The post second world war period has been a growing interest in integrating national economies at regional levels, though the efforts have often floundered due to political differences and unforeseen economic hurdles. The motivation for regional economic integration arises out of the realization of the limitations imposed by national frontiers and the expected benefits of a wider market consisting of several national economies in terms of increased trade, investment and economic efficiency.
Forms of Economic Groupings:
Forms of economic groupings are diverse, involving different levels of economic integration. Economic literature generally envisages four types of economic groupings:
1. Free Trade Area
2. Customs Union
3. Common Market
4. Economic union
The progression is from free trade area to economic union, each stage representing a higher degree of economic integration. The elements to be integrated in various forms can be seen from the matrix given below:
Free Trade Area (FTA)
FTA consists of a number of countries within which trade is free in the sense that customs duties are not levied at the frontier on trade but, in practice, it is limited to specified products with specified exceptions. Exceptions arise out of the typical national needs of protecting specific sectors from international competition. Though tariff barriers on intra-trade are removed, each country maintains its separate customs barriers on trading with non-member countries. This causes serious problems in administering the free trade arrangement. Suppose there are two countries, A and B which are members of FTA. C is a non-member which exports garments to A and B. the import duty on imports of garments is 20 percent in A and 30 percent in B. Exporters in C, faced with this situation, would attempt to ship the garments to A and once the goods are cleared through customs, reship the consignment to B, provided the re-routing costs are lower than the differential in customs duties. To avoid this problem, FTA introduces the system of rules of origin, whereby only goods originating wholly or substantially in the number countries would be eligible for free trade within the area. The most important experiment in this field had been the European Free Trade Area (EFTA) which, however, lost its significance when some EFTA members joined the European Economic Community. Since 1977, there is free trade in Europe for trade in Europe for industrial products.
Like FTA, there are no internal tariff barriers on intra-union trade. But, in addition, the members countries give up their individual tariff schedules and erect a common external tariff barrier for trade with non-union members.
A customs union is like a single nation, not only in internal trade, but also in presenting a common front to the rest of the world with its common external tariff.
A customs union is more difficult to achieve than a free trade area because each member must yield its sovereignty in commercial policy matters, not just with members nations but with the whole world.
Its advantages are: (i) stronger economic integration and (ii) elimination of administrative problems of a free trade area.
Common market is the succeeding stage of economic integration. In addition to the characteristics of a customs union, a common market also allows free movement of labor and capital within the member countries. A common market goes beyond a customs union because it seeks to standardize all Government regulations affecting trade. The European Economic Community is the most successful experiment, so far, as a common market. There are other examples of common market:
(i) Central American Common Market consisting of Costa Rica, EI Salvador, Guatemala, Honduras and Nicaragua.
(ii) Andean Common Market comprising Peru, Venezuela, Colombia, Ecuador and Bolivia.