Economics of Integration and Globalisation - Principles
Gabriele Guaitoli (UAB)
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Economic Integration: What and Who
What is Economic integration?
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Economic Integration: What and Who
What is Economic integration?
Economic integration involves arrangements among institutions that
reduce trade barriers and align monetary and fiscal policies to
enhance trade and economic cooperation.
• “Institutions”: usually countries, but could be regions, cities, or industrial sectors
• Three dimensions:
1 Trade barriers (pecuniary and non-pecuniary)
2 Monetary policy
3 Fiscal policy
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A case for economic integration
Why do countries (or regions, or cities, or industrial associations) tend to integrate?
1 Comparative Advantages: Not all countries are equally “good” at the same
things
=⇒ more trade can increase productivity
2 Scale: Small markets are not efficient if there are economies of scale, learning,
fixed costs
=⇒ larger markets increase productivity
3 Geographical mismatch between demand and supply of capital and labour
=⇒ economic integration allows mobile factors to flow where most needed
4 Pooling: Larger markets tend to face less uncertainty, and have more bargaining
power
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Economic Integration: Why?
• Economic Reasons
• Expand markets, make use of comparative advantages to boost productivity and
employment
• Share technologies, innovation, skills
• Reduce economic uncertainty, protect members from short-term imbalances (e.g.
Euroarea, Common Agricultural Policy, Basel agreements on financial operators)
• Geopolitical Reasons
• Lobbying (e.g. Mercosur, OPEC)
• Discourage wars (both “trade” and “actual”) among members (ECSC, EEA and
EU) by creating common economic incentives
• Gain international strength and credibility (e.g. common foreign policy)
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Economic Integration: How?
• Negative integration: removal of existing barriers to the mobility of goods,
people, capitals
• Removal of tariffs
• Common standards
• Infrastructure projects to overcome geographical limitations
• Positive integration: creation of institution, or modification of existing ones, to
share sovereignty
• Sovra-national courts to rule on international disputes
• Institutions that favour regular coordination of member states (e.g. Council of
Europe)
• Institutions with autonomous power over shared sovereignty (European Parliament
and Commission)
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Levels of Integration
• A. Integration of goods markets
1 Free Trade Agreement (FTA): agreement reducing tariffs on a wide range of goods.
May involve some common standards.
2 Custom Union (CU): no trade barriers + common tariffs
• B. Integration of factor markets and policies
1 Common Market (CM): CU + factor integration
2 Monetary Union (MU): CM + common currency
3 Economic Union (EcU): MU + common fiscal policy
4 Political Union (PU): EcU + one government
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Levels of Economic Integration
Political Union (PU) EU (partly), US, Canada
Economic Union (EcU)
EU (partly)
Common fiscal policy
Monetary Union (MU)
Eurozone
Common currency
Common Market (CM)
EEA
Free factor trade
Custom Union (CU)
EEA + Switzerland
No trade barriers
Free Trade Agreement (FTA)
NAFTA
Reduction of tariffs
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Examples
• North American Free Trade Agreement (NAFTA)
• European Economic Area (EEA): a Common Market between EU and other
countries which agreed to follow all EU’s trade standards
• Switzerland has only sectorial agreements =⇒ EEA + Switzerland is almost (but
not fully) a Custom Union
• European Union (EU): a mix of CM (EEA) + MU (Eurozone) + EcU (Stability
Mechanism, EU Budget) + PU (Commission).
• Canada, US: theoretically full PUs, but several internal non-tariff trade barriers
Notice that while there is a theoretical hierarchy from FTA to Political Unions, this is
not always the case in practice.
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Custom Unions
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Monetary Unions
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Monetary Unions, plus Currency Pegs
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Effects of Integration
Economic Integration has two types of effects:
1 Static effects
• Arise due to direct effects of tariffs/policies/currency peg on terms of trade
• Trade diversion
• Creation of trade
2 Dynamic effects
• Arise due to changes in economic incentives and factor allocation
• Redistribution of surplus due to increased competition on goods, factors markets
• Growth from reallocation of factors to productive sectors, countries, firms
• Gains from economies of scale (lower costs, more incentives to innovate, ...)
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Integration, Globalisation, Cooperation
• Cooperation: working with other countries towards common goals, without
concession of sovereignty.
• Integration: Cooperation + creation of common institutions to favour long-term
integration of the economies
• Globalisation: the process through which distant individuals and markets are
becoming increasingly connected and inter-dependent
Integration or cooperation do not necessarily imply globalisation. Nor globalisation
requires explicit integration agreements to happen.
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Global value chains
• Many goods and services require complex production chains.
• Making bread is quite a complex business ...
• ... imagine making cars, aeroplanes, or microchips!
• Nowadays, most production chains are globalised, and vertically fragmented. We
talk about “global value added chains”.
• Global value added chains allow to make use of economies of scale, competitive
advantages, and procuring from the most competitive (or technologically
advanced) firms
• Unclear consequences for geopolitics and security:
• Reciprocal trade creates economic incentives to avoid conflict
• But dependence on strategic goods may increase costs of conflict for one side only
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Participation to Global Value Chains, 2015
Global Value Chains
(2015)
Innovative Activities
Advanced Manufacturing
and Services
Limited Manufacturing
High Commodities
Limited Commodities
Low Participation
Not Available (Data gaps)
Participation
Backward Participation
High
Forward Participation
Low
Sector
Limited Advanced Innovative
Commodities
Manufacturing Manufacturing Activities
Source: World Bank (2020) World Development Report 2020: Trading for Development in the Age of Global Value Chains, Washington: World Bank. Dr. Jean-Paul Rodrigue, Dept. of Global Studies & Geography, Hofstra University
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