IB Economics

Ch 25: Economic Integration

Integration Issues

• Globalization

• Trading Blocks

• Obstacles to Economic Integration (HL)

• Trade Creation & Trade Diversion

Globalisation

• Increased integration leading to global not national markets– Liberalized capital flows– Liberalized trade– IT advances– Reduction in transport costs

• Globalisation has rapidly increased since 1980’s• The role of MNCs• Integrated international production• FDI and MNCs

MNC Facts

• 25% of worlds output• 51 of the largest economies are MNCs

and not countries• More than 60,000 MNCs• The combined revenue of MMCs is greater

than the US economy• MMCs have been widely criticized and we

will examine their role in developing economies in Unit 5

Trading Blocks

• DEF: a group of countries, agreement to increase trade

• Béla Balassa’s 6 stages of integration– Preferred trading areas– Free trade areas– Customs unions– Common markets– Economic and monetary union– Complete economic integration

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Preferred Trading Areas (PTA)

• Preferential access to certain products/markets• Reduced but not eliminated tariffs/protection• E.g. EU and ACP (Africa, the Caribbean & the

Pacific) – 71 countries– Guarantees raw materials for EU– Allows ACP to enjoy reduced tariffs– Allows ACP access to funds to help with price

stabilization schemes e.g. agriculture and mining

Free Trade Areas

• Countries agree to trade without protection

• E.g. NAFTA– US, Canada and Mexico– Started in 1994– Virtually all trade is now without tariffs– Increased trade flows between the countries

Free Trade Area Diagram

MEXICOUSA

CANADA COUNTRY X

Customs Union

• Free trade between members

• Common External Tariff (CET)

• E.g. Switzerland-Liechtenstein customs union

• All common markets and economic & monetary unions are also customs unions

Customs Union Diagram

MEXICOUSA

CANADACOUNTRY

X

Common Markets

• A customs union with common policies on product regulation, and the free movement of goods and services, capital and labour

• EU

• CARICOM Single Market and Economy (CSME)

Economic & Monetary Union

• A common market with a common currency

• Eurozone

Complete Economic Integration

• The FINAL stage!

• No control of domestic economic policy

• Monetary union

• Complete fiscal harmonisation

• Sound familiar?

An Evaluation of Trading Blocks

• Similar analysis to free trade

• May increase FDI from within and outside of the bloc

• Political stability

• Easier world trade negotiations (like trade union theory)

• May increase barriers between blocs