Levels of Economic Integration

Economic integration can be classified in five additive levels, each present in the global landscape:

• Free Trade. Tariffs (a tax imposed on imported goods) between member countries are significantly reduced, some abolished altogether. Each member country keeps its own tariffs in regard to third countries. The general goal of free trade agreements is to develop economies of scale and comparative advantages, which promotes economic efficiency.
• Custom Union. Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries; a common trade regime is achieved. Custom unions are particularly useful to level the competitive playing field and address the problem of re-exports (using preferential tariffs in one country to enter another country).
• Common Market. Services and capital are free to move within member countries, expanding scale economies and comparative advantages. However, each national market has its own regulations such as product standards.
• Economic union (single market). All tariffs are removed for trade between member countries, creating an uniform (single) market. There is also free movements of labor, enabling workers in a member country is able to move and work in another member country. Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro).
• Political union. Represents the potentially most advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.

As the level of economic integration increases, so does complexity. This involves a set of numerous regulations, enforcement and arbitration mechanisms. Complexity comes at a cost that may undermine the competitiveness of the areas under economic integration since it less flexibility to national policies.