The Meaning And Level of Economic Integration

Meaning of Economic Integration:

• A process whereby countries cooperate with one another to reduce or eliminate barriers to the international flow of products, people or capital

• Takes place either on region or commodity

Levels Of Regional Economic Integration:

Five levels of regional integrations:

1. Preferential Trade Agreement

2.Free Trade Area

3. Customs Union

4.Common Market

5. Economic Union

6. Political Union

Preferential Trade Agreement(PTA):

• The simplest form of economic integration

• Offers member countries tariff reductions in certain product categories

• Discrimination or preferential treatment for some countries is not allowed as it is against the principle of Most Favoured Nation (MFN) under the WTO

• Represents a unilateral relationship as tariffs would be reduced only in one direction

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 import against non-members.

• Tariffs and non-tariff barriers include quotas and subsidies on international trade in goods and services

• Examples of FTA are: The ASEAN Free Trade Agreement(AFTA) and the North American Free Trade Areas(NAFTA)

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

• Each country determines its own barriers and maintains its own external tariffs on imports against non-members.

• A customs union has common policies on product regulations and movement of factors of productions in goods, services, capital and labor amongst members

• Unlike FTA, members of a customs union have common policies on external tariffs against non-members.

Common Market:

• An agreement between two or more countries to remove all barriers to trade and allow free mobility of capital and labor across member countries.

• Harmonize trade policies by having common external tariffs against non-members

• Example is the European Union (EU) previously known as European Economic Community(EEC)

Economic Union:

• An agreement between two or more countries to remove barriers to trade, allow free flow of labor and capital and coordinate economic policies.

• Sets trade policies through common external tariffs on non-members.

• Integration is more intense in an economic union compared to a common market, as 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 euro currency

Political Union:

• An agreement between two or more countries to coordinate their economic monetary and political systems.

• Required to accept a common stance on economic and political policies against non-members.

• Example is US where each US state has its own government that sets policies and laws. But each state grant control to the federal government over foreign policies, agricultural policies, welfare policies and monetary policies. Goods, services, labor and capital can all move freely without any restrictions among the US states and the government sets a common external trade policy

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