International Economic Integration Pdf

[Cecelia Seiner]

Economicintegration can come with downsides and risks. Primarily, countries participating in regional integration may have divergent priorities when it comes to fiscal and monetary policy. Resolving such conflicts can be challenging and costly in terms of time and resources. In addition, economic integration can create a system in which a select group of stakeholders reap the economic benefits, such as more revenue from trade, while others bear the costs, such as job market shifts. These are important considerations to weigh when assessing the value of economic integration.

Economic integration can increase trade, benefiting both producers, consumers, and involved countries. For instance, with the elimination of trade barriers, a firm may be able to produce and sell more products, earning more revenue, and increasing their home country's gross domestic product (GDP). For customers in other countries, they can count on having more product selection and potentially lower costs, as well.

Three fundamental factors have affected the process of economic globalization and are likely to continue driving it in the future. First, improvements in the technology of transportation and communication have reduced the costs of transporting goods, services, and factors of production and of communicating economically useful knowledge and technology. Second, the tastes of individuals and societies have generally, but not universally, favored taking advantage of the opportunities provided by declining costs of transportation and communication through increasing economic integration. Third, public policies have significantly influenced the character and pace of economic integration, although not always in the direction of increasing economic integration.

These three fundamental factors have influenced the pattern and pace of economic integration in all of its important dimensions. In particular, this paper discusses three important dimensions of economic integration: (1) through human migration; (2) through trade in goods and services; and (3) through movements of capital and integration of financial markets. After examining how fundamental forces have influenced economic integration in these dimensions, the paper concludes with reflections on three issues of general importance to the future course of global economic integration: the importance of communication as an influence on integration; the possibility that we may see a sharp reversal in the general trend of increasing integration, as occurred in the interwar period; and the apparent end of imperialism as a mechanism of integration. Before turning to this agenda, however, it is important to emphasize a key theme that will recur in subsequent discussion: the main factors that drive the process of economic integration exert not only independent influences but also interact in important and complex ways.

The tastes that people have and develop for the potential benefits of closer economic integration are themselves partly dependent on experience that is made possible by cheaper means of transportation and communication. 2 For example, centuries ago, wealthy people in Europe first learned about the tea and spices of the East as the consequence of limited and very expensive trade. The broadening desire for these products resulting from limited experience hastened the search for easier and cheaper means of securing them. As a by-product of these efforts, America was discovered, and new frontiers of integration were opened up in the economic and other domains. More recently, if less dramatically, it is clear that tastes for products and services produced in far away locations (including tastes exercised through travel and tourism), as well as for investment in foreign assets, depend to an important degree on experience. As this experience grows, partly because it becomes cheaper, the tastes for the benefits of economic integration typically tend to rise. For example, it appears that as global investors have gained more experience with equities issued by firms in emerging market countries, they have become more interested in diversifying their portfolios to include some of these assets.

For the victor who succeeded in subjugating or driving out a rival society, the result would probably be an improvement in economic welfare. The loser, of course, would lose. The overall result presumably was negative sum. Indeed, in the first work in the entire field now known as social science, Thucydides opens his History on the Peloponnesian War with the following observation:

Turning to human migration in more recent times, it is useful to distinguish between mass migrations which have continued to occur in response to wars and political and social turmoil, and migrations of individuals and families undertaken primarily for economic reasons. Of course, the two categories are not completely distinct; individual and family decisions about migration are often affected by both economic and non-economic factors. Nevertheless, events such as the mass migrations in Europe that occurred during and immediately after World War II clearly reflect different fundamental factors than those that were primarily at work in influencing migration to the United States during the past two centuries.

As the noted historian Oscar Handlin observed, America is a nation of immigrants. The greatest surge of immigrants came during the period from the end of the Civil War up to the start of World War I, especially during the first decade of this century; see Charts 1 and 2. Economic considerations, including the cost of transportation mainly explain why immigration was particularly high during this period, with fluctuations in annual immigration flows reflecting (with a short lag) business cycle conditions in the United States.

Even in the early part of the 19th century, the United States was, relatively, a rich country. Average per capita income was roughly comparable to that in England, but the average American worker and his family probably lived better than the average English working family. The gap between America and much of the rest of Europe was substantial. However, travel from Europe to America was neither cheap nor fast nor without risks. A sailing ship could easily take a month to make the voyage. During colonial times, if a poor man wanted to immigrate, he could secure passage by agreeing to become an indentured servant, usually for five to seven years.

If the conditions for factor price equalization did apply, there would be no economic benefit from international mobility of factors of production. Full economic efficiency could be achieved exclusively through trading outputs. 6 A key reason why the conditions for factor price equalization do not fully apply is because of barriers to trade in outputs that effectively prevent the equalization of relative output prices at different locations. These barriers take two forms: natural barriers to trade in the form of transportation costs and also costs of information about product prices and availabilities at different locations; and artificial barriers to trade arising from tariffs, quotas, and other public policy interventions. Indeed, even if the broader conditions for factor price equalization (e.g., identical technologies with constant returns to scale) and, consequently trade in goods alone (without factor mobility) is not sufficient to achieve full international economic integration, a focus on natural and artificial barriers to trade is still important in assessing the extent to which international economic integration through trade achieves as much as is possible through this channel. Specifically, if there were literally no natural or artificial barriers to trade in goods or services, then the relative prices of all goods and services would be equalized everywhere, and integration through the channel of trade would be perfect and complete. In practice, of course, there are important natural and artificial barriers to trade which preclude such perfection. 7 In general, the higher are the barriers to trade, the lower will be the degree of international integration through trade, and conversely. Thus, it is relevant to consider what has been happening to barriers to trade as a means of assessing what has been happening to international economic integration through this important channel.

The development of ocean-going sailing vessels beginning in the late 15th century expanded the horizons for trade to a truly global scale. However, despite gradual and cumulatively substantial improvements in transportation technology, during the era of sail high sea transportation costs (including risks from piracy or misadventure) generally remained an important barrier to trade over substantial distances. For most goods, shipping by land for more than a few score miles was prohibitively expensive. 8 Shipping by water across the Atlantic or, even more so, between Europe and Asia was mainly restricted to goods with high ratios of value to weight and substantial disparities in relative prices between distant trading locations. Unlike recent times when there is a good deal of two-way intra-industry trade in very similar products, trade over long distances consisted primarily of products which were not produced domestically or of payment flows of gold and silver. Gradually, as sailing vessels became larger and piracy and other hazards to ocean-borne commerce were reduced., ocean-borne shipping costs did decline significantly and longer-distance trade expanded as a result. Nevertheless, well into the 1800s, transportation costs remained an important natural barrier to global trade.

The invention and development of steam-powered iron ships during the second half of the 19th century further reduced the costs of ocean shipping. By the end of the century, the cost of shipping a ton of cargo across the Atlantic was probably less than one-fifth of what it had been at the start of the century.9 This reduction in shipping costs contributed importantly to the expansion of world trade and to the range of products participating in that trade.

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