26 May 2005

Forms of Economic Integration

There are five types of regional economic integration between countries, they include:
  • Free Trade Area (FTA)
A free trade area eliminates all barriers (both tariff and non-tariff) to trade between member countries but allows each country to establish its own trade policies against non members.
Examples include:
• The North American Free Trade Area (NAFTA) and
• The Association of Southeast Asian Nations (ASEAN)
  • Customs Union
A customs union combines the elimination of barriers (both tariff and non-tariff) to internal trade between member countries with the adoption of common external trade policies toward non members.
An example of a customs union is the one which exists between Switzerland and Liechtenstein.
  • Common Market
A common market combines the elements of a customs union with a policy that allows for the mobility of factors of production. Productivity is expected to rise in a common market because factors of production are free to locate where the returns to them are highest.
The European Union is an example of a common market till the late 1990s.
  • Economic Union
An economic union eliminates trade barriers between member countries, establishes a common external trade policy, follows a policy of factor mobility and a total harmonisation of monetary and fiscal policies which includes using a single currency.
The European Union is currently moving toward economic union status as only 12 out of 25 countries have adopted the Euro.
  • Political Union
A political union combines the elements of an economic union with the added feature of complete political integration.
The United States, transformed from 13 separate colonies into one, is an example of a political union.

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