Economic Integrations

Any kind of an agreement in which countries decide to coordinate their trade, fiscal, and/or monetary policies is referred to as economic integration. It can be noted that if countries cooperate and set zero tariffs against each other, then both countries are likely to benefit relative to the case when both countries attempt to secure short-term advantages by setting optimal tariffs. This is just one advantage of cooperation. Benefits may also accrue to countries who liberalize labor and capital movements across borders, who coordinate fiscal policies and resource allocation towards agriculture and other sectors and who coordinate their monetary policies. Basically, there are many different degrees of integration. It often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not possible otherwise. One reason supporters of free trade may support regional trade an arrangement is because they are seen to represent movements towards free trade. Section 24 of the original GATT allows signatory countries to form free trade agreements and customs unions in spite of the fact that preferential agreements violate the principle of non-discrimination. When a free trade area or customs union is formed between two or more WTO member countries, they agree to lower their tariffs to zero between each other but will maintain their tariffs against other WTO countries. Thus, the free trade area represents discriminatory policies. Presumably the reason these agreements are tolerated within the WTO is because they represent significant commitments to free trade, which is another fundamental goal of the WTO. The types of economic integration include preferential trade agreement (PTA), free trade agreement (FTA), customs union, common market, economic union and monetary union. Some economists are also concerned if regional trade agreements may make it more difficult, rather than easier, to achieve the ultimate objective of global free trade. Whether economic integration increases a country's welfare and raises economic efficiency depends on the extent to which the arrangement causes trade diversion versus trade creation.