There are several stages in the process of economic integration, from a very loose association of countries in a preferential trade area, to complete economic integration, where the economies of member countries are completely integrated.
A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members in other geographical regions, and who look to trade more with each other. Regional trading blocs increasingly shape the pattern of world trade - a phenomenon often referred to as regionalism.
Stages of 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.
Free Trade
Area
Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. The North Atlantic Free Trade Agreement (NAFTA) is an example of such a free trade area, and includes the USA, Canada, and Mexico.
Customs
Union
A customs union involves the removal of tariff
barriers between members, plus the acceptance of a common (unified)
external tariff against non-members. This means that members may
negotiate as a single bloc with 3rd parties, such as with
other trading blocs, or with the WTO.
Common
Market
A common market is the first significant
step towards full economic integration, and occurs when member countries
trade freely in all economic resources – not just tangible goods. This
means that all barriers to trade in goods, services, capital, and labour
are removed. In addition, as well as removing tariffs, non-tariff
barriers are also reduced and eliminated. For a common market to be
successful there must also be a significant level of harmonisation of
micro-economic policies, and common rules regarding monopoly power and
other anti-competitive practices. There may also be common policies
affecting key industries, such as the
Common Agricultural Policy
(CAP) and Common Fisheries Policy (CFP) of the European Single Market
(ESM).
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 policy, 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 harmonise 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 fiscal 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.
Complete Economic Integration
Complete economic integration involves a single economic market, a common trade policy, a single currency, a common monetary policy (EMU) together with a single fiscal policy, tax and benefit rates – in short, complete harmonisation of all policies, rates, and economic trade rules.
See also: