Every type of economic union shares the development and enlargement of market opportunities as a basic orientation; usually markets are enlarged through preferential tariff treatment for participating members, common tariff barriers against outsiders or both. Enlarged, protected markets stimulate internal economic development by providing assured outlets and preferential treatment for goods produced within the customs union, and consumers benefit from lower internal tariff barriers among the participating countries. In many cases, external as well as internal barriers are reduced because of the greater economic security afforded domestic producers by the enlarged market.
Nations with complementary economic bases are least likely toe encounter frictions in the development and operation of a common market unit. However, for an economic union to survive, it must have agreements and mechanisms in place to settle economic disputes. In addition, the total benefits of economic integration must outweigh individual differences that are sure to arise as member countries adjust to new trade relationships. The European Union includes countries with diverse economies, distinctive monetary systems, developed agricultural bases, and different natural resources. It is significant that most of the problems encountered by the EU have risen over agriculture and monetary policy. In the early days of the European Community (now the European Union) agricultural disputes were common. The British attempted to keep French poultry out of the British market, France banned Italian wine, and the Irish banned eggs and poultry from other member countries. In all cases, the reason given was health and safety, but the probable motive was the continuation of the age old policy of market protection. Such skirmishes are not unusual but they do test the strength of the economies union. In the case of the EU, the European Commission was the agency used to settle disputes and charge the countries that violated EU regulations.
The demise of the Latin American Free Trade Association (LAFTA) was the result of economically stronger members not allowing for the needs of the weaker ones. Many of the less well known attempts at common markets have languished because of economic incompatibility that could not be resolved and the uncertainty of future economic advantage.
Political amenability among countries is another basic requisite for development of a supranational market arrangement. Participating countries must have comparable aspirations and general compatibility before surrendering any part of their national sovereignty. State sovereignty is one of the most cherished possessions of any nation and is relinquished only for a promise of significant improvement of the national position through cooperation.
Economic considerations are the basic catalysts for the formation of a customs union group, but political elements are equally important. The uniting of the original European Union countries was partially a response to the outside threat of the Soviet Union’s great political and economic power; the countries of Western Europe were willing to settle their family squabbles to present a unified font to the Russian bear. The communist threat no longer exists but the importance of political unity to fully achieve all the benefits of economic integration has driven European countries to form the Union (EU).
Geographic and Temporal Proximity
Although geographic and temporal proximity are not absolutely imperative for cooperating members of a customs union, such closeness does facilitate the functioning of a common market. Indeed, the most recent research demonstrates that more important than physical distance are differences across time zones. That is, now trade tends to travel more easily in north – south directions than it did in ancient times. However, transportation networks (basic to any marketing system) are likely to be interrelated and well developed when countries are close together. Issues of immigration legal and illegal also promote closer economic integration between close neighbors. One of the first major strengths of the European Union was its transportation network; the opening of the tunnel between England and France further bound this common market. Countries that are widely separated geographically have major briers to overcome in attempting economic fusion. However, with increasing efficiencies in communication and transportation the importance of such factors appears to be waning.
The United States has bilateral free trade agreements with, among others Israel, Morocco, Chile, and Singapore. These are in addition to its multilateral agreements such as NAFTA and CAFTA. But, generally cultural similarity eases the shock of economic cooperation with other countries. The more similar the culture the more likely an agreement is to succeed because members understand the outlook and viewpoint of their colleagues. Although there is great cultural diversity in the European Union, key members share a long established Christian heritage and are commonly aware of being European. However, even this aspect of diversity may be un-important as negotiations proceed with Turkey about EU membership. Language as a part of culture has not created as much a barrier for EU countries s was expected. Nearly every educated European can do business in at least two or three languages, so the linguistic diversity of several major languages did not impede trade.