Levels of Economic Integration
There are about five additive levels of economic integration
impacting the global landscape:
- Free trade. Tariffs (a tax imposed on imported goods) between member
countries are abolished or significantly reduced. Each member
country keeps its own tariffs in regard to third countries. The
general goal is to develop economies of scale and comparative advantages,
which promotes economic
- Custom union. Sets common external tariffs among member
implying that the same tariffs are applied to third countries. Custom
unions are particularly useful to level the competitiveness
playing field and address the problem of re-exports (using
preferential tariffs in one country to enter another country).
- Common market. Factors of production, such a labor and
capital, are free to move within member countries, expanding scale economies
and comparative advantages. Thus, a worker in a member country
is able to move and work in another member country.
- Economic union. 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 were the
sovereignty of member country is significantly reduced. Only found within
nation states, such as federations where there is a central
government and regions having a level of autonomy.