Levels of Economic Integration

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, including its economic policy. The general goal of free trade agreements is to develop economies of scale and comparative advantages, promoting economic efficiency. A challenge concerns the resolution of disputes as free trade agreements tend to offer limited arrangements and dispute resolution mechanisms. Therefore, they are therefore prone to the respective influence and leverage of the involved nations that can lead to different outcomes depending on their economic size. A large and complex economy having a free trade agreement with smaller economies is better positionned to negotiate advantageous clauses.
  • 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). Movements of capital and labor remain restricted.
  • 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 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 over well defined matters such as education.

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.