Levels of Economic Integration
Describe the different levels of regional economic integration.
Several levels of economic integration are possible in theory (see Figure 9.1). From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and, finally, a full political union.
FIGURE 9.1 Levels of Economic Integration
In a free trade area, all barriers to the trade of goods and services among member-countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between members. Each country, however, is allowed to determine its own trade policies with regard to nonmembers. Thus, for example, the tariffs placed on the products of nonmember countries may vary from member to member. Free trade agreements are the most popular form of regional economic integration, accounting for almost 90 percent of regional agreements.2
Free Trade Area
A group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies.
The most enduring free trade area in the world is the European Free Trade Association (EFTA). Established in January 1960, EFTA currently joins four countries—Norway, Iceland, Liechtenstein, and Switzerland—down from seven in 1995 (three EFTA members, Austria, Finland, and Sweden, joined the EU on January 1, 1996). EFTA was founded by those western European countries that initially decided not to be part of the European Community (the forerunner of the EU). Its original members included Austria, Great Britain, Denmark, Finland, and Sweden, all of which are now members of the EU. The emphasis of EFTA has been on free trade in industrial goods. Agriculture was left out of the arrangement, each member being allowed to determine its own level of support. Members are also free to determine the level of protection applied to goods coming from outside EFTA. Other free trade areas include the North American Free Trade Agreement, which we shall discuss in depth later in the chapter.
European Free Trade Association (EFTA)
A free trade association including Norway, Iceland, Liechtenstein, and Switzerland.
ANOTHER PERSPECTIVE Economic Integration in the Classical World
Traditionally, the success of the Roman Empire has been explained by economic historians as an example of centralized, forced reallocation of goods. Recent scholarship, though, suggests that there was not a single empire-wide, centralized market for all goods, but that local markets were connected and that most exchanges were voluntary, based on reciprocity and exchange. Ancient Rome had an economic system that was an enormous, integrated conglomeration of interdependent markets. Transportation and communication took time, and the discipline of the market was loose. But there were many voluntary economic connections between even far-flung parts of the early Roman Empire.
Sources: Karl Polanyi, The Livelihood of Man (New York: Academic Press, 1977); and Peter Temin, “Market Economy in the Early Roman Empire,” University of Oxford, Discussion Papers in Economic and Social History.
The customs union is one step farther along the road to full economic and political integration. A customs union eliminates trade barriers between member countries and adopts a common external trade policy. Establishment of a common external trade policy necessitates significant administrative machinery to oversee trade relations with nonmembers. Most countries that enter into a customs union desire even greater economic integration down the road. The EU began as a customs union, but it has now moved beyond this stage. Other customs unions include the current version of the Andean Community (formerly known as the Andean Pact) among Bolivia, Colombia, Ecuador, and Peru. The Andean Community established free trade between member-countries and imposes a common tariff, of 5 to 20 percent, on products imported from outside.3