Small states and the nontraditional effects of economic integration

Abstract

Economic integration is a process which has, in recent decades, gained increased attention, particularly following the development of the European Union and the expansion of the regional integration agreements (RTA) lodged with the World Trade Organization, especially after 1995. Traditional economic theory indicates that the effects of economic integration are likely to be relatively stronger for small economies than for larger ones. The main reason is that small states cannot affect trading conditions, and thus, the power of imposing tariffs and other barriers to trade is negligible in influencing trade in international fora. The negative effects of tariffs are the loss in national welfare, with a redistribution of income from consumers (who are asked to pay higher prices) to local inefficient producers (who get protected) and governments (who use tariffs as a revenue-generating mechanism). For these reasons, economic integration for small countries is expected to offer more benefits than costs. The evaluation of the overall economic effect, however, depends on various factors.