Regional integration is a process in which neighboring countries enter into agreements to enhance economic cooperation. Some countries prefer regional cooperation to multilateral trade negotiations under the World Trade Organization (WTO) because it is easier to achieve and require less time. Also, regional integration is even less politically controversial.
Stages and purposes of regional integration
Regional integration can take the form of several economic collaborations, ranging from simple to complex. They are:
- Free trade area. It is the free movement of goods and services between members by reducing tariffs. But, each member country has a different policy for trade with non-members.
- Customs union. Same as the free trade area, but member countries have uniform policies related to trade with non-members.
- Common market. Free flow is not only goods and services but also factors of production such as labor and capital.
- Economic union, the common market plus member countries carry out uniform economic policies. Therefore, in its implementation, economic unions need the formation of joint institutions, such as the European Central Bank, in the European Union.
- Monetary union. It is an advanced form of the economic union, where member countries adopt a common currency — examples such as the Euro in Eurozone member countries.
The objectives of regional cooperation vary depending on each form of collaboration. At the most basic level, the partnership aims to reduce the costs of goods and services.
For complex collaboration, the ultimate goal is not only to increase the free flow of goods and services but also to harmonize their economic policies. The economic position of members in the global economy expands, and that is often important in international negotiations as well as in dealing with external shocks.
Factors that encourage regional integration
In addition to joint economic and social issues, cooperation is formed due to the foundation of shared cultural heritage. Its formation was also driven by the impact of globalization and the establishment of trade blocs in other regions.
Pros and cons
Integration reduces the cost of goods and services because of tariff reductions. Also, the free flow allows production factors allocation at their most valuable uses, encourages a more efficient allocation of resources.
Tight competition leads to efficiency and technological innovation. Regional integration allows businesses to be free in and out of member countries, thereby increasing competition.
The formation of a shared market also creates a bigger market. A bigger market means a significant opportunity to make more revenue and profits.
But regional cooperation also contains some weaknesses. Shocks in one country can easily and quickly spread to other member countries, as happened in the Greek and Italian crises. That requires thoughtful and measurable steps. A few mistakes can cause regional, or even international, shock.
Increased competition can kill strategic industries in a member country. Unemployment rises and lasts long if labor mobility is low. And, it is politically disadvantageous.
