Understanding Economic Integration (DP IB Economics)

Economic Integration

• Economic integration occurs as countries reduce trading barriers between themselves and become more interdependent
   

• There are several ways in which economic integration can deepen

1. Through the development of trade agreements

2. Through the creation of trading blocs

3. Through the formation of a monetary union
    

1. Trade agreements

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

2. Trading Blocs

• 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

3. Monetary Unions

• 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