Economic Integration
The term economic integration refers to an agreement between countries from the same geographic area, established in order to reduce, and with time remove, tariff and non tariff barriers. This is done to facilitate the free movement of products or services among the member states. In other terms, any type of agreements in which countries assent to coordinate their trade and monetary policies are referred to as economic integration.
The primary objective of the economic integration is the increase of trade between its member states, and as a result the increase of their GDP.
It should be mentioned that economic integration does not happen in one day or week, this process has different stages. The economic integration can be seen as an outcome, in the case when the integration can be completed after certain criteria are fulfilled. It can also be seen as a process, in the case in which integration refers to a dynamic process, represented by stages from FTA to political integration.
The main stages of the economic integration are the following:
Stage 1 - free trade area
Stage 2 - customs union
Stage 3 - single market
Stage 4 - economic and monetary union
Stage 5 - complete integration
These stages differ by the degree of unification of economic policies, the most complex degree being the political union.
A FTA (free trade area) is formed when at least 2 countries partially or fully eliminate custom tariffs between them. The free trade area represents a trade bloc, consisting of countries that have agreed to remove tariffs and quotas on most products they import and export. The members have a system of preferential tariffs and levy lower import duties from one another than they do on imports from third countries. In free-trade associations no duties are levied on imports from its member states, however different rates of duty may be charged by each member on its imports from other countries of the world. There exists a rule of certificate of origin, intended to exclude regional exploitation of zero tariffs within the FTA. Unlike a customs union, members of a FTA don't have a common external tariff, resulting in different quotas and customs.
Examples of FTA are the Central European Free Trade Agreement (CEFTA) and North American Free Trade Agreement (NAFTA).
A customs union represents a trade bloc which is composed of a FTA which has a common external tariff and the member states establish a common external trade policy. This means that the customs union introduces unified tariffs for other countries outside the trade bloc.
A common market represents a trade bloc composed of a customs union with common policies on product regulation, and freedom of movement of the factors of production and of enterprise. The objective is that the movement of capital, labour, goods, and services between the members becomes easier.
An economic and monetary union represents a trade bloc which is composed of a single market having a common currency. A good example of economic and monetary union is the EU.
The final stage of the economic integration is the complete integration, after which the integrated units have a negligible control of economic policy, including full monetary union and complete fiscal policy harmonisation.
