1.1 Introduction
The theory of regional economic integration has developed extensively in recent decades in response to growing integration processes in Europe and elsewhere. The 23 June 2016 referendum in Britain showed, however, that regional integration does not have to be a one-way process as it was once thought to be. While there are well-developed models of regional integration in economic theory, there is little in the way of analytical explanation of the mechanics of disintegration. This is because integration was for many years commonly viewed as a beneficial process, while disintegration was seen as undesirable, which led to a normative bias in research on regional integration. This gap is the main rationale to formulate the aim of this chapter, which is to contribute to developing the theory of regional economic disintegration and gauging its consequences for the international competitiveness of economies in areas such as international trade and the mobility of capital. It must be noted that as the EU–UK negotiations on Brexit started in 2017 and the rules and exact timetable of Britain’s exit from the European Union were not yet known, different scenarios were possible, including an option referred to as a “soft Brexit”, implying Britain’s continued close ties with continental Europe in areas such as trade, investment and migration.
1.2 Regional Integration vs. Regional Disintegration
In recent decades, regional economic integration—defined by Balassa (1961) as “the abolition of discrimination within an area”, and by Kahnert et al. (1969) as “the process of removing progressively those discriminations which occur at national borders”—has been a notable trend in the global economy. It involves the establishment of commonly accepted transnational rules on economic activity that lead to greater trade and cooperation between countries. The major examples of economic integration in the global economy, such as the European Union, the Association of Southeast Asian Nations (ASEAN) and the North American Free Trade Agreement (NAFTA), show that a key factor in this process is geographic proximity. In many cases, neighbouring countries become involved in integrative activities because of factors such as relatively short transportation distances, similar consumer tastes and needs, fairly established distribution channels, common history and an awareness of common interests. However, this is not always the case, as similar consumer tastes, for example, cannot be pointed out as a reason for regional integration between the USA and Mexico as part of the North American Free Trade Agreement (NAFTA).
There are two approaches in which we can analyse regional economic integration:
- as a continuing, step-by-step process (dynamic approach) whereby boundaries between national states become less discontinuous, thus leading to the formation of a more comprehensive system (Mennis and Sauvant 1976);
- as a state of affairs (static approach) representing the present level of integration between national economies, which may take on the form first pointed out by Balassa (1961): a free-trade area (FTA), a customs union (CU), a common market (CM), an economic union and complete integration.
In a dynamic perspective, Brexit shows that regional economic integration is not a one-way process and that it may be reversed and turned into regional economic disintegration. Hence, the traditional view of integration as a process where countries deepened cooperation and subsequently switched to modes involving stronger commitment—starting from a FTA, through a customs union, a common market, an economic union, to complete integration—is being challenged. The characteristics of different levels of regional integration, a process that may also turn into disintegration, are presented in Table 1.1.
Table 1.1
Different levels of regional integration and disintegration processes
Integration process | Type (level) | Principal features | Disintegration process |
|---|---|---|---|
 | Preferential trade agreement (PTA) | Tariffs between the members of the agreement are reduced (or eliminated) only for some goods or services, sometimes unilaterally |  |
Free-trade area (FTA) | No internal tariffs and import quotas Each member determines its independent trade policies with all countries outside the agreement | ||
Customs Union (CU) | No internal tariffs and import quotas Harmonisation of external trade policy: Establishing a common external tariff (CET) and import quotas on goods entering the region from third-party countries | ||
Common market (CM) | As for customs union above Free movement of factors of production such as labour, capital, and other resources within the region | ||
Economic Union | As for common market above Coordinated monetary and fiscal policies as well as labour market, regional development, transportation and industrial policies | ||
Political Union | Common home and judicial policies and a common foreign and security policy |
As the level of economic integration increases so does the complexity of the process involving a set of numerous regulations, enforcement and arbitration mechanisms. However, regional integration does not have to always start with a preferential trade agreement (PTA) or a FTA and end with full integration. For example, the European Union started out as a CU, whereas NAFTA will probably never go beyond the FTA stage. Economic disintegration does not have to be a simple reversal of this process. In general, a devolution of economic integration could occur if the complexity it creates comes at a cost that may undermine the competitiveness and is no longer judged to be acceptable by society.
It should be also remembered that reaching a formal agreement does not necessarily ensure real integration between member states, as exemplified by regional integration arrangements in Africa. On the one hand, identifying the process of economic integration with membership in the group is debatable; on the other, it is controversial to put an equality sign between disintegration and exit from an integration grouping. For example, Poland’s integration with the European Union occurred many years before the country’s formal accession. Meanwhile, a situation in which a member state ignores a judgement of the Court of Justice of the European Union is a mild form of disintegration. An example of gradual decomposition to the point of full institutional disintegration was the break-up of the Council for Mutual Economic Assistance (CMEA) in 1991, as analysed by Marszałek (1993). In fact, there were many cases of regional disintegration processes in the past, even in ancient times. For example, Goldsworthy (2009) analyses the process of the disintegration of the Roman Empire, finding plenty of analogies to the current EU situation.
Different scenarios are possible for the UK’s exit from the European Union, and there are opinions that the final outcome will be the so-called soft Brexit, which could involve keeping strong linkages with the EU, e.g. through some form of membership in the FTA, customs union or even European single market, to guarantee free movement of goods, capital, services and labour. This means that regional economic disintegration does not have to necessarily mean that the leaving country will be totally out of the integration levels listed in Table 1.1. However, the question is which of these levels of relations between the European Union and the UK will be established after Brexit. Possible Brexit scenarios may be classified on the basis of findings by Barrett et al. (2015), as presented in Table 1.2.
Table 1.2
Different scenarios for regional disintegration in the Brexit case
Alternative scenarios | Selected characteristics |
|---|---|
Membership of the European Economic Area (EEA) and the European Free Trade Area (EFTA) (Norway’s model of relationship with the EU) | • Access to the EU Internal Market for goods, but no full access to the internal market for financial services • Freedom to set own external trade policy, and own VAT regime • Freedom from participation in the Schengen free-movement zone • The need to abide by the EU law in relation to the EU Internal Market, and to contribute to the EU budget |
Bilateral agreements with the EU and membership of EFTA (Switzerland’s model of relationship with the EU) | • No obligation to apply and/or contribute to Common Agricultural Policy (CAP), Common Fisheries Policy (CFP), and structural funds • Freedom to conclude trade agreements with third countries • No obligation to transpose EU Internal Market legislation automatically into UK law • UK goods exported to the EU would have to comply with all... |