Etymology of integration

In economics, the word 'integration' was first employed in industrial organisation to refer to combinations of business firms through economic agreements, cartels, concerns, trusts, and mergers. Integration can be horizontal or vertical. Horizontal integration refers to combinations of competitors while vertical integration refers to combinations of suppliers with customers. Economic integration Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state. It is an economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. Aims and Objectives of Economic Integration Despite the fact that the general aim of making trade flourish remains the same, particular ob ectives of economic integration agreements have changed to correspond to modern political and economic circumstances. !hey include" #. Increase of Trade $hen foreign products are sub ect to tariffs, e%porters either have to accept the e%tra cost of trade or make do with a lesser volume of e%ported products. & basic element of economic integration policies is the abolition of part of the e%tra fees or even the full amount of them, making trade cheaper and giving e%porters a bigger incentive to do business with integrated economies. '. Allowing Consumers to Spend More Economic integration reduces or eliminates customs duties, which in turn results in cheaper imported products for consumers. !his way, the purchasing power of consumers grows, and with it, activity in the market. !he public can start buying more imported products or spend former

duty e%penses on other products or services. In addition, goods that are not produced sufficient (uantities in one country can be imported and distributed in the market with low cost. ). Movement of Capital *ovement of capital refers to the transfer of business or individual assets among countries. !he benefit of capital movement is the investment in new markets, leading to their eventual development. Economic integration removes barriers to foreign investors, minimizing or abolishing e%tra ta%, while advanced integration policies, such as a monetary union, can even eliminate the cost of currency e%change. *ovement of capital is recognized as an essential element of economic integration. +. Economic Cooperation !he concepts of economic cooperation and e(uitable economic development are the basis of economic unions. $hen economies within the integrated area encounter problems, it is the duty of other members to help, not only as a moral obligation, but because a failing economy can have serious effects in the whole integration process. Advantages of Economic Integration #. Trade Creation. *ember countries" En oy a wider selection of goods and services not previously available. &c(uire goods and services at a lower cost after trade barriers due to lowered tariffs or removal of tariffs. Encourage more trade between member countries. !he balance of money spend from cheaper goods and services can be used to buy more products and services. '. reater Consensus. It is easier to gain consensus amongst small memberships in regional integration.

). !olitical Cooperation. & group of nation can have significantly greater political influence than each nation would have individually. !his integration is an essential strategy to address the effects of conflicts and political instability that may affect the region. ,seful tool to handle the social and economic challenges associated with globalization.

+. Employment

Opportunities.

&s economic integration encourage trade liberation and lead to market e%pansion, more investment into the country and greater diffusion of technology, it create more employment opportunities for people to move from one country to another to find obs or to earn higher pay. -or e%ample, industries re(uiring mostly unskilled labour tends to shift production to low wage countries within a regional cooperation.

"isadvantages of Economic Integration #. Creation of Trading #locs. !his increases trade barriers against non.member countries. /on member countries of the trade bloc will be ostracised since trade blocs are created to help only their member countries reduce trade barriers. '. Trade "iversion. 0ecause of trade barriers, trade is diverted from a non.member country to a member country despite the inefficiency in cost. -or e%ample, a country has to stop trading with a low cost manufacture in a non.member country and trade with a manufacturer in a member country which has a higher cost. $ational Sovereignty.
Economic integration re%uires member countries to give up some degree of control over &ey policies li&e trade' monetary and fiscal policies. T(e (ig(er t(e level of integration' t(e greater t(e degree of controls t(at needs to be given up particularly in t(e case of a political union economic integration w(ic( re%uires nations to give up a (ig( degree of sovereignty.

Types of integration #. *arket integration" consumer and producer behaviour in different regions become geared to supply and demand condition in the whole geographical area covered by economic integration. &s integration deepens, price disparities between markets in individual countries are reduced as a result of increased trade and competition. 1rice

disparities for t(e

same good between countries disappear i.e. mar&et integration results in single mar&et wit( an identical price for' say' a car in all member countries.
'. 1olicy integration" the laws and regulations influencing consumer and producer behaviour in different regions become harmonised. !his involves member states pooling of decision making institutions on issues affecting all countries and results in common policies on environment, transport, employment, etc.

). $egative integration)

removal of all barriers to free movement of goods and T(e

production factors among member states e.g. abolition of custom duties' tariffs' non tariff barriers *$T#+s, etc.!ositive economic and social policies.
"egree of economic integration Economic integration is term used to describe how different aspects between economies are integrated. &s economic integration increases, the barrier of trade between markets diminishes. !he most integrated economy today, between independent nations, is the European ,nion and its euro zone. !he degree of economic integration can be categorized into si% stages"
integration)

coordination *(armonisation, or - in its strongest form -unification of

#. 1referential trading area '. -ree trade area ). 2ustoms union +. 2ommon market 3. Economic and monetary union 4. 2omplete economic integration !referential trading area *!TA, & preferential trade agreement is perhaps the weakest form of economic integration. & 1referential trade area 5also preferential trade agreement, 1!&6 is a trading bloc which gives preferential access to certain products from the participating countries. !his is done by reducing tariffs, but not by abolishing them completely. & 1!& can be established through a trade pact. It is the first stage of economic integration.

*otivations for 1referential !rading &rrangements

7everal reasons may be cited" #. 1!&s foster political stability and economic prosperity, thereby supporting the

continuation of the democratic process and reducing the likelihood of political and social disruption in those countries that are economically or politically important to the strategic interests of each other. '. 1!&s hasten the progress of multilateral trade negotiations and thus stimulate economic growth and development between member countries. !his is through substantial reduction in barriers to trade, particularly agriculture, intellectual property rights, services, non.tariff barriers, and dispute settlement procedures.

Effects of 1referential !rading &rrangements !hese can be divided into short term and long term effects.

S(ort Term Effects. !he short term effects of creating a 1!& are measured in terms of trade creation and trade diversion. In the case where there is full employment of domestic resources, trade creation increases the economic well.being of member nations because it leads to greater specialization in production and trade, lower consumer prices, and higher disposable incomes. 1!& members may import from one another certain goods not previously imported at all due to high tariffs. #. Trade Creation. !rade creation occurs when domestic production of one member nation is replaced by lower.
cost imports from another member nation. !he trade creation effect causes efficiency gains for member nations, because some countries shift from a higher.cost domestic source of supply of an item to a lower.cost foreign source. *ember countries eventually specialize in producing those items for which they have a comparative advantage.

& trade.creating 1!& may also increase the economic well.being of non.members since some of the increase in its economic growth will produce real increases in income that will, in turn, translate into increased imports from the rest of the world. 8ains from a 1!& are e%pected to be large if the tariff to be removed is large and if domestic supply and demand are more responsive to price changes over the long.run.

.. Trade "iversion. !rade diversion occurs when lower.cost imports from a non.member nation are prevented from entering the 1!& by tariff or nontariff barriers, and are replaced by higher.cost imports from a member nation. !rade diversion reduces world economic well.being since it shifts production from more efficient producers outside the 1!& to less efficient producers within the 1!&. !he international allocation of resources becomes less efficient, and production shifts away from the pattern suggested by comparative advantage. In reality, most attempts to create 1!&s contain both trade creation and trade diversion effects and may increase or decrease member welfare depending on the relative strength of the two

opposing forces. 1!&s will most likely lead to trade creation and increased economic well.being of member nations under the following conditions" a6 High pre.1!& trade barriers increase the probability that trade will be created

among members, rather than diverted from non.members to members. b6 !he more countries included in the 1!& and the larger their size, the more likely that low.cost producers will be found among member nations. c6 & 1!& formed by competitive, rather than complementary, economies is more likely to produce opportunities for specialization in production and trade creation. d6 $hen member nations are in close pro%imity to one another, transportation costs become less of an obstacle to trade creation. e6 If the 1!& contains countries with the lowest cost source of goods and services consumed by member nations, trade diversion is less likely to occur.

/ong Term Effects. 1!& formation can be e%pected to have ma or long term benefits that are important to participating nations. !he more important long term gains include" #. Increased 2ompetition. 1ossibly the most important single gain from a 1!& is the potential for increased competition. 0usinesses, especially those in monopolistic and oligopolistic markets, may become sluggish and complacent when protected by barriers to trade. $ith the formation of a 1!&, trade barriers among members are greatly reduced or eliminated, and producers must become more efficient to effectively compete with foreign firms. 7ome may succeed, some may merge with other firms and others will go out of business. !he higher level of competition is also likely to stimulate the development and adoption of new technology and new products. !he end result will be lower costs of production and, therefore, lower consumer prices for goods and services, new products, and improvements in product (uality. It is important that member country governments enforce the new trade rules if these competitive forces are to operate effectively. '. Economies of 7cale.

&nother benefit of 1!&s is that substantial economies of scale may become possible in the enlarged market area. If firms were previously serving only the domestic market, the e%panded market with the 1!& may create e%port opportunities. If the production process possesses economies of scale, the increase in output lowers per unit costs and the price charged to consumers. ). 7timulus to Investment. !he formation of a 1!& is likely to stimulate outside investment in production and marketing facilities to avoid the discriminatory barriers imposed on non.member products. In order for firms to meet the increased competition and take advantage of the enlarged market, investment is
li&ely to increase. In most cases' investment in a !TA area is an alternative to t(e e0port of products from non-member countries.

+. Efficient 9esource ,se.

-inally, if the 1!& is a common market, the free movement of labour and capital is likely to stimulate more efficient use of the economic resources of the entire bloc. :verall efficiency of industries and individual firms will likely increase with increased access to lower.cost capital and additional labour. ;ower consumer costs and higher real incomes should follow.

1ree trade area & free trade area 51TA6 is a trade bloc whose member countries have signed a free trade agreement 51TA6, which eliminates tariffs, import (uotas, and preferences on most 5if not all6 goods and services traded between them. If people are also free to move between the countries, in addition to -!&, it would also be considered an :pen 0order. It can be considered the second stage of economic integration. 2ountries choose this kind of economic integration if their economical structures are complementary. -ree trade areas allow the agreeing nations to focus on their competitive advantage and to freely trade for the goods they lack the e%perience at making, thus increasing the efficiency and profitability of each country. If their economical structures are competitive, they are more likely to form a customs union
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,nlike in a customs union, members of a free trade area do not have a common e%ternal tariff, which means they have different (uotas and customs as well as other policies with respect to non.members. !o avoid tariff evasion 5through re.e%portation6 the countries use the system of certification of origin most commonly called rules of origin, where there is a re(uirement for the minimum e%tent of local material inputs and local transformations adding value to the goods. :nly goods that meet these minimum re(uirements are entitled to the special treatment envisioned by the free trade area provisions. !o e%clude regional e%ploitation of zero tariffs within the -!& there is a rule of certificate of origin for the goods originating from the territory of a member state of an -!&. Objective of an 1.T.A !he aim of a free trade area is to reduce barriers to e%change so that trade can grow as a result of specialization, division of labour, and most importantly via comparative advantage. !he theory of comparative advantage argues that in an unrestricted marketplace 5in e(uilibrium6 each source of production will tend to specialize in that activity where it has comparative 5rather than absolute6 advantage. !he theory argues that the net result will be an increase in income and ultimately wealth and well.being for everyone in the free trade area. However the theory refers only to aggregate wealth and says nothing about the distribution of wealth< in fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter.party transfers. Additional ains from 1ree Trade

#. 1rotected markets in small countries do not allow firms to e%ploit scale economies. '. !he presence of scale economies favors free trade that generates more varieties and results in lower prices. ). -ree trade, as opposed to =managed> trade, provides a wider range of opportunities and thus a wider scope for innovation

/ists of free trade areas /orth &merican -ree !rade &rea. !his is one of the most well known free trade and was created because of the signing of the /orth &merican -ree !rade &greement 5/&-!&6, between 2anada, the ,nited 7tates and *e%ico. Every customs union, trade common market, economic union, customs and monetary union and economic and monetary union has also a free trade area

C2STOMS 2$IO$ & customs union 52,6 builds on a free trade area by, in addition to removing internal barriers to trade, also re(uiring participating nations to harmonize their e%ternal trade policy. !his includes establishing a common e%ternal tariff 52E!6 and import (uotas on products entering the region from third.party countries, as well as possibly establishing common trade remedy policies such as anti.dumping and countervail measures. & customs union may also preclude the use of trade remedy mechanisms within the union. *embers of a 2, also typically negotiate any multilateral trade initiative 5such as at the $orld !rade :rganization6 as a single bloc. 2ountries with an established customs union no longer re(uire rules of origin, since any product entering the 2, area would be sub ect to the same tariff rates and?or import (uotas regardless of the point of entry. !he elimination of the need for rules of origin is the chief benefit of a customs union over a free trade area. !o maintain rules of origin re(uires e%tensive documentation by all -!& member countries as well as enforcement of those rules at borders within the free trade area. !his is a costly process and can lead to disputes over interpretation of the rules as well as other delays. & 2, would result in significant administrative cost savings and efficiency gains. In order to gain the benefits of a customs union, member countries would have to surrender some degree of policy freedom @ specifically the ability to set independent trade policy. 0y e%tension, because of the increased importance of trade and economic measures as foreign policy tools, customs unions place some limitations on independent foreign policy as well.

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#enefits of a Customs 2nion *ost economies on their own are too small to attract any ma or meaningful investment in todays globalize economy, 0ut with custom unions where mass production is vital helps to reduce unit costs. 0y moving towards the creation of one economic region through the 2ustoms ,nion, it helps in the creation of a single market and a combined 8D1. !his large economic region is meaningful if it is more than a simple aggregation of neighboring countries. !he E&2 2ustoms ,nion assists to level the playing field for the regionAs producers by imposing uniform competition policy and law, customs procedures and e%ternal tariffs on goods imported from third countries, which should assist the region to advance its economic development and poverty reduction agenda. 2ustoms union help to promote cross.border investment and serve to attract investment into the region, as the enlarged market with minimal customs clearance formalities, is more attractive to investors than the previously small individual national markets. 2ustoms ,nion will offer a more predictable economic environment for both investors and traders across the region, as regionally administered 2E! and trade policy tend to be more stable. 1rivate sector operators based in the region with cross.border business operations are able to e%ploit the comparative and competitive advantages offered by regional business locations, without having to factor in the differences in tariff protection rates, and added business transaction costs arising from customs clearance formalities. !he regionally based enterprises get better protection, as enforcement of the 2E! is at a regional level. *ost importantly, however, is the signaling effect that arise from the member 7tates agreeing to implement a common trade policy in their relationship with the rest of the worldB !his is important in view of the developments at global level, where countries are entering into economic partnership as regional groupings. &d ustment of the national e%ternal tariffs to the common e%ternal tariff result into ma or welfare gains for consumers, if the 2E! on finished goods will be lowered as a result of such
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ad ustment.

Objectives of t(e Customs 2nion !he main ob ective of the customs union is formation of a single customs territory. !herefore, trade is at the core of the customs union. It is within this conte%t that internal tariffs and non.tariff barriers hinder trade between the partner states have to be eliminated, in order to facilitate formation of one large single market and investment area. 7imilarly, policies relating to trade between the partner states and other countries, such as the e%ternal tariffs, have to be harmonized. !herefore, within a customs union, partner states have to behave as a single customs territory and trading bloc. !he aim of creating one single customs territory is to enable partner states to en oy economies of scale, with a view to supporting the process of economic development. ,nlike in developed countries, economic integration is not ust for purpose of trade per se, but as a vehicle for bringing about faster economic development.

/evertheless, a customs union on its own will not bring about faster economic development. !herefore, it has to be supported by other measures such as development of infrastructure, to link production areas to markets. In addition, measures to support development of human resources across the region are similarly important. COMMO$ MA34ET & 2ommon *arket is a merger?union of two or more territories to form one common territory in which there is free movement of goods, labour, services and capital, and the right of establishment and residence. !he basic elements of a common market are" C & smoothly functioning customs union including complete elimination of all tariff and non tariff barriers plus a common e%ternal tariff

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C -ree movement of persons, labour, services and right of establishment and residence C -ree movement of capital within the 2ommunity C Enhanced macro.economic policy harmonization and coordination particularly with regards to fiscal regimes and monetary policy C 7etting up, strengthening and empowering the necessary institutions?organs to support the common market operations 5in the case of the E&2 these include the East &frican 2ourt of Dustice and the East &frican ;egislative &ssembly6 & common market represents a ma or step towards significant economic integration. In addition to containing the provisions of a customs union, a common market 52*6 removes all barriers to the mobility of people, capital and other resources within the area in (uestion, as well as eliminating non.tariff barriers to trade, such as the regulatory treatment of product standards. Establishing a common market typically re(uires significant policy harmonization in a number of areas. -ree movement of labour, for e%ample, necessitates agreement on worker (ualifications and certifications. 2ommon market is also typically associated @ whether by design or conse(uence @ with a broad convergence of fiscal and monetary policies due to the increased economic interdependence within the region and the effect that one member countryAs policies can have on other member countries. !his necessarily places more severe limitations on member countriesA ability to pursue independent economic policies. !he principal advantage of establishing a common market is the e%pected gains in economic efficiency. $ith unfettered 5loose6 mobility, labor and capital can more easily respond to economic signals within the common market, resulting in a more efficient allocation of resources. Objectives of t(e EAC Common mar&et !he overall ob ective of the E&2 2ommon *arket is to widen and deepen cooperation among the 1artner 7tates in the economic and social fields for the benefit of the 1artner 7tates and their citizens.

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