4.4 Economic Integration

Question 1

What are the 6 types of economic intergration?

Answer 1

• Preferential Trade Agreement (PTA)
• Free Trade Agreement (FTA)
• Custom Union
• Common Market
• Economic Union
• Political Union

Question 2

What is a “ Preferential Trade Agreement (PTA)”?

Answer 2

This is a discriminatory trade agreement. It is a trading bloc which gives preferential access to certain products from the participating countries.
This is done by reducing tariffs, but not by abolishing them completely.

Question 3

What is a “Free Trade Agreement (FTA)”?

Answer 3

Tariffs (a tax imposed on imported goods) between member countries are significantly reduced, some abolished altogether.
The general goal of free trade agreements is to develop economies of scale and comparative advantages, promoting economic efficiency.

Question 4

What is a “Custom Union”?

Answer 4

Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries; a common trade regime is achieved. Custom unions are particularly useful to level the competitive playing field and address the problem of re-exports (using preferential tariffs in one country to enter another country). Movements of capital and labour remain restricted.

Question 5

What is a “Common Market”?

Answer 5

A common market is a formal agreement where a group is formed amongst several countries that adopt a common external tariff. In a common market, countries also allow free trade and free movement of labour and capital among the members of the group. The trade arrangement is aimed at providing improved economic benefits to all the members of the common market.

Question 6

What is an “Economic Union”?

Answer 6

All tariffs are removed for trade between member countries, creating a uniform market. There are also free movements of labor, enabling workers in a member country to move and work in another member country. Monetary and fiscal policies between member countries are harmonized. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro).

Question 7

What is a “Political Union”?

Answer 7

Represents the potentially most advanced form of integration with a common government and where the sovereignty of a member country is significantly reduced. Only found within nation-states, such as federations where there are a central government and regions (provinces, states, etc.) having a level of autonomy over well defined matters such as education.

Question 8

Give a possible example of a political union:

Answer 8

USA

Question 9

Give a possible example of an economic union:

Answer 9

European Union

Question 10

What is the difference between Free Trade Agreement (FTA) and Preferential Trade Agreement (PTA)?

Answer 10

A PTA gives preferential access to certain products from member states, reducing some tariffs.

An FTA however reduces all tariffs significantly between member stats (even abolishing some entirely)

Question 11

What are similarities and differences between a Custom Union and a Common Market?

Answer 11

Both are groups of countries which set the same external tariffs on third countries.

In a custom union movement of labor and capital is restricted, whereas in a common market there is free movement.

Question 12

What are some advantages of trading blocs?

Answer 12

• Tariff removal leads to trade creation – lower prices for consumers and greater opportunity for exporters.
• Increased trade enables increased specialisation – which gives benefits of economies of scale
• Gives small countries a greater say in global trade agreements
• Increased competition. The removal of tariffs creates greater choice for consumers. Therefore domestic firms have a greater incentive to cut costs to remain competitive.

Question 13

What are some disadvantages of trading blocs?

Answer 13

• Joining a customs union may lead to increased import tariffs – which leads to trade diversion.
• Increased interdependence on economic performance in other countries in trading block. (If Eurozone goes into recession, it will affect all countries in the Eurozone.)
• Loss of sovereignty and independence. A trading block needs to make decisions for the whole area.
• Increased influence of multinationals.

Question 14

What are some benefits for the UK of being in the European Union?

Answer 14

• According to the Treasury, EU migrants in the UK are net contributors to the British economy. This is because EU migrants tend to be younger than the average Briton. They, therefore, pay more tax and require less government assistance in terms of health care and pensions. Without this net migration, there would be a greater strain on the government’s budget deficit as it seeks to fund its public services.
• Students within the EU can study in any member state for marginal prices as compared to those who do not come from an EU country. This is beneficial for Britain because there is a lot of diversity and having nominal prices for millions of students attracts a lot of intellectual talent into Britain, which will likely stay there
• The UK is the third largest recipient of investment in the world. One of the reasons for this is because it provides businesses with access to the single market of the EU

Question 15

What are some drawbacks for the UK of being in the European Union?

Answer 15

• Little to no control over monetary policy means that if there is an issue with the British economy that is specific to Great Britain, there is no guarantee that the monetary policy set by the European Central Bank is going to help the country to overcome their economic troubles. Alone, Britain has control over their own economy, thus can better tackle economic recessions, overheating of the economy and other issues that arise.
• By excluding themselves from the European Union, Britain is able to benefit from having their own seat in the World Trade Organisation, as well as other large organisations. This will allow the best interests of Britain to always be the centre of their priorities, rather than the collective priorities with 27 other countries.
• EU membership fee – Going forward with BREXIT would mean that the British government would no longer have to pay the £137 million per week EU membership fee, a total annual fee equal to 2% of the government annual budget. Which could be potentially spent elsewhere, perhaps to counter the loss of trade deals, by lowering tariffs since they would have a larger disposable budget.

Question 16

What is a “trade diversion”?