Economic Integration

Unit 13 - Lesson 8.1

Learning outcomes:
Explain that preferential trade agreements give preferential access to
certain products from certain countries by reducing or eliminating
tariffs, or by other agreements relating to trade.
Distinguish between bilateral and multilateral (WTO) trade
agreements.
Distinguish between a free trade area, a customs union and a
common market.
Compare and contrast the different types of trading blocs.
Explain that economic integration will increase competition among
producers within the trading bloc.
Explain that different forms of economic integration allow member
countries to gain from economies of scale.

Economic Integration
Refers to the Economic
cooperation between
countries including
coordination of economic
policies to varying degrees.

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Preferential Trade Agreements - PTA

Agreement between two or more countries
to lower or remove trade barriers on specific
goods or labor.
Trade barriers remain on those goods not
included in the agreement.
Some PTAs can include agreements on:
1.
2.
3.

Labor standards
Environmental issues
Intellectual property rights
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Preferential Trade Agreements - PTA

Bilateral Trade Agreements: Agreement made between two countries.
Multilateral Trade Agreements: Agreement made between more than
two countries.
Regional Trade Agreements: Agreement made with countries within a
particular region of the world.
The aim of all Preferential Trade Agreement is to liberalize trade by
removing or limiting trade barriers between the countries involved.

Trading Bloc
Trading Bloc:
Group of countries who have agreed to reduce or eliminate trade barriers
encouraging freer trade among the members.
Types of Trading Blocs:
1. Free Trade
2. Customs Union
3. Common Market

Trade Bloc - Free Trade

Free Trade Area:
A group of countries who agree to
work to eliminate trade barriers
between the member countries.
Each individual country retains the
right to place trade barriers on nonmember countries.
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Trade Bloc - Custom Unions

Custom Unions:
Have all the same characteristics as a Free
Trade area with the goal of reducing trade
barriers between countries.
However, the Custom Unions members
agree upon and adopt a common trade
barrier policy with all other countries.
No longer does a country have the ability to
adopt their own trade policies toward other
non-member countries.

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Trade Bloc - Common Market

Common Market:
Even higher degree of Economic Integration than Custom Unions.
Member countries agree to remove all Trade Barriers that exist between
the member countries.
Member countries continue to have a common external policy on trade
with nonmember countries.
Members of the Common Market also agree to allow the free movement
of all factors of production between member countries.

Advantages of a Trade Bloc

1. Increased Competition: removal of Trade Barriers increases the
competition among producers. It forces producers to become more
efficient. With Trade Barriers, inefficient producers are protected.
2. Ability to expand market share: With the removal of Trade Barriers,
this allows Producers access to other markets to sell their goods.
3. Economies of Scale: In a small domestic market, firms do not have
the ability to achieve Economies of Scale. With the ability to expand
into other markets/countries firms are able to expand and better
achieve Economies of Scale

Advantages of a Trade Bloc

1. Consumer benefit with lower prices and increase in choice.
2. Increased investment by firms: with the ability to expand into
other markets, firms invest more in their production thus aiding
employment and Economic Growth.
3. Better Allocation of Resources: with the ability of capital to flow
unhindered between countries, there becomes a more efficient
allocation of the Factors of Production.
4. Political Advantages: with these agreements in place, countries
are less likely to have hostilities towards one and other.

Possible Disadvantages of Trade Blocs

1. May not be the Best Way to Achieve Trade Liberalization:
Trading Blocs have a greater chance of discrimination between
countries thus negatively affecting Trade Liberalization.
2. May Create Obstacles Towards Achieving Global Free Trade:
with the possibility of discrimination this may hinder the ability to
achieve Global Free Trade.
3. Unequal Gains and Losses: Agreements between countries could
make a country better off at the expense of another country.