Introduction to Regional Economic Integration and degrees of formal

Economic Integration

Regional economic integration is a process in which two or more

countries agree to eliminate economic barriers, with the end goal of enhancing
productivity and achieving greater economic interdependence. The primary
component of economic integration is an increase in trade and investment flows
between countries. Trade and investment may be the full extent of integration in
some cases but usually, as trade grows, pressure builds to remove any remaining
trade and investment barriers. This often brings about some reform in trade laws
and domestic policies that hinder trade.

It can distinguish between two forms of economic integration, shallow

integration and deep integration. Shallow integration refers to tariffs and quotas,
customs procedures and other border-related issues. Deep integration goes
beyond border-related matters and refers to the harmonization or mutual
recognition of various national domestic policies, such as environmental
standards, product standards, and labor standards or the rules of fair economic
competition.

Economic integration is a continuum. Some nations and regions have

stopped at fairly mild reductions in tariffs, while others have become unions.
Economic recognize four general categories of integration beyond the level of
simple trading partners.

Free-Trade Area

The simplest kind of formal agreement is a free-trade area. A free-trade

area is the region encompassing a trade bloc whose member countries have
signed a free-trade agreement (NAFTA). In a free-trade area, goods and services
are allowed to trade across international boundaries without paying a tariff or
encountering limitations from quotas.
 In reality, however, most-free trade areas such as NAFTA do not allow
completely free trade. Nations usually reserve some restrictions for particularly
sensitive items. In addition, nations usually keep their own health, safety, and
technical standards and may deny entry to products from partners within the
free-trade area if they do not meet the national standards.

Customs Unions

The next higher level of integration is called the customs union. A

customs union is a free-trade area plus a common set of tariffs toward
nonmembers. It is an agreement between two or more countries to remove trade
barriers and lower or eliminate tariffs. Members of a customs union generally
apply a common external tariff on imports from non-member countries.

The European Union (EU) is an example of a customs union. Goods

move between EU member countries without tariffs (duty-free). In addition, all
EU members charge non-member countries the same tariffs for imported goods.

Common markets

The third level of integration is termed a common market. A common

market is a formal agreement where a group is formed amongst several
countries that adopt a common external tariff. In a common market, countries
also allow free trade and free movement of labor and capital among the
members of the group. The trade arrangement is aimed at providing improved
economic benefits to all the members of the common market.

The most famous example of a common market is the European Common

Market, which aims to provide the free movement of goods, capital, services,
and labor within the European Union.

Economic Union
 The final level of economic integration is economic union. An economic
union is an agreement between two or more nations to allow goods, services,
money and workers to move over borders freely. The countries may also
coordinate social and financial policies to support this common market.

The European Union (EU) is an example of an economic union. The

countries of the EU coordinate their respective economic policies, laws and
regulations so they can work together to address economic and financial issues.
The EU also has a common currency, the Euro, used by 19 EU members.

An economic union is different from a customs union. The members of a

customs union enjoy free movement of goods but do not typically share
currency or allow workers to move freely across borders.