Stages and forms of economic integration explained in detail
There are many stages and forms of economic integration, reaching, according to experts, five different and distinct phases, arranged according to their depth and degree of influence.
The first phase is free trade
Free trade, in which tariffs (a type of tax levied on imported goods) between member countries are greatly reduced and in some cases eliminated altogether.
Each member country maintains its own tariffs, including its own economic policies. The overall goal of free trade agreements is to develop economies of scale and comparative advantage and to increase economic efficiency.
One problem relates to dispute settlement since FTAs often provide limited dispute resolution mechanisms and mechanisms.
As such, they are subject to the specific influence of their respective countries and can lead to different results depending on the size of their economies.
A large, complex economy that has a free trade agreement with a smaller economy is in a better position to negotiate favorable terms.
The second phase of a customs union
A customs union, where a common external tariff is established between member countries, means that the same tariffs apply to third countries and a common trading system is achieved. Customs unions are particularly useful for leveling the playing field and solving re-export problems (using preferential tariffs from one country to enter another), but the movement of capital and labor remains limited.
The third phase of the Common Market
The Common Market allows free movement of services and capital in member countries, expanding economies of scale and comparative advantage, but each national market has its own rules, such as product standards.
The fourth stage is the single market.
An economic union (single market) where all tariffs on trade between member countries are removed, creating a single market, along with the free movement of labor, allowing workers from one member country to move and work in another.
Harmonization of monetary and fiscal policies among member countries implies a degree of political integration. Another step involves monetary union, the use of a common currency, as in the case of the European Union (the euro).
The fifth step of political union
A political union, which is the most advanced form of integration, has a coalition government in which the sovereignty of the member states is greatly reduced and is found only within nation-states, such as a federation in which there is a central government and regions (provinces, states, etc.) with a certain degree of autonomy in clearly defined issues, such as education.
As the level of economic integration increases, so does the complexity of its regulation. This includes a set of regulations, enforcement and arbitration mechanisms to ensure compliance by importers and exporters. This complexity comes at a cost and can undermine the competitiveness of regions affected by economic integration.
Because it makes national policies less flexible and removes autonomy, a shift in responsibility for economic integration can occur if the complexity of economic integration and the constraints it generates are no longer perceived as acceptable by its members, including the loss of sovereignty. [1]
The Importance of Economic Integration
It is clear from this study that economic theory and international experience emphasize the importance of economic integration as follows
1- Small countries become richer when they are deeply integrated into the global economy.
2- Economic integration can facilitate access to a broader consumer base, more skilled workers, more sources of financing, and new technology.
3- A larger market with a level playing field in which all companies can compete can emerge.
4- Shake up rigid industries controlled by tight-knit domestic political and business elites and encourage innovation.
5- Economic integration can create an environment in which existing companies can grow and become more productive or exit the market, allowing new companies to emerge and succeed or fail quickly and cheaply.
A real-life example of economic integration
The European Union (EU) was created in 1993 and in 2019 includes 28 member countries, 19 of which have adopted the euro as a common currency since 2002. According to the International Monetary Fund (IMF), the EU accounts for 16.04% of global GDP.
Britain voted to leave the EU in 2016 In January 2020, U.K. lawmakers and the European Parliament voted to exit the U.K. The goal is to complete the exit by January 2021.
Benefits of economic integration
Economies of scale.
For individual countries, with their small domestic markets and limited ability to expand production, economic integration helps provide unlimited access to a wide range of products produced in member countries.
International specialization
Through economic integration, member countries can specialize more in their own production processes and products.
Specialization depends entirely on the various advantages of cost comparisons as well as a specific geographic location, and therefore to a certain extent can lead to important productions for the member countries.
Improved product quality
This is one of the most important benefits that can result from economic advances.
There is regional cooperation between the economies of different countries, and this can indeed lead to rapid changes in many technological aspects, which in addition occur on a larger and more efficient scale.
Employment expansion
There are many different countries in the process of economic integration, and since these countries are organized into regional economic blocs, there is unlimited movement in terms of national and regional employment, and since different countries practice economic integration in the best possible way, there will undoubtedly be an increase in some jobs due to the increased demand for their labor.
Improved trade.
This is another important benefit that can come from economic integration, and it is certainly one of the best: through this process, the bargaining power that member countries can have with the world will improve.
Economic efficiency
Through the economic integration that takes place between the countries of the region, competition between them will increase.
Through this process, the economic efficiency of this bloc will increase, which of course is very beneficial to the member countries.
Conditions for economic integration
1- One of the conditions for economic integration is geographical convergence, a condition that is very important for the success of integration and its promotion and facilitation of the movement of labor, services, and goods within the region, which includes the integration process.
2- Political will Since the lack of political will inevitably lead to the failure of economic integration, governments need to create institutions before regional integration can take place.
3- Economic homogeneity that can be integrated, here integration takes place between more than one economy that has a similar homogeneity of structure that can be integrated.
4- The availability of means of transportation and communication, where there is no transportation and communication between complementary national economies because it reduces the possibility of specialization of production and commercial expansion between the integrated countries. [3]
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