Economic Integration

The prompts:

a) There has been an increasing trend in different parts of the world for countries to engage in economic integration through the formation of trading blocs. Using suitable examples, explain the different types of trading bloc that may be formed. (10 marks)

b) Evaluate a country’s decision to join a free trade area (FTA) (15 marks)

Demands: prompt A demands that the student identifies and defines the different types of trading bloc. Then, with the use of examples for each type of trading bloc, the student must explain why these real world examples are accurate.

Prompt B demands an evaluation of an imaginary country’s decision to join a FTA. Evaluation in this case should likely include aspects like short term and long term effects, stakeholders, pros and cons, other consequences, and macroeconomic goals.

Definitions:

Free Trade Area

Sovereign countries belonging to a free trade area trade freely amongst themselves but have individual trade barriers with countries outside the free trade area. All members have most favoured nation status, which means that they are all treated equally.

Examples include the North American Free Trade Area (NAFTA) between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC) and the Common Market of Eastern and Southern Africa (COMESA).

Customs Union

In a Customs Union, countries have free trade amongst themselves, as in an FTA, but they are no longer fully sovereign over trade policy. There will be some degree of standardisation of trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union. The countries will be represented at trade negotiations with organisations such as the World Trade Organisation by supra-national organisations, e.g. the European Union.

Common Market

This trading bloc is a customs union, which has, in addition, the free movement of factors of production such as labour and capital between the member countries without restriction. Mercosur is an example of a common market comprising of a number of South American nations. The European Union is also a common market and people and capital can flow between EU members without restriction.

Economic Union

This is a common market where the level of integration is more developed. The member states may adopt common economic policies, e.g. the Common Agricultural Policy (CAP) of the European Union. They may have a common currency like the Euro in the EU. This will involve common monetary policy – in the case of the EU, monetary policy is operated by the European Central Bank (ECB) in Frankfurt.

Economic Integration from Power Point

Relevant Diagrams to Economic Integration

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