International Economic Integration

What is international economic integration? Explain the various stages of international economic integration.

Countries around the globe have common economic objectives. Some of the objectives that nations share are decreasing unemployment, providing welfare, etc. These objectives are fulfilled with smooth functioning of trade between the two countries. Nations generally form trade agreements amongst themselves which facilitate such smooth functioning of trade. These agreements have led economies around the globe to become dependent on each other. Hence, we can define economic integration as a phenomenon where nations reduce trade barriers to achieve a common economic objective.

Stages/ Types of International economic integration

Preferential Trade Agreements: The first step towards facilitating smoother trade between nations is to reduce tariff barriers. Tariffs are taxes imposed on imports of goods or commodities. When nations reduce tariff barriers it is called as a preferential trade agreement.

Free Trade Agreements: Geographically closer nations form trade agreements such as decreasing tariff barriers only amongst themselves, whereas they continue to keep national barriers for other nations. An example for such a FTA is North American Free Trade Area (NAFTA).

Customs Union: When geographically closer nations form a union for free trade amongst themselves it’s called as a customs union. In such unions, a similar tariff is imposed by all the member countries on all the non members. This allows such unions to operate as one big nation. An example of such union is the southern cone common market (MERCOSUR), formed by Argentina, Brazil, Paraguay and Uruguay in 1991.

Full Economic Union: Full economic unions are equal to custom unions however differ from them on one ground .i.e. members are allowed to follow their own macroeconomic policies internally. The European Union is an example to a such an union.

Monetary Economic Union: A monetary union is one where nations forego their individual currencies and adopt a common currency between members. An example for such a union is the European Union.

Fiscal Union: When member countries of a union agree to follow similar fiscal policies such as taxation policy, government expenditure, borrowing etc then it’s called as a custom union.

Complete Economic Union: When economies form a monetary union, custom union, a single currency and have complete harmonization of all economic trade rules is called as a complete economic union.

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