Levels of Economic Integration
Economic integration can be classified in five additive levels,
each present in the global landscape:
As the level of economic integration increases, so does
complexity. This involves a set of numerous regulations,
enforcement and arbitration mechanisms. Complexity comes at a
cost that may undermine the competitiveness of the areas under
economic integration since it less flexibility to national
policies. A devolution of the economic integration could occur
if the complexity it creates is no longer judged to be
acceptable by its members.
- 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 in regard to third countries. The
general goal of free trade agreements is to develop economies of scale and comparative advantages,
which promotes economic
- 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 an uniform
(single) market. There is also free movements of labor, enabling
workers in a member country is able 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 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.