International Economic Integration: Limits and Prospects

By Miroslav N. Jovanović | Go to book overview

7

Conclusion
Free trade and an unimpeded movement of factors is the first best policy in a world which does not have any distortions, but this is only a hypothetical scenario. The real situation is full of market imperfections that may be corrected and/or exploited by the employment of an economic policy (intervention). The rationale for international economic integration can be found in the case where market imperfections exist. When one distortion (e.g. a universal tariff of a country) is replaced by another (e.g. the common external tariff of a customs union) the net effect may be obscure. Theory about regional economic integration (an introverted economic strategy, to a degree) is the analysis of second best situations. It is, therefore, not surprising that general theoretical principles may not be found. What matters, however, is not solely the predictions of theory, but rather what happens in real life. The gains that international economic integration provides can be summarized as follows:
Integration extends, improves and secures the markets for a country’s goods and services against abrupt changes in the trade policy of partners in the future. Hence, integration can be seen as an ‘insurance policy’ against sudden and unilateral economic actions by partners in the deal.
Improvement in the efficiency of the use of resources due to increased competition, specialization and returns to scale. This increases average standards of living.
Integration results in more efficient manufacturing and service sectors.
Creation of new technologies, goods and services.
Integration reduces the cost of a national import-substitution policy.
International action limits, to an extent, the possibility for unnecessary public intervention in the economy because it extends the scope of economic policy across several countries.
Wider and secure markets increase investment opportunities for both domestic firms and TNCs. Expectations may be established with an increased degree of security.
Trade creation and trade diversion.

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