Understanding Economic Integration (DP IB Economics)

Revision Note

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Economic integration occurs as countries reduce trading barriers between themselves and become more interdependent
There are several ways in which economic integration can deepen

There are 4 common types of trade agreements

A preferential trade agreement (PTA) is an agreement between two or more countries providing preferential (better)
terms and conditions of trade to member countries
- E.g. Vietnam has preferential tariff rates with Australia
A bilateral trade agreement is a preferential trade agreement between two countries and aims to reduce or eliminate barriers to trade
- E.g. Vietnam signed a bilateral trade agreement with Korea in 2015
A regional trade agreement (RTA) is a preferential trade agreement usually between more than two countries in the same geographical region
- E.g. Armenia created an agreement with the EU in 2019 to create the EU-Armenia RTA
A multilateral trade agreement is a legally binding preferential trade agreement between more than two countries or trading blocs and is usually negotiated and overseen by the World Trade Organisation (WTO)
- E.g. The East African Community was created in 2005 between seven African countries

There are generally three types of trading blocs - Free Trade Areas (FTAs), Customs Unions, and Common Markets
- Each successive bloc has a higher level of integration

Advantages and Disadvantages of Trading Blocs

Advantages

Disadvantages

Greater access to markets offer the potential for economies of scale
With freedom of labour, there are greater employment opportunities
Membership in a trading bloc may allow for stronger bargaining power in new multilateral negotiations
Greater political stability and cooperation between the countries within the bloc due to the increased interdependence
Trade Creation
Trade creation occurs when a regional trade agreement (RTA) leads to the expansion of trade between member countries. By eliminating or reducing trade barriers, such as tariffs or quotas, within the agreement, member countries can access new markets and increase their trade volumes.

Loss of sovereignty as nations increasingly give up their autonomy, perhaps most visible when joining a monetary union (nations lose the ability to set their own monetary policy)
Multilateral trading negotiations become more challenging as countries within a trading bloc have to maintain the existing bloc rules when dealing with third-party countries
Trade Diversion
Trade diversion occurs when a regional trade agreement redirects trade away from more efficient external suppliers towards less efficient internal suppliers It can sometimes lead to higher costs and reduced efficiency due to the loss of access to lower-cost suppliers outside the agreement

Monetary Unions often develop once there is integration at a Common Market level
Nations in the Common Market may desire the creation of a common central bank and convergence of monetary policy

Last updated: 16 March 2024

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