Levels of Economic Integration

There are about five additive levels of economic integration:

• Free trade. Tariffs between members are abolished or significantly reduced. A tariff is a tax imposed on imported goods. Each member keeps its own tariffs in regard of third parties. The general goal is to develop economies of scale and comparative advantages.
• Custom union. Sets common external tariffs among members, implying that the same tariffs are applied to third parties. Custom unions are particularly useful to address the problem of re-exports.
• Common market. Factors of production, such a labor and capital, are free to move within members, expanding scale economies and comparative advantages.
• Economic union. Monetary and fiscal policies between members are harmonized as well as the use of a common currency. It also imply a level of political integration. This type of economic integration does not truly exists but the European Union is the closest example.
• Political union. Represents the potentially most advanced form of integration with a common government.