The modern industrial system rests upon such techniques that can be employed economically only if the production takes place on a very large scale. This requires expanding markets on the one hand and increasing purchasing power with the people on the other.
For the fullest exploitation of the production potential of the modern techniques, certain countries having small internal geographical markets, have attempted to organise themselves into regional groupings. The economic integration, in the broadest sense, means the unification of distinct economies into a single larger economy.
The tariffs and other restrictions upon trade are applied in a discriminatory manner. Such discrimination is of two forms—country- discrimination and commodity-discrimination. The economic integration, according to Salvatore, is the “commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together.”
Thus the economic integration refers to an arrangement whereby two or more countries combine into a larger economic region through the removal of discontinuities and discriminations existing along national frontiers, while following a common tariff and trade policies against the countries outside the group.
Tinbergen has defined economic integration as “the creation of the most desirable structure of international economy, removing artificial hindrances to the optimum operation and introducing deliberately all desirable elements of co-ordination and unification.” Tinbergen has distinguished-between the negative and positive aspects of integration.
The negative aspects of integration involve the removal of discrimination and restrictions on the movement of goods among the member countries. The positive aspects of integration involve the adoption of such policy measures and institutional arrangements as facilitate the removal of market distortions within the given economic region.
The economic integration can be understood both as a process and as a state of affairs. As a process, it is concerned with the measures which aim at abolition of discrimination between economic units belonging to different nation states. As a state of affairs, it can be treated as an area comprised of different nation states among which there is an absence of various forms of discrimination.
There are two essential features of economic integration:
(i) Re-introduction of free trade among the member nations.
(ii) Imposition of a common external tariff policy against the non-member countries.
From these two features, it follows that economic integration is a synthesis between free trade and tariff protection.
Benefits of Economic Integration:
The economic integration between two or more countries brings the following main benefits:
(i) Economies of Scale:
The individual countries, having small internal market, have limited capacity to expand production. The economic integration provides an unrestricted access of the products produced by any member country. This gives strong inducement to expand production and exploit fully the economies of scale.
(ii) International Specialisation:
The economic integration enables the member countries to attain a greater degree of specialisation in both products and processes. Specialisation based on comparative cost advantage by a specific geographical region can cause considerably large expansion in production.
(iii) Qualitative Improvement in Output:
The regional economic co-operation among a number of countries leads to rapid technological changes and larger and easier capital movements. The member countries, in such favourable conditions, can bring about qualitative improvement in production.
(iv) Expansion of Employment:
As some countries organise themselves into regional economic groups and allow unrestricted flow of labour within the region, there can be maximisation of employment and income.
(v) Improvement in Terms of Trade:
The economic integration greatly increases the bargaining power of the member countries vis-a-vis the rest of the world. That brings about a significant improvement in their terms of trade.
(vi) Increase in Economic Efficiency:
The economic integration results in increased competition within the region. That helps in maintaining a higher level of economic efficiency of the group as a whole.
(vii) Improvement in Living Standard:
As some countries organise themselves into regional groups, there is easier availability of superior varieties of goods at competitive prices. The increase in employment opportunities and the purchasing power too contributes in improving the living standards of the people.
(viii) Increase in Factor Mobility:
The economic integration leads to dismantling of barriers upon the movement of labour and other factors among the member countries. Increased factor mobility enlarges employment; lowers factor costs; and promotes productive activity in all the member countries.
Forms of Economic Integration:
The essence of economic integration is the economic co-operation among the participating countries.
On the basis of the degree of cooperation, the economic integration can be of the following main forms:
(i) Preferential Trade Area or Association:
The preferential trade area or association is the most-loose form of economic integration. In this arrangement, the member countries lower tariffs on imports from each other. It means they offer preferential treatment to the member countries.
As regards the outside world, they continue to maintain their individual tariffs. The best instance of preferential trade area or association is the Commonwealth System of Preferences, established in 1932. It is headed by Britain and includes all the Commonwealth countries.
(ii) Free Trade Area:
In this form of economic integration, the member countries abolish completely both tariff and quantitative trade restrictions among themselves. However, each member country is free to maintain its own trade barriers against the non- member countries. An important example of free trade area is the European Free Trade Association (EFTA).
This association was formed in November, 1959. It included such countries as United Kingdom, Austria, Denmark, Norway, Sweden, Portugal, Switzerland and Finland as associate members. Another such association is Latin American Free Trade Association (LAFTA). It was formed in June 1961 by 10 Latin American countries.
(iii) Customs Union:
A more formal type of integration among two or more countries is the customs union. In this form of integration, the member countries abolish all tariffs and other barriers on trade among themselves. As regards the rest of the world, they adopt a common external tariff and commercial policy.
The customs unions and free trade area are similar in respect of abolition of all trade barriers for the member countries. But the customs union is distinct from the free trade area in respect of the common external tariff against the non-member countries.
In case of free trade area, the member countries retain their own tariff and other trade barriers against the non-member countries. Thus customs union is a more closely- knit form of integration than the free trade area. In a customs union, all the member countries act as a single economic unit against the non-member countries.
The customs union has been defined by GATT as the Substitution of a single customs territory for two or more customs territories, so that:
(i) Duties and other regulations of commerce…….. are eliminated with respect to substantially all trade between the constituent territories of the Union or at least with respect to substantially all the trade in products originating in such territories, and
(ii) The same, duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union. J.E. Meade explained that a customs union is characterised by “complete freedom of movement of goods and services within the territories of the member countries or a common tariff applicable to all the member countries of the customs union and a common tariff adopted by all the member countries of the customs union with respect to the rest of the world.”
The most important instance of a customs union is the European Economic Community formed by West Germany, France, Italy, Belgium, the Netherlands and Luxembourg in 1957.
The theory of customs union was first of all given by Jacob, Viner in 1950. According to him, customs union ensures, on the one hand, increased competition among the members and, on the other, an increased measure of protection against trade and competition from the rest of the world. Viner clearly stated that the synthesis of elements of competition and protection might or might not increase the welfare of the member nations.
Jacob Viner’s pioneering work in this field was followed by the contribution made by the writers like J.E. Meade (1955), R. G. Lipsey (1957), H.G. Johnson (1962), J. Vanek (1965), Cooper and Masell (1965), Murry Kemp (1969), J. Bhagwati (1971), P.J. Lloyd (1982) and many others.
(iv) Common Market:
The common market signifies a more unified arrangement among a group of countries than the customs union. The common market involves the abolition of tariff and trade restrictions among the member countries and adoption of a common external tariff. It goes even beyond that and allows free movement of labour and capital among the member nations.
Thus in case of a common market, there is a free and integrated movement of goods and factors among the member countries. The European Common Market (ECM) called also as the European Economic Community (EEC) is the best example of the common market.
(v) Economic Union:
The most advanced form of economic integration involving the greatest degree of co-operation is the economic union. In case of an economic union, two or more countries form a common market. In addition, they proceed to harmonise and unify their fiscal, monetary, exchange rate, industrial and other socio-economic policies. The member countries attempt to have a common currency and banking system.
An example of economic union is BENELUX (including Belgium, Netherlands and Luxembourg) which was formed in 1948 initially as a customs union bat later got converted into an economic union in 1960. These countries have now joined the EU. The European Economic Community (EEC) has transformed itself into an economic union called as European Union (EU) in 1991.
An interesting recent development, based on the principles of integration, has been the duty-free zones or economic zones. Such areas have been set up in different countries or regions with the object of attracting foreign investment through duty-free imports of raw materials and intermediate products.