IBEconomicsHLRevision Notes4. The Global Economy4.4 Economic Integration4.4.1 Understanding Economic Integration

Understanding Economic Integration (HL IB Economics)

Revision Note

Steve Vorster

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

4-4-1-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


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

 

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 

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

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Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.