Free Trade Area to Economic Union

There are various stages of economic integration that range from a free trade area to an economic union.



Countries belonging to the free trade area are able to sell goods and services between them without restrictions.  They do not have to agree on a common set of trade policies with countries outside the free trade area.


The European Free Trade Association (EFTA) was established in 1960 as an alternative for European countries who were either unable to, or chose not to, join the then European Economic Community (EEC) (now the European Union).  The UK was a member of the EFTA, but left to join the EEC in 1973.  Today only Iceland, Norway, Switzerland, and Liechtenstein remain members of EFTA.


Other 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).



A customs union is essentially a free trade area with a common external tariff.  The member countries set common external trade policy.  Common competition policy is a desirable, but not an essential feature of a customs union.  Countries will want to move to a customs union from a free trade area if they share a desire to establish closer political and cultural ties.


The European Economic Area is an example of a customs union; it is an agreement between member states of European Free Trade Association and the member states of the European Union.  It allows the EFTA countries to participate in the Single European Market without joining the EU.



A common market is a customs union that also has the free movement of factors of production within it.

What are the four factors of production?



This means that workers are just as able to get a job in their own country as another member of the common market.  Mercosur is an example of a common market made up from 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, for example, the Economic and Monetary Union and Common Agricultural Policy of the European Union.  Greater political ties will signify further integration between nations in the economic union.  The European Union is an example of an economic union.


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