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Types of Economic Integration

Preferential Trading,
Free Trade Area,
Custom union
Common market
Economic Union,
Economic & Monetary Union
Complete Economic Integration

Preferential Trade Area


Preferential Trade Areas (PTAs) exist when countries within a geographical region
agree to reduce or eliminate tariff barriers on selected goods imported from other
members of the area. This is often the first small step towards the creation of a trading
bloc. Agreements may be made between two countries (bi-lateral), or several countries
(multi-lateral).

Economic Union
Economic Union is a term applied to a trading bloc that has both a common market
between members, and a common trade policy towards non-members, but where
members are free to pursue independent macro-economic policies.

Monetary Union
Monetary union is the first major step towards macro-economic integration, and enables
economies to converge even more closely. Monetary union involves scrapping
individual currencies, and adopting a single, shared currency, such as the Euro for the
Euro-16 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean.
This means that there is a common exchange rate, a common monetary, including
interest rates and the regulation of the quantity of money, and a single central bank,
such as the European Central Bank or the East Caribbean Central Bank.

Fiscal Union
A fiscal union is an agreement to harmonize tax rates, to establish common levels of
public sector spending and borrowing, and jointly agree national budget deficits or
surpluses. The majority of EU states agreed a compact in early 2012, which is a less
binding version of a full fiscal union.

Economic and Monetary Union


Economic and Monetary Union (EMU) is a key stage towards compete integration, and
involves a single economic market, a common trade policy, a single currency and a
common monetary policy

Free Trade Area


In this case, tariff barriers to the trade of goods between member states are eliminated,
but each country retains control over its own commercial policy; this means that certain
types of barriers are effectively maintained. There are certain limitations imposed by
rules of origin: only goods that have either been completely produced in one of the
member countries, or which have mainly been produced in them are allowed to circulate
freely.

Characteristics of Free Trade

Tariffs
The most common characteristic of free trade is the lack of state tariffs on
imports. A tariff is a tax placed on incoming goods by the host country. it
makes foreign goods, therefore, artificially more expensive than domestically
produced goods, giving the latter a competitive edge.

Markets

Markets, not the state or even powerful economic actors, are


empowered to make decisions in free trade systems. If foreign goods are
priced according to market norms, then the winner in economic competition
is who makes the best product at the lowest price. In protected trade, it often
is the actor with the most political power who gets its economic interests
protected.

States

Free trade takes the state out of the economic equation. States are
disempowered to make any kind of economic decision concerning the global
economy. Consumers and companies are then empowered to make these
decisions based on their preferences rather than state policy.

Contracts

Markets are based on contracts between buyers and sellers. Therefore,


the removal of the state from economic decision-making means the
dominance of contracts over state regulations in global economics. In this
case, free contracts are an important characteristic of free trade. Protected
trade, on the other hand, is international economic activity controlled, at
least in part, by the state.

Economics

Economics is at the center of free trade thinking. Politics is at the


center of protected trade. Therefore, any free trade regime thinks in terms of
economic categories: efficiency, markets and contracts. Protectionism thinks
in terms of political categories: domestic producers, powerful interests, state
power.

Globalism

Free trade demands a world without borders. In an economic sense,


the states of the globe are irrelevant, only the demands of the global market
have any economic relevance. Hence, under free trade, the globe becomes
progressively smaller as corporations and bankers serve a global, rather than
a national, market.

CUSTOM UNION
Agreement between two or more (usually neighboring) countries to remove trade
barriers, and reduce or eliminate customs duty on mutual trade. A customs union (unlike
a free trade area) generally imposes a common external-tariff (CTF) on imports from
non-member countries and (unlike a common market) generally does not
allow free movement of capital and labor among member countries.

Characteristics of Custom Union


Free Trade
One of the defining features of the customs union is a policy of free trade between
member states. Free trade is the economic term for the elimination of import and export
tariffs between states. As David Ricardo outlined in his theory of Competitive
Advantage, free trade is generally desirable because it maximizes total economic
efficiency by allowing competition to run its natural course. Under free trade, if nation A
can produce a product more cheaply than nation B, consumers in nation B can buy the
product from nation A without paying an additional tax. Without free trade, the
government of nation B might impose a heavy tariff on imports of the product in
question, forcing consumers in nation B to purchase nation B's products at a higher
price.

Common External Tariff


A common external tariff is the agreement between the parties of the customs union that
stipulates that all member states maintain the same tariffs, import quotas, non-tariff
trade barriers and preferential policies towards non-member states. This prevents the
practice of re-exportation within the customs union, which occurs if one member
charges lower tariffs to attract foreign imports, and then re-exports those products to
other members of the customs union for a profit under the internal free trade policy. The
common external tariff is also useful in that it allows the members of the customs union
to combine their economic power in enacting punitive or favorable tariffs towards nonmember states.

A Building Block of Economic Cooperation


Perhaps the most important advantage to forming a customs union is that it represents
an important step in the process of economic integration. In today's globalized economy,
economic integration is more important than ever, as advancements in transportation
technology have made international trade increasingly viable, and economic
interdependency has emerged as a tool to facilitate cooperation and conflict resolution.
The European Union Customs Union is a prime example; established in 1958 as a
feature of the European Economic Community,
Common

Market Economics

A common market, also called a single market, refers to an economic agreement


between two or more countries that stipulates that the signatory countries
establish a free trade area, share a single currency and have the same tariffs on
goods imported from non-member countries. Primary example of common
markets includes the European Union, or EU, and the European Economic Area,
or EEA.

Characteristics of Common Market


Efficient Allocation of Resources

A bigger market more efficiently allocates resources than a smaller one. As


goods, services, capital and workers move across borders as if there were no borders,
resources move from places of abundance to where they are needed most. A notable
example is high unemployment in one country or region and a shortage of qualified
labor in another. As a result of the common market, people from one place can easily
move to another place, helping to boost productivity and increase their living standards.

Economies of Scale

A common market is good for business. Selling products or services in a country


of 1 million people differs greatly from operating in a market with 350 million potential
customers, for example. As companies do not need to comply with a multitude of
national regulators but only have to satisfy one common regulator, doing business
becomes easier. Consumers benefit, too, through lower prices and higher quality as a
result of greater competition between producers.

Shared Currency

Another important aspect of a common market is a single currency. Single


currency lowers transaction costs by eliminating the exchange risks and currency
conversion fees. Furthermore, a shared currency also allows easier cross-border
investments and price comparisons by consumers between countries. For example, if a
person in country A goes online and finds a cheaper car in country B, he can order the
car from that country, without paying any additional taxes or levies.

Problems

A common market has a number of theoretical as well as practical problems.


First, as of February 2011 the implementation of a common market in its pure form has
never taken place in any country. The Euro zone comes close, but it still faces many
hurdles, and some states still protect their markets from foreign competition, particularly
cross-border takeovers. In addition, there are also problems that would be present even
in a pure common market. For example, a common market cannot be fully integrated
unless people speak a common language, which is difficult provided countries' unique
cultural and linguistic heritages. Technical problems also exist. As different regions of
the common market may experience different stages of economic cycle, no single
monetary policy, such as interest rates, can fully accommodate them. For example,
Germany may have high inflation, demanding high interest rates, while Ireland can have
deflation and may need low interest rates.
ECONOMIC

UNION

An economic union typically will maintain free trade in goods and services, set common
external tariffs among members, allow the free mobility of capital and labor, and will also
relegate some fiscal spending responsibilities to a supra-national agency. The European
Union's Common Agriculture Policy (CAP) is an example of a type of fiscal coordination
indicative of an economic union.

MONETARY

UNION

Monetary union establishes a common currency among a group of countries. This


involves the formation of a central monetary authority which will determine monetary
policy for the entire group. Perhaps the best example of an economic and monetary
union is the United States. Each US state has its own government which sets policies
and laws for its own residents. However, each state cedes control, to some extent, over
foreign policy, agricultural policy, welfare policy, and monetary policy to the federal
government. Goods, services, labor and capital can all move freely, without restrictions
among the US states and the Nations sets a common external trade policy .

POLITICAL UNION
Represents the potentially most advanced form of integration with a common government
The level of Economic integration as opposed to its complexity is illustrated in the graph below:

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