Levels of Economic Integration
Economic integration can be classified into five additive levels, each present in
the global landscape:
Free trade. Tariffs (a tax imposed on imported goods) between member
countries are significantly reduced, some abolished altogether. Each member
country keeps its own tariffs regarding third countries. The general goal of free trade
agreements is to develop economies of scale and comparative advantages,
promoting economic efficiency.
Custom union. Sets common external tariffs among member countries,
implying that the same tariffs are applied to third countries; a common trade regime
is achieved. Custom unions are particularly useful to level the competitive playing
field and address the problem of re-exports (using preferential tariffs in one country
to enter another country).
Common market. Services and capital are free to move within member
countries, expanding scale economies and comparative advantages. However, each
national market has its own regulations, such as product standards.
Economic union (single market). All tariffs are removed for trade between
member countries, creating a uniform (single) market. There are also free
movements of labor, enabling workers in a member country to move and work in
another member country. Monetary and fiscal policies between member countries
are harmonized, which implies a level of political integration. A further step concerns
a monetary union where a common currency is used, such as with the European
Union (Euro).
Political union. Represents the potentially most advanced form of integration
with a common government and where the sovereignty of a member country is
significantly reduced. Only found within nation-states, such as federations where
there are a central government and regions (provinces, states, etc.) having a level of
autonomy.
As the level of economic integration increases, so does the complexity of its
regulations. This involves a set of numerous regulations, enforcement, and
arbitration mechanisms to ensure that importers and exporters comply. The
complexity comes at a cost that may undermine the competitiveness of the areas
under economic integration since it allows for less flexibility for national policies and
a loss of autonomy. The devolution of economic integration could occur if the
complexity and restrictions it creates, including the loss of sovereignty, are no longer
judged to be acceptable by its members.