In the following video I will explain the different levels of economic integration between
countries, specifically through examining trade agreements and levels of economic integration.
I found this nicely organised chart on Wikipedia that has a laid out visualisation of economic
integration.
At the very top we have preferential trade agreements and at the very bottom, which is
the most integrated, we have complete economic integration.
For the CIE syllabus, you need only focus on four stages.
I will explain them next.
We’ll start with an explanation of a free trade area and move through full economic
union.
As we progress through the spectrum, we will be discussing greater economic integration.
First up is the free trade area.
In this stage of economic integration, the member countries’ government agree to remove
or significantly reduce trade barriers with each other.
The agreement only addresses the trading policies of these countries with each other.
This means that countries do not set policies towards countries not in the free trade area.
For example, NAFTA is an agreement between the US, Canada and Mexico.
They must adhere to the policies of the agreement when trading with each other, but do not share
common policies towards non-NAFTA members like Brazil, the United Kingdom and China.
Next we’ll examine a customs union.
In this stage of economic integration countries not only establish a free trade area, but
they also set a common external tariff.
This build on the free trade area by sharing a protectionist policy towards countries outside
of the agreement.
An example of this would be the Southern African Customs Union (SACU), which is includes five
countries of Southern Africa: Botswana, Lesotho, Namibia, South Africa and Swaziland.
The collected revenue from the common external tariff is shared out between member countries.
Thirdly, we’ll consider a monetary union.
This exists when a group of independent countries share a single currency.
These countries, while maintaining sovereignty on economic policy, taxes, and similar issues,
have transferred responsibility for monetary policy to a central bank shared by participating
members.
The most famous monetary union is the eurozone.
It is important here to distinguish between the eurozone and the European Union.
The eurozone offers benefits including the elimination of exchange rates, reducing transaction
costs etc. and making it easier for members to conduct cross border trade which promotes
more growth and stability to the member states.
A country can be in the European Union but not use the euro as their currency.
Members of the European Union have joined in order to form a political and economic
organisation.
The hope is that the larger body can act as a global representative in the pursuit of
benefits for the member countries.
19 out of 28 members of the EU currently use the euro.
Finally, we’ll consider full economic integration.
A full economic union includes a common market with a customs union.
Member countries share polices on regulation, the freedom of movement of goods and services
as well as the movement of the factors of production (including labour).
They also share a common external trade policy.
If it includes sharing the same currency, it becomes an economic and monetary union.
If you want to try an interesting exercise, try applying what you’ve just learned to
this graphic.
Take a second to pause it and see if it makes sense.
Share your comments below!
That brings us to the end of this video on the stages of economic integration.
I hope you've found the information helpful in developing your understanding.
If you have any questions, leave them below, email me at enhancetuition@gmail.com or visit
my website at www.enhancetuition.co.uk.
That’s us done for now and I will see you in the next one!