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In International Trade, there are several level of regional integration which are as follows:
1. Free Trade Area
2. Preferential Trade Agreement
3. Common Market
4. Custom Union
5. Economic Union
6. Political Union
FREE TRADE AREA ( FTA):
- An agreement between two or more countries to remove all trade barriers between themselves.
- Each country determines its own barriers and maintains its own external tariffs on imports against non-members. Examples of tariffs and non-tariffs barriers are quotas and subsidies on international trade in goods and services
- Examples of Free Trade Areas are the ASEAN Free Trade Agreement (AFTA) and the North American Free Trade Area (NAFTA)
PREFERENTIAL TRADE AGREEMENT (PTA):
- An agreement which offers member countries tariff reductions in certain product categories
- An unilateral relationship, as tariffs would be reduced only in one direction
Note that discrimination or preferential treatment for some countries is not allowed as it is against the principle of Most Favoured Nation (MFN) under the WTO.
COMMON MARKET:
- An agreement between two or more countries to remove all barriers to trade and allow free mobility of capital and labour across member countries
- Helps to harmonize trade policies by having common external tariffs against non-members.
- Example of a common market is the former European Economic Community (EEC) which was established in 1957 and is now known as European Union (EU)
CUSTOMS UNION:
- An agreement between two or more countries to remove tariffs between themselves and set a common external tariff on imports from non-member countries
- Member countries agree on a tariff across industries.
- Has common policies on product regulations and movement of factors of production in goods, services, capital and labour among members
- Contrast to a free trade area where each country determines its own barriers, members in Custom Union have common policies on external tariffs against non-members
ECONOMIC UNION:
- An agreement between two or more countries to remove barriers to trade, allow free flow of labor and capital and to coordinate economic policies
- Sets trade policies through common external tariffs on non-members.
- Here, integration is more intense than a common mart where member countries are required to harmonize their tax, monetary and fiscal policies and to create a common currency.
- Example is the European Union (EU) where economic and monetary integration has created a single market with a common currency the EURO.
POLITICAL UNION:
- An agreement between more than two countries to coordinate their economic, monetary and political systems.
- Members here are required to accept a common stance on economic and political policies against non-members. ( However, nations are allowed some degree of freedom in setting certain political and economic policies within their territories.
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