Econonomic integration

S25 Economic Integration

Define Economic Integration:

Describes a process whereby countries coordinate and link their economic policies.

As the degree of economic integration increases, the trade barriers between countries decrease and their fiscal and monetary policies start to synchronize.

Differentiate between bilateral trade agreements and multilateral trade agreements.

                                                                                                                                                                                                               Examples

Bilateral	•A bilateral trade agreement is an agreement relating to trade between two countries. The aim is usually to reduce or remove tariffs and/or quotas that have been placed on items traded between the two countries.
Multilateral	•A multilateral trade agreement is an agreement relating to trade between multiple countries. It also usually aims to reduce or remove tariffs and/or quotas that have been placed on traded items, but the agreement applies to all the multiple countries involved.

Illustrate and Explain

Trade Creation

Trade Diversion

Trading Blocs: Defined as a group of countries that join together in some form of agreement in order to increase trade between themselves or to gain economic benefits from cooperation on some level. This coming together is economic integration.

Advantage and disadvantages

1. Exchange rate fluctuations will disappear eliminating uncertainty

2. Enhanced currency credibility should be more stable against speculation

3. Business confidence in member countries tends to impove b/c less risk is perceived which should lead to growth

4. Exchange transaction costs are eliminated within the union

5. Common currency makes price differences more obvious so over time

•Though they clearly favor increased trade among members; they may be discriminatory against non-members.

•Discriminatory policies can be damaging to multilateral trading negotiations of the WTO.

•They may even undermine international trade rules and limit potential gains to trade achievable with more liberalized world trade.

•The downsides to trading blocs may be more obvious for small or poor economies that have little bargaining power.