A single market

Joining a common (or single) market is perhaps the most significant step a national economy can take towards integrating with its neighbors.

A single market may be defined as a formal arrangement between sovereign nations to allow members free access to each other’s markets. Free access relates to the unrestricted movement of goods and services, as well as the free movement of labour and real and intellectual capital.

Examples of single markets

The European single market, also called the ‘internal market’, is the most well-known and significant of the world’s existing single markets. Other examples of single markets include the 12 Caribbean nations that make up CARICOM, and the 10 members of the ASEAN Economic Community (AEC). (ASEAN stands for the Association of South East Asian Nations, and was founded in 1967).

The AEC, which is now called the “AEC 2015” comprises the original 6 major nations – Indonesia, Thailand, the Philippines, Malaysia, Singapore and Vietnam – along with Brunei, Laos, Myanmar, and Cambodia.

Tariff-free access

While no two single markets are the same, the common denominator is the desire to create a market in which members can trade freely with each other by having tariff-free and open access to each other’s national markets. This means, in theory, gaining the benefits of free trade, such as lower prices, higher quality products, increased competition, and factor mobility.

Single market evolution and enlargement

Single markets typically evolve slowly, often involving just a few countries, and then enlarging as neighbouring countries see the benefits of joining and the costs of not joining.

The formation and enlargement of a single market usually involves highly complex negotiations, the degree of complexity depending upon the number of members and their level of development. Less developed economies may have a smaller range of goods and services as well as under-developed capital and credit markets, compared with, for example, the European single market. In Europe, the single market for goods was largely completed by 1992, whereas the single market for services still does not exist.

For a common market to be successful it is recognised that there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding product standards, monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the European Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP).

Membership of a single market but not a customs union

It is possible for a member of a single market to agree to the free movement of economic resources between itself and other members, while not sharing common customs duties on imported goods from outside. This is the case with Norway, which is a member of the single market but not the European customs union. However, this imposes significant constraints on Norway.

Firstly, Norwegian producers who export to other single market members must prove that the goods originated in Norway, through the ‘rules of origin’ requirements. In other words, Norway cannot be a bridgehead for non-EU producers looking to avoid EU tariffs. Secondly, access to the single market means allowing the free movement of people, which may create issues of integration as well a suppress Norwegian wages. Finally, Norway must contribute to various programmes and schemes, and make grants to various organisations, as a result of its open access to the single market.

The advantages of single market membership

Joining a single market enables members to gain the benefits of free trade between themselves, including:

Trade creation, where trade is stimulated as a result of free access to markets.
The exploitation of economies of scale by local firms as their markets expand.
Lower production costs as a result of scale economies.
Lower prices as a result of lower costs and increased competition.
Common production standards, which reduces information failure allowing consumers to make more rational choices.
Technology transfer as a result of increased investment flows between members.
Transfer of skills across the single market.
Increased labour mobility enabling wage costs to converge, and unemployment to be spread more evenly between members.
Increased capital mobility which increases its relative supply in each country, and enables businesses to grow and innovate.
Increased remittance flows between workers resident in one country and families remaining in another country.
Co-operation on common projects of mutual benefit, such as green energy research.
Enables jointly produced goods which members might not be able to fund on their own, such as Europe’s Airbus consortium.

Disadvantages

Trade diversion may result from single market memberhsip, as more efficient non-members are crowded out of local markets.
Lower wages as migrant labour may drive down local wages.
Rising negative externalities associated with the free movement of people, including pressure on infrastructure and the insufficient supply of merit goods such as healthcare and education.
Trade rules may favour some members over others, and some industries and sectors over others.
Excessive bureaucracy may inhibit the ability of members to innovate.
Members may become inward looking and their industries fail to respond to changes in the global economy.
Lost opportunities to exploit closer relationships with non-members through free trade deals between individual members and non-members (which, at least in the European single market, are not allowed.)