ABSTRACT
Economic integration describes the process whereby the economies of independent nation states unify progressively in response to the removal of barriers both to trade in goods and services (product markets), and to the movement of factors of production (factor markets). The degree of economic integration achieved between two or more countries is, therefore, directly linked to the extent to which restrictions to the free flow of goods, services, capital, and labour (the “four freedoms”) are eliminated, and national product and factor markets are opened to international competition. The theory of international economic integration examines the economic effects that result from these measures. The crucial difference between the economic theory of integration on the one hand, and general international trade theory on the other, is that integration theory deals with situations in which national product and factor markets concessions are restricted to a specific group of countries, rather than being available to all trading partners. Its starting point, therefore, is the analysis of preferential trading arrangements in which a number of countries agree to eliminate obstacles to trade and factor flows between themselves, but also agree to retain restrictions against such flows originating outside the area. As the removal of national barriers to the “four freedoms” proceeds, the process of economic integration gathers pace until, in the final instance, national product and factor markets effectively combine to become a single market. One of the main sets of questions that the economic theory of integration addresses concerns the impact that these arrangements have on global economic welfare. In other words, assuming that global free trade results in the optimal allocation of productive resources and maximizes global economic welfare, what will be the impact on global economic welfare from a move to free trade that involves a limited number of countries under the guise of a preferential trading area? Is this likely to increase welfare or reduce it?
