There are several stages in the process
of economic integration, from a very loose association of countries in a preferential
trade area, to complete economic integration, where the
economies of member countries are completely integrated.
A regional trading bloc is a group of
countries within a geographical region that protect themselves from imports
from non-members in other geographical regions, and who look to trade more with
each other. Regional trading blocs increasingly shape the pattern of world
trade - a phenomenon often referred to as regionalism.
Stages of integration
Preferential Trade Areas (PTAs) exist
when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the
area. This is often the first small step towards the creation of a trading
bloc. Agreements may be made between two countries (bi-lateral), or
several countries (multi-lateral).
Free Trade Area
Free Trade Areas (FTAs) are created
when two or more countries in a region agree to reduce or eliminate barriers to
trade on all goods coming from other members. The North Atlantic Free
Trade Agreement (NAFTA) is an example of such a free trade area, and includes the
USA, Canada, and Mexico.
Customs Union
A customs union involves the removal of
tariff barriers between members, together with the acceptance of a common
(unified) external tariff against non-members.
Countries that export to the customs
union only need to make a single payment (duty), once the goods have passed
through the border. Once inside the union goods can move freely without
additional tariffs. Tariff revenue is then shared between members, with the
country that collects the duty retaining a small share.
The advantages of
a customs union
Without a unified external tariff,
trade flows would become distorted. If, for example, Germany imposes a 10%
tariff on Japanese cars, while France imposes a 2% tariff, Japan would export
its cars to French car dealers, and then sell them on to Germany, thereby
avoiding 80% of the tariff. This is avoided if a common tariff is shared
between Germany and France (and other members of the customs union.)
A common external tariff effectively
removes the possibility of arbitrage and, some would argue, is one of the
fundamental building blocks of economic integration.
The disadvantages
of a customs union
Union members must negotiate
collectively with non-members or organisations like the WTO as a single group of countries. While this is essential to
maintain the customs union, it means that members are not free to negotiate
individual trade deals.
For example, if a member wishes to
protect a declining or infant industry it cannot do so through imposing its own
tariffs. Equally, if it wishes to open up to complete free trade, it cannot do
so if a common tariff exists.
Also, it makes little sense for a
particular member to impose a tariff on the import of a good that is not
produced at all within a that country.
For example, the UK does not produce
its own bananas, so a tariff on banana imports only raises price and does not
protect domestic producers. The current EU tariff on bananas imported from
outside the EU is 10.9%.
There is also a potential disadvantage
to a single member in how the tariff revenue is allocated. Members that trade
relatively more with countries outside the union, such as the UK, may not get
their 'fair share' of tariff revenue.
The UK's status as a customs union
member is one of the dilemmas facing the UK as a result of Brexit. If it wishes to create individual
trade deals with, say the USA and China, it cannot retain its current status as
a full member of the customs union.
Common Market
A common (or single) market is
the most significant step towards full economic integration. In the case
of Europe, the single market is officially referred to the 'internal market'.
The key feature of a common market is
the extension of free trade from just tangible goods, to include all economic
resources. This means that all barriers are eliminated to allow the free
movement of goods, services, capital, and labour.
In addition, as well as removing
tariffs, non-tariff barriers are also reduced and eliminated.
For a common market to be successful
there must also be a significant level of harmonisation of micro-economic
policies, and common rules regarding product standards, monopoly power and
other anti-competitive practices. There may also be common policies affecting
key industries, such as the Common
Agricultural Policy (CAP) and Common
Fisheries Policy (CFP).
Full Economic Union
Economic union is a term applied to a
trading bloc that has both a common market between members, and a common trade
policy towards non-members, although members are free to pursue independent
macro-economic policies.
The European Union (EU) is the best known
Economic union, and came into force on November 1st 1993, following the signing
of the Maastricht Treaty (formally called
the Treaty on European Union.)
Monetary Union
Monetary union is the first major step
towards macro-economic integration, and enables economies to converge even more
closely. Monetary union involves scrapping individual currencies, and adopting
a single, shared currency, such as the Euro for the Euro-17 countries, and
the East Caribbean Dollarfor 11 islands in the East Caribbean. This means that there is a
common exchange rate, a common monetary policy, including interest rates and the regulation of the quantity of money, and a single central bank, such as the European Central Bank or the
East Caribbean Central Bank.
Fiscal Union
A fiscal union is an agreement to harmonise tax rates, to establish common
levels of public sector spending and borrowing, and jointly agree national
budget deficits or surpluses. The majority of EU states agreed a fiscal compact in early 2012, which is a less binding version of a full fiscal
union.
Economic and Monetary Union
Economic and Monetary Union (EMU) is
a key stage towards compete integration, and involves a single economic market,
a common trade policy, a single currency and a common monetary policy.
Complete Economic Integration
Complete economic integration involves
a single economic market, a common trade policy, a single currency, a common
monetary policy, together with a single fiscal policy, including common tax and
benefit rates – in short, complete harmonisation of all policies, rates, and
economic trade rules.
In
more recent years, the Brexit adventure has brought the question of integration
to the fore. There is tension when rules are harmonised across
regions/countries with one feeling being disadvantaged by a bureaucratic process determined in Brussels or some other
regional centre. It is feedback and responses of member nations’ interests not
being accounted for that jeopardises the progress to integration. It is in a
way similar to nation states, where one region is aggrieved by rules set in
Madrid or Putrajaya for an economic activity in Catalan or Sabah as the case
may be. Mindless bureaucrats and egocentric politicians impact negatively an
idea that may actually lead to common prosperity and growth.
Reference:
Economic Integration (https://www.economicsonline.co.uk)
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