The degree of economic integration can be categorized into six stages:
- Preferential trading area
- Free trade area, Monetary union
- Customs union, Common market
- Economic union, Customs and monetary union
- Economic and monetary union,
- Complete economic integration
These differ in the degree of unification of economic policies, with the highest one being the political union of the states.
(1) A Preferential trade area (also Preferential trade agreement, PTA) is a trading bloc which gives preferential access to certain products from the participating countries. This is done by reducing tariffs, but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration.
These tariff preferences have created numerous departures from the normal trade relations principle, namely that World Trade Organization (WTO) members should apply the same tariff to imports from other WTO member
(2) A "free trade area" (FTA) is formed when at least two states partially or fully abolish custom tariffs on their inner border. To exclude regional exploitation of zero tariffs within the FTA there is a rule of certificate of origin for the goods originating from the territory of a member state of an FTA. It eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration if their economical structures are complementary.
(3) A "customs union" introduces unified tariffs on the exterior borders of the union (CET, common external tariffs). Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration.
If their economical structures are competitive, they are more likely to form a customs union
Note: A "monetary union" introduces a shared currency. A "common market" adds to a FTA the free movement of services, capital and labor. An "economic union" combines customs union with a common market. A "fiscal union" introduces a shared fiscal and budgetary policy.
(4) An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy. Purposes for establishing a economic union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries.Economic union is established through trade pact.
(5) An economic and monetary union is a type of trade bloc which is composed of an economic union (common market and customs union) with a monetary union. It is to be distinguished from a mere monetary union (e.g. the Latin Monetary Union in the 19th century), which does not involve a common market. This is the fifth stage of economic integration. EMU is established through a currency-related trade pact. An intermediate step between pure EMU and a complete economic integration is the fiscal union
(6) Complete economic integration is the final stage of economic integration. After complete economic integration, the integrated units have no or negligible control of economic policy, including full monetary union and complete or near-complete fiscal policy harmonisation.
Complete economic integration is most common within countries, rather than within supranational institutions. A good example of this is a country like the United States of America which can be viewed as a series of highly integrated quasi-autonomous nation states. In this example it is true that complete economic integration results in a federalist system of governance as it requires political union to function as, in effect, a single economy.
In order to be successful the more advanced integration steps are typically accompanied by unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the trade barriers, introduction of supranational bodies, and gradual moves towards the final stage, a "political union".
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