What Is Regional Economic Integration?

Regional economic integration is an agreement among countries in a geographic region to reduce and ultimately remove, tariff and non tariff barriers to the free flow of goods or services and factors of production among each others. It can be also refers as any type of arrangement in which countries agree to coordinate their trade, fiscal, and/or monetary policies are referred to as economic integration. Obviously, there are many different levels of integration.

Free Trade Area: 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.

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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.

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.

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.

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.

Regional Economic Integration plays a major importance role in global trade. It enhances trade among member through the elimination of customs barriers, and to quickly and substantially improves the allocation of resources and general dynamism, by fostering greater competition among the participating countries and by providing more incentives for the introduction of new and rapidly changing technologies and production methods. It helps to accelerate national investments and foreign direct investments in order to acquire international competitiveness in the face of increasing globalization.

Regional Economic Integration stimulates economic growth in countries and provides additional gains from free trade beyond international agreements such as GATT and WTO. Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation. Together, the countries have the economic clout to enhance trade with other countries or trading blocs.