The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Theory of Economic Integration: A Review

  • Nigel Grimwade
Reference work entry


The theory of economic integration is the branch of economics concerned with analysing the effects of different forms of integration on the economies of member states and the rest of the world. Its relevance for Europe is the progress made since the foundation of the European Community and European Free Trade Area in 1958 and 1960 in dismantling trade barriers, adopting a common external tariff (in the case of the EC), establishing a single market and, more recently, creating a common currency. The basic theory of customs union, first expounded by Viner in 1950 and later extended by Meade and Lipsey, provides the theoretical foundation on which the theory of integration rests. While Viner’s work was important in showing that customs unions and free trade areas are not always welfare-enhancing and may even lower global economic welfare, in its simple form the theory was incomplete. It focused mainly on the short-run effects of regional integration and failed to provide a convincing rationale for why countries enter into such arrangements. Subsequently, Viner’s analysis was modified and added to by relaxing some of the more limiting assumptions on which it rested, preparing the way for a deeper understanding of the integration process. In particular, our understanding of how integration affects countries was strengthened by the incorporation of economies of scale and terms of trade effects, which Viner had largely ignored.

Beginning in the 1980s, important advances were made by extending the analysis to incorporate the effects of increasing returns and imperfect competition. An important role in this respect was played by the emergence of the new trade theories. The launching of the Single Market programme in 1987 led to greater attention being given to the effects of deep integration on markets in which intra-industry trade was the predominant form of competition. On top of the normal gains from lower prices and improved resource allocation, potentially much greater gains could be reaped from intra-industry specialisation. At the same time, integration theory became much more interested in the effects of integration on economic growth. The application of endogenous growth theories to integration theory appeared to show that much the largest gain from integration results from a permanent increase in the regional growth rate. More recently, integration theory has become concerned about the location effects of integration, reflecting the growing interest of trade theorists in the importance of geography. New models of trade, incorporating the effects of factor mobility, external economies of scale and product competition, have established the importance of location in the analysis of the effects of integration. In short, integration theory has come a long way from where it started out fifty years or more ago, leaving us with a much more comprehensive picture of how it impacts on countries both inside and outside the region.


Customs unions Dynamic effects Economic growth Economic welfare Economies of scale Free trade areas General equilibrium Imperfect competition Location Partial equilibrium Single market Static effects Terms of trade 

JEL Classifications

F15 F42 F43 F55 
This is a preview of subscription content, log in to check access.


  1. Arndt, S.W. 1968. On discriminatory versus non-preferential tariff policies. Economic Journal 78: 971–978.CrossRefGoogle Scholar
  2. Balassa, B. 1967. Trade-creation and trade-diversion in the European common market. Economic Journal 77: 1–21.CrossRefGoogle Scholar
  3. Balassa, B. 1974. Trade creation and trade diversion in the European common market. Manchester School of Economics and Social Studies 42(2): 93–135.CrossRefGoogle Scholar
  4. Baldwin, R. 1989. The growth effects of 1992. Economic Policy 9: 247–282.CrossRefGoogle Scholar
  5. Baldwin, R., and C. Wyplosz. 2006. The economics of European integration. 2 nd ed. Maidenhead: McGraw-Hill Education.Google Scholar
  6. Brander, J. 1981. Intra-industry trade in identical commodities. Journal of International Economics 11: 1–14.CrossRefGoogle Scholar
  7. Brander, J., and P. Krugman. 1983. A reciprocal dumping model of international trade. Journal of International Economics 13: 313–321.CrossRefGoogle Scholar
  8. Cooper, C., and D. Massell. 1965. Towards a general theory of customs unions in developing countries. Journal of Political Economy 75: 724–727.Google Scholar
  9. Corden, W.M. 1972. Economies of scale and customs union theory. Journal of Political Economy 80: 465–475.CrossRefGoogle Scholar
  10. De Lombaerde, P., ed. 2006. Assessment and measurement of regional integration. London: Routledge.Google Scholar
  11. Dixit, A.K., and J. Stiglitz. 1977. Monopolistic competition and optimum product diversity. American Economic Review 67: 297–308.Google Scholar
  12. Ethier, W., and H. Horn. 1984. A new look at economic integration. In Monopolistic competition and international trade, ed. H. Kierzkowski. Oxford: Clarendon Press.Google Scholar
  13. Greenaway, D., and R. Hine. 1991. Intra-industry specialisation, trade expansion and adjustment in the European economic space. Journal of Common Market Studies XXIX: 6.Google Scholar
  14. Grubel, H.G., and P.J. Lloyd. 1975. Intra-industry trade: the theory and measurement of international trade in differentiated goods. London: Macmillan.Google Scholar
  15. Helpman, E. 1981. International trade in the presence of product differentiation, economies of scale and monopolistic competition. Journal of International Economics 11: 305–340.CrossRefGoogle Scholar
  16. Helpman, E., and P. Krugman. 1985. Market structure and foreign trade: increasing returns, imperfect competition and the international economy. Cambridge, MA: MIT Press.Google Scholar
  17. Johnson, H.G. 1965. An economic theory of protectionism, tariff bargaining and the formation of customs unions. Journal of Political Economy 73: 256–283.CrossRefGoogle Scholar
  18. Kemp, M. 1969. A contribution to general equilibrium theory of preferential trading. Amsterdam: North-Holland.Google Scholar
  19. Kemp, M., and H. Wan. 1976. An elementary proposition concerning the formation of customs unions. Economic Journal 6: 95–97.Google Scholar
  20. Kreinin, M. 1979. The Effects of European Integration on Trade Flows in Manufactures. Seminar Paper No. 125, Institute for International Economic Studies, Stockholm University.Google Scholar
  21. Krugman, P. 1979. Increasing returns, monopolistic competition and international trade. Journal of International Economics 9: 469–479.CrossRefGoogle Scholar
  22. Krugman, P. 1991. Geography and trade. Cambridge, MA: MIT Press.Google Scholar
  23. Krugman, P.R., and A.J. Venables. 1995. Globalisation and the inequality of nations. Quarterly Journal of Economics 110(4): 857–880.CrossRefGoogle Scholar
  24. Lancaster, K. 1980. Intra-industry trade under perfect monopolistic competition. Journal of International Economics 10: 151–175.CrossRefGoogle Scholar
  25. Lipsey, R.G. 1957. The theory of customs unions: trade-diversion and welfare. Economica 24: 40–46.CrossRefGoogle Scholar
  26. Lucas, R. 1988. On the mechanics of economic development. Journal of Monetary Economics 22: 3–42.CrossRefGoogle Scholar
  27. Mayes, D.G. 1978. The effects of economic integration on trade. Journal of Common Market Studies 17: 1–25.CrossRefGoogle Scholar
  28. Meade, J.E. 1955. The theory of customs unions. Amsterdam: North-Holland.Google Scholar
  29. Mundell, R.A. 1964. Tariff preferences and the terms of trade. Manchester School of Economics and Social Studies 32: 1–13.CrossRefGoogle Scholar
  30. Ohyama, M. 1972. Trade and welfare in general equilibrium. Keio Economic Studies 9: 37–73.Google Scholar
  31. Owen, N. 1983. Economies of scale, competitiveness and trade patterns within the European community. Oxford: Oxford University Press.Google Scholar
  32. Puga, D. 1988. The rise and fall of regional inequalities. European Economic Review 43: 303–334.CrossRefGoogle Scholar
  33. Romer, P. 1983. Dynamic competitive equilibria with externalities, increasing returns and unbounded growth. PhD Thesis, University of Chicago.Google Scholar
  34. Romer, P. 1986. Increasing returns and long-run growth. Journal of Political Economy 94: 1002–1037.CrossRefGoogle Scholar
  35. Smith, A., and A.J. Venables. 1988. 1988: Completing the internal market in the EC: Some industry simulations. European Economic Review 32: 1501–1525.CrossRefGoogle Scholar
  36. Vanek, J. 1965. General equilibrium of international discrimination. Cambridge, MA: Harvard University Press.Google Scholar
  37. Venables, A.J. 1984. Multiple equilibria in the theory of international trade with monopolistically competitive industries. Journal of International Economics 16: 103–121.CrossRefGoogle Scholar
  38. Viner, J. 1950. The customs union issue. New York: Carnegie Endowment for International Peace.Google Scholar
  39. Wonnacot, P., and R. Wonnacot. 1981. Is unilateral tariff reduction preferable to a customs union? The curious case of the missing foreign tariffs. American Economic Review 71: 704–714.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Nigel Grimwade
    • 1
  1. 1.