The Disadvantages of Regional Economic Integration

Regional economic integration agreements are treaties between member states in a particular region of the world such as Sub-Saharan Africa or the Middle East. These agreements are usually made between nations with smaller economies in order to promote trade within the region. However, they can have disadvantages, too.

How Regional Economic Integration Works

Regional economic integration is a type of trade liberalization treaty in the sense that the member states participating in the agreement decide to abolish tariffs and restrictive regulations that may hamper or discourage trade between each other. Tariffs and restrictions on trade with nations outside the agreement are retained. The idea is that the member states will be able to strengthen each other's economies through mutual support. Businessmen in the member countries will be motivated to trade and invest within the region because of the lack of tariffs or regulations.

Trade Diversion

Regional economic integration treaties are usually signed between nations with relatively small economies and a lack of foreign trade and investment. While these treaties are intended to promote increased trade within the region, they can have the unintended effect of reducing trade with nations outside the agreement, since those nations must pay tariffs and deal with other trade barriers while the member states don't. If the trade lost from non-member countries is greater than the trade gained from member countries through the agreement, the result is known as "trade diversion."

Investment Diversion

One of the problems faced by many smaller economies is a lack of foreign investment. Investment diversion is a potential economic disadvantage of a regional economic integration program. Foreign investors from outside the region may see a country that is a member of such an agreement as a less-attractive place to invest due to the higher burden of tariffs and regulations. As a result, the regional economic integration treaty can lead to a net loss in foreign investment.

Higher Costs

If participation in a regional economic integration agreement leads to decreased trade and investment with less-expensive markets outside the region while encouraging trade with more-expensive markets inside the region, it can result in higher costs to consumers. For example, if a company had previously located its factory in a nation outside the region with low production costs, but then decided to move its factory to a country inside the region with higher production costs due to the tariff and regulatory advantages, this could result in increased profits for the company but more expensive products for the consumer.