Free Trade Area
Sovereign countries belonging to the free trade area
trade freely amongst them but have individual trade barriers with countries
outside the free trade area. All members have most favoured nation status,
which means that they are all treated equally.
Examples include North American Free Trade Area (NAFTA)
between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC)
and COMESA (Common Market for Eastern and Southern Europe).
The countries are no longer fully sovereign over trade
policy. There will be some degree of unification of custom or trade policies.
They will have a common external tariff (CET) which is applied to all
countries outside the customs union. The countries will be represented at
trade negotiations with organisations such as the World Trade Organisation by
A Customs Union
differs from a Free Trade Area through the existence of a common tariff
against outsiders. Members of a
free trade area are free to set their own tariffs and quotas against
This trading bloc is a customs union, which has in
addition the free movement of factors of production such as labour and
capital between the member countries without restriction. Mercosur is an
example of a common market comprising of a number of South American nations.
This is a common market where the level of integration
is more developed. The member states may adopt common economic policies e.g.
the Common Agricultural Policy (CAP) of the European Union. They may have a
fixed exchange rate regime such as the ERM of the EMU. Indeed, they may have
integrated further and have a single common currency. This will involve
common monetary policy. The ultimate act of integration is likely to be some
form of political integration where the national sovereignty is replaced by
some form of over-arching political authority.
For example the
EU, which is working towards:
customs posts between countries.
product standards between countries, e.g., safety standards.
of taxes, e.g., income taxes and VAT.