The agreement among countries or regions to establish links through the movement of goods, services, capital, and labor across borders is known as economic integration. Economic integration includes at the far end a truly global economy in which all countries share a common currency and agree to a free flow of goods, services, and factors of production. At the other extreme would be a number of closed economies, each independent and self-sufficient. Each of the various integrative agreements in effect today involves some sacrifice of national independence and autonomy to enjoy the benefits of free trade and stable exchange rates. Levels of economic integration include the free trade area, the customs union, the common market, and the economic union.
Free trade agreements account for about 90 percent of the economic integration across groups of countries or regions (REI). While the primary function of REIs is to eliminate tariff and non-tariff barriers, open border controls to increase capital, increase resources, increase spending power by citizens, generate more jobs and profit between the countries engaged in the agreement, countries outside the agreement are subject to high tariffs, which may be set by the group as a whole (customs union, common market, and economic union) or set by the individual country (free trade area).
The free trade area is the least restrictive and loosest form of economic integration among countries. In a free trade area, all barriers to trade among member countries are removed. No discriminatory taxes, quotas, tariffs, or other trade barriers on free trade area members are permitted. The most notable feature of a free trade area is that each country continues to set its own policies in relation to nonmembers, including tariffs, quotas, or other restrictions that it chooses. The most notable free trade area is the North American Free Trade Agreement (NAFTA). Sometimes a free trade area is formed only for certain classes of goods and services; For example, an agricultural free trade area is restricted to agricultural goods only.
The customs union is one step further along the spectrum of economic integration. Like the members of a free trade area, members of a customs union dismantle barriers to trade in goods and services among themselves. In addition, however, the customs union establishes a common trade policy with respect to nonmembers. Typically this takes the form of a common external tariff, where imports from nonmembers are subject to the same tariff when sold to any member country. Tariff revenues are then shared among members according to a prescribed formula. The Southern African Customs Union and Andean Community (Comunidad Andina de Naciones or “CAN”) are examples of this model of economic integration.
Further still along the spectrum of economic integration is the common market. Like the customs union, a common market has no barriers to trade among members and has a common external trade policy. In addition, however, factors of production are also mobile among members. Factors of production include labor, capital, and technology. Thus restrictions of immigration, emigration, and cross-border investment are abolished. The importance of factor mobility for economic growth is very important. Mercosur, or the “Common Market of the South,” is an example of this form of economic integration.
Despite the obvious benefits, members of a common market must be prepared to cooperate closely in monetary, fiscal, and employment policies. While a common market will enhance the productivity of members in the aggregate, it is by no means clear that individual member countries will always benefit.
Economic union requires integration of economic policies in the addition to the free movement of goods, services, and factors of production across borders. Under an economic union, members would harmonize monetary policies, taxation, and government spending. In addition, a common currency would be used by all members. This could be accomplished de facto or in effect by a system of fixed exchange rates. The formation of an economic union requires nations to surrender a large measure of their national sovereignty to supranational authorities in communitywide institutions.
The Americas
The North American Free Trade Agreement (NAFTA), the free trade bloc of the United States, Canada, and Mexico, removed export tariffs in several industries, reduced tariff barriers on agricultural products, put in place intellectual property protections, created mechanisms to resolve commercial disputes, and facilitated the trade in illegal drugs. The economies of all three countries have grown since the agreement was signed in 1994, with Canada growing the fastest and Mexico the slowest. Most economists see a favorable impact of NAFTA, but this may be influenced by the general “theoretical” disposition, which typically favors free trade and views the adverse consequences as outweighed by long-term benefits. Under NAFTA, Canada, Mexico, and the United States are permitted to set and apply their own labor and environmental standards as these standards pertain to trading among member nations.
The Central American Free Trade Agreement (CAFTA) represents a trade pact to promote free trade among the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. CAFTA proports to eliminate barriers to trade among the member nations, eliminate barriers to foreign investment, and protect intellectual property, in addition to increasing transparency in corporate governance, legal systems, and due process for member nations. CAFTA is a trade agreement that is patterned after the North American Free Trade Agreement between Canada, Mexico, and the United States.
The Mexico–Northern Triangle Trade Agreement represents a trade agreement governing regional economic integration among Mexico and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The objective of the Mexico–Northern Triangle Agreement is to create a free trade zone among its member countries.
The Group of Three (G-3) Trade Agreement represents a multilateral trade agreement formed originally among the countries of Colombia, Mexico, and Venezuela. The principal goal of the G-3 agreement is to eliminate tariffs in trades among its member countries. Since the signing of the G-3 agreement in June 1994, Panama joined the G-3 as a signatory in 2004, and Venezuela announced its intension to withdraw from the G-3 in 2006.
Asia Pacific And Europe
The Association of Southeast Asian Nations (ASEAN) was established on August 8, 1967, in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on January 8, 1984; Vietnam on July 28, 1995; Lao PDR and Myanmar on July 23, 1997; and Cambodia on April 30, 1999. China joined these 10 Southeast Asian countries in November 2004.
ASEAN is intended to lay the groundwork for the world’s biggest free trade zone by 2010—the group would cover a total population of nearly 2 billion people. The agreement includes a promise to liberalize tariff and non-tariff barriers on traded goods and to establish a trade dispute mechanism. Importantly, the agreement includes full liberalization of the services sector, which for developing countries is a more significant force for growth than traditional agricultural and light industrial goods. In addition to its economic impact, the agreement will increase China’s role as the growth engine for ASEAN’s export-led economies, because of China’s huge need for raw materials, finished goods, and components.
The European Free Trade Agreement (EFTA) currently unites Iceland, Norway, Switzerland, and Liechtenstein in a free trade agreement. There are now several EFTA and other countries, such as Mexico, Korea, Israel, and Singapore. Emphasis has been placed on the free trade of industrial goods. Agriculture was left out to allow member countries the flexibility to determine what they needed. Member countries also determine the trade barriers applied to goods coming from outside EFTA.
Customs Unions
The Southern African Customs Union (SACU) consists of Botswana, Lesotho, Namibia, South Africa, and Swaziland. The SACU secretariat is located in Windhoek, Namibia. SACU was established in 1910, making it the world’s oldest customs union. The economic structure of the union links the member states by a single tariff and no customs duties between them. The member states form a single customs territory in which tariffs and other barriers are eliminated on substantially all the trade between the member states for products originating in these countries; there is a common external tariff that applies to nonmembers of SACU.
The Andean Community (CAN), composed of Bolivia, Colombia, Ecuador, and Peru, joined together for the purpose of achieving more rapid, better balanced, and more autonomous development through Andean, South American, and Latin American integration in order to contribute effectively to sustainable and equitable human development, to live well, with respect for the diversity and asymmetries that agglutinate the different visions, models, and approaches and that will converge in the formation of the Union of South American Nations (Unasur).
Common Markets
Mercosur, also known as the Southern Common Market, comprises Argentina, Paraguay, Uruguay, and Brazil, and represents a total population of nearly 200 million individuals. It objectives include the free transit of production goods, services, and factors between the member states, the elimination of customs rights and lifting of non-tariff restrictions on the transit of goods or any other measures with similar effects; the fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to nonmember states or groups of states, and the coordination of positions in regional and international commercial and economic meetings; the coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport, and communications, and any others they may agree on, in order to ensure free competition between member states; and the commitment by the member states to make the necessary adjustments to their laws to allow for the strengthening of the integration process.
Economic Unions
The European Union (EU) is the most highly integrated regional entity, and if you add up its members’ gross national incomes, the EU is probably also the regional entity with the greatest wealth and intra-system trade. The EU’s intended function is to create a uniform system, including currency, that facilitates the most frictionless and efficient transfer of goods, services, people, and factors of production while limiting the risks of currency conversion and fluctuation arising from vastly different country situations with respect to debt as a percentage of gross domestic product, unemployment levels, tax rates, industrial policy, etc. The point is not to have a uniform standard but to narrow the range of differences. As of 2008, there were 27 members, including Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. Croatia, Macedonia, and Turkey were still candidate countries in June 2008.
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