Economic Integration

Economic Integration

Economic integration can be defined as a kind of arrangement where countries get in agreement to coordinate and manage their fiscal, trade, and monetary policies in order to be mutually benefitted by them.

There are many degrees of economic integration, but the most preferred and popular one is free trade. In economic integration no country pays customs duty within the integrated area, so it results in lower prices both for the distributors and the consumers. The ultimate aim of economic integration is to increase trade across the world.

Three fundamental factors that derived economic integration

1. Improvements in the technology of transportation and communication have reduced the costs of transporting goods, services, and factors of production and of communicating economically useful knowledge and technology.
2. The tastes of individuals and societies have generally, but not universally, favored taking advantage of the opportunities provided by declining costs of transportation and communication through increasing economic integration.
3. Public policies have significantly influenced the character and pace of economic integration, although not always in the direction of increasing economic integration.

Advantage of Economic Integration

1.Progress in trade.

All countries that follow economic integration have extremely wide assortment of goods and services from which they can choose. Introduction of economic integration helps in acquiring goods and services at much low costs. This is because the removal of trade barriers reduces or removes the tariffs entirely. Reduced duties and lowered prices save a lot of spare money with countries which can be used for buying more products and services.

2.Ease of agreement.

When countries enter into regional integration, they easily get into agreements and stick to them for long periods of time.

3.Improved political cooperation.

Countries entering economic integration form groups and have greater political influence as compared to influence created by a single nation. Integration is a vital strategy for addressing the effects of political instability and human conflicts that might affect a region.

4.Opportunities for employment.

The various options available in economic integration help to liberalize and encourage trade. This results in market expansion due to which high amount of capital is invested in a country’s economy. This creates higher opportunities for employment of people from all over the world. They thus move from one country to another in search of jobs or for earning higher pay.

5.Beneficial for financial markets.

Economic integration is extremely beneficial for financial markets as it eases firm to borrow finances at low rate if interest. This is because capital liquidity of larger capital market increases and the resultant diversification effectreduces the risks associated with high investment.

6.Increase in Foreign Direct Investments.

Economic integration helps to increase the amount of money in Foreign Direct Investment (FDI). Once firms start FDI, through new operations or by merger, takeover, and acquisition, it becomes a international enterprise.

Thus economic integration is a win-win situation for all the firms, people and the economies involved in the process. Is has become a preferred strategy for most countries of the world.

The degree of economic integration

Can be categorized into six stages:

1. Preferential trading area
2. Free trade area
3. Customs union
4. Single market
5. Economic and monetary union
6. Currency union
7. Fiscal union
8. Complete economic integration

Free Trade Area (FTA)

A free trade area occurs when a group of countries agree to eliminate tariffs between themselves, but maintain their own external tariff on imports from the rest of the world. The North American Free Trade Area is an example of a FTA. When the NAFTA is fully implemented, tariffs of automobile imports between the US and Mexico will be zero. However, Mexico may continue to set a different tariff than the US on auto imports from non-NAFTA countries. Because of the different external tariffs, FTAs generally develop elaborate "rules of origin". These rules are designed to prevent goods from being imported into the FTA member country with the lowest tariff and then transshipped to the country with higher tariffs. Of the thousands of pages of text that made up the NAFTA, most of them described rules of origin.

Customs Union

A customs union occurs when a group of countries agree to eliminate tariffs between themselves and set a common external tariff on imports from the rest of the world. The European Union represents such an arrangement. A customs union avoids the problem of developing complicated rules of origin, but introduces the problem of policy coordination. With a customs union, all member countries must be able to agree on tariff rates across many different import industries.

Common Market

A common market establishes free trade in goods and services, sets common external tariffs among members and also allows for the free mobility of capital and labor across countries. The European Union was established as a common market by the Treaty of Rome in 1957, although it took a long time for the transition to take place. Today, EU citizens have a common passport, can work in any EU member country and can invest throughout the union without restriction.

Economic Union

An economic union typically will maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labor, and will also relegate some fiscal spending responsibilities to a supra-national agency. The European Union's Common Agriculture Policy (CAP) is an example of a type of fiscal coordination indicative of an economic union.

Monetary Union

Monetary union establishes a common currency among a group of countries. This involves the formation of a central monetary authority which will determine monetary policy for the entire group. The Maastricht treaty signed by EU members in 1991 proposed the implementation of a single European currency (the Euro) by 1999. The degree of monetary union that will arise remains uncertain in 1998.

Perhaps the best example of an economic and monetary union is the United States. Each US state has its own government which sets policies and laws for its own residents. However, each state cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to the federal government. Goods, services, labor and capital can all move freely, without restrictions among the US states and the Nations sets a common external trade policy.

MALAYSIAN ECONOMIC INTEGRATION

Top Trading partners (2007)

Country / Share (%)
USA / 13.4
Singapore / 13.2
Japan / 10.9
China / 10.6
Thailand / 5.1
South Korea / 4.3
Taiwan / 4.1
Hong Kong / 3.8
Indonesia / 3.5
Germany / 3.4
Others / 27.5

Source: MATRADE

Food and Beverage (2009)

Malaysian Export (various product)

Malaysian FDI

1