Economic integration is the process by which different countries agree to remove trade barriers between them. Trade barriers can be tariffs (taxes imposed on imports to a country), quotas (a limit to the amount of a product that can be imported) and border restrictions.

There are four main types of regional economic integration.

1. Free trade area. This is the most basic form of economic cooperation. Member countries remove all barriers to trade between themselves but are free to independently determine trade policies with nonmember nations. For example, Canada, Mexico and the United States have formed the North American Free Trade Agreement (NAFTA), which reduces trade barriers between the three countries. On the integration scale NAFTA, would be at about 2 since Canada, the U.S. and Mexico are still free to set their own trade barriers on goods from other countries.
2. Customs union. This type provides for economic cooperation as in a free-trade zone. Barriers to trade are removed between member countries. The primary difference from the free trade area is that members agree to treat trade with nonmember countries in a similar manner. The Gulf Cooperation Council (GCC) is an example.
3. The single market is the midpoint of the integration scale between political and economic integration. It is the point at which the economies of the co-operating states become so integrated that all barriers to the movements of labour, goods and capital are removed. Like customs unions, there is a common trade policy for trade with nonmember nations. The primary advantage to workers is that they no longer need a visa or work permit to work in another member country of a common market. An example is the Common Market for Eastern and Southern Africa (COMESA).
4. Economic union. This type is created when countries enter into an economic agreement to remove barriers to trade and adopt common economic policies. A further step in the process of economic integration might be adoption of a common currency, with monetary policy regulated by a single central bank.An example is the European Union (EU).

Pros

The pros of creating regional agreements include the following:

Trade creation. These agreements create more opportunities for countries to trade with one another by removing the barriers to trade and investment. Due to a reduction or removal of tariffs, cooperation results in cheaper prices for consumers in the bloc countries. Studies indicate that regional economic integration significantly contributes to the relatively high growth rates in the less-developed countries.

Employment opportunities. By removing restrictions on labor movement, economic integration can help expand job opportunities.

Consensus and cooperation. Member nations may find it easier to agree with smaller numbers of countries. Regional understanding and similarities may also facilitate closer political cooperation.

Cons

The cons involved in creating regional agreements include the following:

Trade diversion. The flip side to trade creation is trade diversion. Member countries may trade more with each other than with nonmember nations. This may mean increased trade with a less efficient or more expensive producer because it is in a member country. In this sense, weaker companies can be protected inadvertently with the bloc agreement acting as a trade barrier. In essence, regional agreements have formed new trade barriers with countries outside of the trading bloc.

Employment shifts and reductions. Countries may move production to cheaper labor markets in member countries. Similarly, workers may move to gain access to better jobs and wages. Sudden shifts in employment can tax the resources of member countries.

Loss of national sovereignty. With each new round of discussions and agreements within a regional bloc, nations may find that they have to give up more of their political and economic rights. In the opening case study, you learned how the economic crisis in Greece is threatening not only the EU in general but also the rights of Greece and other member nations to determine their own domestic economic policies.