of economic unions is meant to lead to the increase of the GDP of its members, and hence, to better welfare - a goal of any state around the world. This is one of the reasons for the global scale development of economic integration, a phenomenon now realized in continental (ASEAN, the North American Free Trade Agreement (NAFTA), SACN, European Union (EU), Eurasian Economic Community (EurAsEC) and proposed for intercontinental (Comprehensive Economic Partnership for East Asia (CEPEA), Transatlantic Free Trade Area (TAFTA)) economic blocks. The other objective for the states pursuing economic integration is to stay/become regionally and globally competitive, as the goods in the states outside economic blocks become more expensive (i.e., less

competitive). This is the other reason making global economic integration inevitable.

BENEFITS OF ECONOMIC INTEGRATION


Economic integration can be defined as a kind of arrangement where countries get in agreement to coordinate and manage their fiscal, trade, and monetary policies in order to be mutually benefitted by them. There are many degrees of economic integration, but the most preferred and popular one is free trade. In economic integration no country pays customs duty within the integrated area, so it results in lower prices both for the distributors and the consumers. The ultimate aim of economic integration is to increase trade across the world. There are many other advantages associated with this concept. Some of these are: 1. Progress in trade. All countries that follow economic integration have extremely wide assortment of goods and services from which they can choose. Introduction of economic integration helps in acquiring goods and

services at much low costs. This is because the removal of trade barriers reduces or removes the tariffs entirely. Reduced duties and lowered prices save a lot of spare money with countries which can be used for buying more products and services. 2. Ease of agreement. When countries enter into regional integration, they easily get into agreements and stick to them for long periods of time. 3. Improved political cooperation. Countries entering economic integration form groups and have greater political influence as compared to influence created by a single nation. Integration is a vital strategy for addressing the effects of political instability and human conflicts that might affect a region.

4.Opportunities for employment. The various options available in economic integration help to liberalize and encourage trade. This results in market

expansion due to which high amount of capital is invested in a countrys economy. This creates higher opportunities for employment of people from all over the world. They thus move
from one country to another in search of jobs or for earning higher pay. 5.Beneficial for financial markets.

Economic integration is extremely beneficial for financial markets as it eases firm to borrow finances at low rate if interest. This is because capital liquidity of larger capital market increases and the resultant diversification effect reduces the risks associated with high investment. 6.Increase in Foreign Direct Investments.

Economic integration helps to increase the amount of money in Foreign Direct Investment (FDI). Once firms start FDI, through new operations or by merger, takeover, and acquisition, it becomes a international enterprise.

Thus economic integration is a win-win situation for all the firms, people and the economies involved in the process. Is has become a preferred strategy for most countries of the world.

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ADVANTAGES OF ECONOMIC INTEGRATION


TRADE CRIATION:
Member countries have (a) wider selection of goods and services not previously available; (b) acquire goods and services at a lower cost after trade barriers due to lowered tariffs or removal of tariffs (c) encourage more trade between member countries the balance of money spend from cheaper goods and services, can be used to buy more products and services

GREATER CONSENSUS:
Unlike WTO with hugh membership (147 countries), easier to gain consensus amongst small memberships in regional integration

POLITICAL COOPERATION:

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A group of nation can have significantly greater political influence than each nation would have individually. This integration is an essential strategy to address the effects of conflicts and political instability that may affect the region. Useful tool to handle the social and economic challenges associated with globalization EMPLOYMENT OPPORTUNITIES: As economic integration encourage trade liberation and lead to market expansion, more investment into the country and greater diffusion of technology, it create more employment opportunities for people to move from one country to another to find jobs or to earn higher pay. For example, industries requiring mostly unskilled labor tends to shift production to low wage countries within a regional cooperation

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DISADVANTAGES OF ECONOMIC INTEGRATION


Creation Of Trading Blocs:
It can also increase trade barriers against non-member

countries. Trade Diversion:


Because of trade barriers, trade is diverted from a non-member country to a member country despite the inefficiency in cost. For example, a country has to stop trading with a low cost manufacture in a non-member country and trade with a manufacturer in a member country which has a higher cost.

National Sovereignty:
Requires member countries to give up some degree of control over key policies like trade, monetary and fiscal policies. The higher
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the level of integration, the greater the degree of controls that needs to be given up particularly in the case of a political union economic integration which requires nations to give up a high degree of sovereignty.

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LEVELS OF ECONOMIC ITEGRATION

Levels of Economic Integration There are about five additive levels of economic integration:

Free trade. Tariffs between members are abolished or significantly reduced. A tariff is a tax imposed on imported goods. Each member keeps its own tariffs in regard of third parties. The general goal is to develop economies of scale and comparative advantages.

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Custom union. Sets common external tariffs among members, implying that the same tariffs are applied to third parties. Custom unions are particularly useful to address the problem of re-exports.

Common market. Factors of production, such a labor and capital, are free to move within members, expanding scale economies and comparative advantages.

Economic union. Monetary and fiscal policies between members are harmonized as well as the use of a common currency. It also imply a level of political integration. This type of economic integration does not truly exists but the European Union is the closest example.

Political union. Represents the potentially most advanced form of integration with a common government.

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STAGES OF ECONOMIC INTEGRATION

Preferential trading area A preferential trading area gives a preferential access to certain products from the participating countries. Tariffs are reduced, but are not abolished for this first stage of economic integration. Although the difference between preferential trading area and free-trade area may be unclear, preferential trading area has a main goal of becoming a freetrade area in accordance with the General Agreement on Tariffs and Trade. An example of a preferential trading area is the European Agreement: a treaty between the European Union and a non-European Union country that creates a framework for co-operation between them. 2) Free-trade Area A free-trade area is established by eliminating all tariffs and non-tariff barriers among the members' agreement in the trading nations, with each member maintaining a set of trade restrictions. The agreement can be

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limited to a few sectors or cover all aspects of international trade. It can also include formal mechanisms to resolve trade disputes. The North American Free Trade Agreement (NAFTA) which consists of Canada, Mexico, and the United States is an example of such an agreement. 3) Customs Union A customs union composes of a free-trade area, and is an agreement among the participating nations to remove all tariffs and non-tariff trade barriers. The aim for establishing a customs union would be to increase economic efficiency and build closer political/cultural ties between the member countries. An example would be Benelux which consists of Belgium, the Netherlands, and Luxembourg formed in 1948 and the Andean Group which consists of Bolivia, Colombia, Ecuador, Peru and Venezuela. 4) Common Market A common market represents a major step towards significant economic integration, eliminating all barriers to trade in goods among the member

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nations, adopting a common external tariff. In addition, it permits free movement of goods and services within the market. The many benefits of common market would be free full movement of factors for production between the member countries, and factors of production become more efficiently allocated with additional of increasing productivity. The European Union is an example to achieve such status of a common market in 1992. 5) Economic and Monetary Union The economic and monetary union is a union in which national, social, taxation, and fiscal policies are harmonized and administrated by supranational institution: an agreement is required to transfer economic sovereignty to a supranational authority. A final degree of economic union by the supranational monetary authority would be the unification of national monetary policies and which administrated the acceptance of the common currency. United States is an example of a monetary union.

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6) Complete Economic Integration The complete economic integration is the final stage of the economic integration. Political integration is required, and in order to be effective and it is necessary for all provinces to be at the same stage of the economic cycle. For effectiveness of the government policy to be maximized, it is best for the economic microcosms to be at the same stage of the economic cycle. In order to achieve economic harmonization, increasing central control would be necessary to pursue an economic area wide policy of combating inflation and promotion of stability. A loss of provincial political sovereignty is often scrutinized, but it is necessary to remove disparities. An example of complete economic integration is the United States which has federalist system of governance as it required political union to function as a single economy.

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