Economic integration is a term standing for unification of states by partial or full abolishment of customs tariffs on inner border of the states as a main feature of this phenomenon. This, in turn leads to less prices (no customs duties are paid within integrated area) and drastically increases trade. Trade stimulation effect due to economic integration has been a foundation for second best theory: first best option is free trade, with free competition and no whatsoever trade barriers. Since free trade is treated as an idealistic option, although realized within certain developed states, second best option seems fair term to describe economic integration.

Increase of welfare has been recognised as a main objective of economic integration. Increase of trade between member states of economic unions mainly leads to increase of the GDP of its members, and hence, to better welfare - a goal of any state around the world. This is one of the reasons of the global scale in development of economic integration as phenomenon which has now achieved a degree of continental (ASEAN, NAFTA, SACN, EU, EurAzEC) and intercontinental (EAFTA, US-EU FTA) economic blocks.

The foundation of the theory of economic integration was laid out by Jacob Viner (1950) who defined trade creation and trade diversion effects, terms introduced for the change of interregional flow of goods caused by changes in customs tariffs due to creation of economic union. He considered trade flows between two states prior and after their unification, and compared them with the rest of the world. His findings became and still are the foundation of the theory of economic integration. Next attempts to enlarge the static analysis towards 3 states+world (Lipsey et all) were not as successfull.

The basics of the theory were summated by the Hungarian Economist Béla Balassa in the 1960s. As economic integration increases, the barriers of trade between markets diminish. Probably, one of the most integrated economy today, between independent nations, is the European Union and its euro zone. The USA is also economically and politically integrated country as it has unified 50 different states (US states), but this was achieved (current political and economic structure) via civil war, and not by steady peaceful development according to the stages of economic integration (based on historically recent, XX-XXI century experience of economic integration development).

Dynamic part of international economic integration theory such as the dynamics of the trade diversion and trade creation effects, Pareto-efficiency of the factors (labor, capital) and value added, mathematically was introduced by Ravshanbek Dalimov (Modelling International Economic Integration: an Oscillation Theory Approach, Victoria, Trafford, 2008; and The dynamics of the trade creation and diversion effects under international economic integration, Current Research Journal of Economic Theory, 2009, vol. 1, issue 1; www.maxwellsci.com). This provided interdisciplinary approach to previously static theory of international economic integration, showing what effects take place due to economic integration, as well as enabling to implement results of non-linear sciences to the dynamics of international economic integration.

Equations describing: a) enforced oscillations of pendulum with friction; b) predator-prey oscillations; c) heat and/or gas spatial dynamics (heat equation and Navier-Stoxes equation) were successfully applied towards: a) the dynamics of the GDP; b) price-output dynamics and dynamic matrix of the outputs of economy; c) regional and inter-regional migration of labor income and value added as well as trade creation and trade diversion effects (inter-regional output flows). Straightforward conclusion from the findings is that one may use accumulated knowledge of exact and natural sciences (physics; biodynamics; chemical kinetics) and continue to apply them towards the analysis and forecasting of economic dynamics. At the same time, this approach sharply differs from the most of econometric methods since it uses none of regression models currently considered as a main tool in forecasting an economic parameters.

Dynamic analysis of economic integration has started from introducing the new definition of the GDP initially proposed as a difference between aggregate revenues of sectors and investment (modification of the value added definition of the GDP). It was able to analytically prove that all the states gain from economic unification, with larger states receiving less growth of GDP and productivity, and vice versa concerning lesser states benefit. Although this fact has been empirically known for decades, now it was also shown as being mathematicly correct. Qualitative finding of dynamic method is similarity of a coherence policy of economic integration and a mixture of previously separate liquids in a retort: they finally get one colour and become one same liquid. Economic space (tax, insurance and financial policies, customs tariffs etc.) all finally become the same along with the stages of economic integration.

Another important finding is direct link provided between the dynamics of macro- and micro-economic parameters such as evolution of industrial clusters and the GDP's temporal and spatial dynamics. Specifically, dynamic approach analytically described main features of the theory of competition summated by M.Porter stating that industrial clusters evolve from initial entity further gradually expanding within their geographic proximity. It was analytically found that geographic expansion of industrial clusters goes along with toggle raise of their productivity and technological renovation.

Economist Fritz Machlup traces the origin of the term 'economic integration' to a group of five economists writing in the 1940s, including Wilhelm Röpke, Ludwig von Mises and Friedrich von Hayek.^[1] Economic integration was a foundational plank of US foreign policy after World War II.^[2]

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. Complete economic integration

All of them differ by degree of unification of economic policies, with the highest one in political union of the states.

Free trade area (FTA) is formed by at least two states partially or fully abolishing custom tariffs on their inner border. To exclude regional exploitation of zero tariffs within the FTA there is a rule of certificate of origin for the goods originating from the territory of member state of an FTA. Customs union introduces unified tariffs on exterior border of the union (CET, customs exterior tariffs). Common market adds unification of economic policies (tax, social welware benefits etc.). Economic union introduces supranational bodies, one single currency and gradually moves towards political union. In fact, Balassa believed that supranational common markets, with their free movement of economic factors across national borders, naturally generate demand for further integration, not only economically (via monetary unions) but also politically--and, thus, that economic communities naturally evolve into political unions over time.

Experience of economic integration in current understanding as phenomenon starts probably since the creation of South African Union (1910), which to some degree was further implemented in Belgium-Luxemburg economic union; Benelux; and European Coal and Steel union.

Among the requirements of successfull development of economic integration are permanency in its evolution (gradual expansion and each time higher degree of the stage of economic/political unification); a formula of sharing the joint revenues (customs duties, licensing etc.) between member states (per capita); a formula in adopting the decision both economicly and politically; a will of making concessions between developed and developing states of the union.

Coherence policy is also a must for permanent development of economic unions being also a property of economic integration process. Historically success of the European Steel and Coal Union opened a way for the formation of EEC which had much more than just 2 sectors in the ECSU. So the coherence policy was implemented to use different speed of economic parameters unification (coherence) applied both to economic sectors and economic policies in general.

Obstacles standing as barriers for development of economic integration include naturally present preservation of the control of tax revenues and licensing by local powers, sometimes requiring decades to passing them under control of supranational bodies. Experience of 1990-2009 has shown radical change in this pattern, when the world has observed economic success of the EU. So now no one disputes benefits of economic integration: the only way is when and how it happens, what exact benefits it may bring to a state, and what kind of negative effects may take place.

Economists argue that negative consequences of economic integration include suppression of local industries causing unemployment. The others say that there is no other way to exist in current global economic environment for a state if it wishes to prosper. Conslusion is to prepare a state for economic integration before it will actually take place. There are different models how to do it. South East Asian model of economic integration is an export oriented, while Latin American one has fully open doors to imports consequently forcing local manufacturers to increase the standards in production.

An important consequence is a unification of financial markets due to economic integration which caused global turbulence since the beginning of 2008 economic crisis. So now, when global unification of the markets preceeded formal global economic unification, it is a time for the global regulation of the markets. At the same time, it is impossible without global supranational bodies being in place - as a main dilemma in discussions on main panels of the world (G8; G20; UN General Assembly), which is pushed by economic development and stopped at political level as well as by cultural differences of the states (e.g., Iran and Israel). An example of recent unprecedented development of economic integration is formation of East Asian Free Trade Area (EAFTA): ASEAN has proposed to Japan (along with India and China) to join EAFTA, and Japan declined to do it. China's consent to enter EAFTA has forced Japan in a matter of avalanche to sign respective agreements, since otherwise it would place Japanese goods to become cost-inefficient (more expensive) and hence loose its competitiveness both regionally and globally.

[edit] See also

• List of international trade topics
• Trade pact
• Trade bloc
• Regional integration

[edit] Notes

Balassa, В. Trade Creation and Trade Diversion in the European Common Market. The Economic Journal, vol. 77, 1967, pp. 1-21.
Dalimov R.T. Modelling international economic integration: an oscillation theory approach. Trafford, Victoria 2008, 234 p.
Johnson, H. An Economic Theory of Protection, Tariff Bargaining and the Formation of Customs Unions. Journal of Political Economy, 1965, vol. 73, pp. 256-283.
Johnson, H. Optimal Trade Intervention in the Presence of Domestic Distortions, in Baldwin et al., Trade Growth and the Balance of Payments, Chicago, Rand McNally, 1965, pp. 3-34.
Jovanovich, М. International Economic Integration. Limits and Prospects. Second edition, 1998, Routledge.
Lipsey, R.G. The Theory of Customs Union: Trade Diversion and Welfare. Economica, 1957, vol. 24, рр.40-46.
Меаdе, J.E. The Theory of Customs Union.” North Holland Publishing Company, 1956, pp. 29-43.
Negishi, T. Customs Unions and the Theory of the Second Best. International Economic Review, 1969, vol. 10, pp. 391-398
Porter M. On Competition. Harvard Business School Press; 1998; 485 pgs.
Riezman, R. A Theory of Customs Unions: The Three Country–Two Goods Case. Weltwirtschaftliches Archiv, 1979, vol. 115, pp. 701-715.
Ruiz Estrada, M. Global Dimension of Regional Integration Model (GDRI-Model). Faculty of Economics and Administration, University of Malaya. FEA-Working Paper, № 2004-7
Tinbergen, J. International Economic Integration. Amsterdam: Elsevier, 1954.
Tovias, A. The Theory of Economic Integration: Past and Future. 2d ECSA-World conference “Federalism, Subsidiarity and Democracy in the European Union”, Brussels, May 5-6, 1994, 10 p.
Viner, J. The Customs Union Issue. Carnegie Endowment for International Peace, 1950, pp. 41-55.
INTAL; http://www.iadb.org/intal/index.asp?idioma=ENG

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