Stages of Economic Integration

The Regional Comprehensive Economic Partnership (RCEP) is a proposed FTA of which India aims to be a part of. The BREXIT proposal has also created pressure on India to form FTAs with the UK. In this context it is important to consider the meaning of FTA, and various other stages of economic integration.

Independent Economy

• In order to implement the principle of economic self-sufficiency, one must build an independent national economy.
• If an independent national economy is to be built, the economy must be developed in a diversified and integral manner. It requires development of heavy industry and light industry and agriculture simultaneously.
• It is necessary to establish reliable and independent sources of raw materials and fuel. Technical independence is also necessary.
• An independent economy is opposed to foreign economic domination and subjugation; but it does not rule out international economic cooperation.
  

Preferential Trade Area

• A preferential trade area/agreement (PTA) is a trading bloc that 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.
• Today simple PTA has evolved into bilateral PTAs and Mega-PTAs. Mega-PTA is wide regional trade agreements, such as the Transatlantic Trade and Investment Partnership (TTIP) or Trans Pacific Partnership (TPP).
• These tariff preferences create departures from the normal trade relations principle.

Free Trade Area

• A Free Trade Area (FTA) is a group of countries who have mutually agreed to limit or eliminate trade barriers - tariffs or quotas - among them.
• FTAs tend to promote free trade and the international division of labor, allowing countries to increase specialization in their respective comparative advantages.
• To develop a FTA, participating nations must develop rules for how the new FTA will operate and decide upon the following:
  • Customs procedures that each country will follow
  • Tariffs, if any, that will be allowed and their costs
  • Trade despite resolution mechanism
  • Transportation of goods
  • Intellectual property rights protection and management
• FTA rules decide the scope and degree of how “free” trade will actually be.
• Advantages: FTAs can benefit consumers, who get increased access to less expensive and/or higher quality foreign goods. Population may also see increased living standards.
• Disadvantages: Producers can struggle with increased competition, but they might also acquire a greatly expanded market of potential customers or suppliers.
  • Some jobs may be lost as production moves to areas with comparative advantage.
  • Outcomes of FTA may represent the influence of pressure groups, and rent-seeking behaviors may increase.
  • FTAs may actually distort patterns of international specialization and division of labor by biasing and limiting trade toward trade blocs, as opposed to allowing natural market forces to determine patterns of production and trade across countries.

Customs Union

• A Customs Union (CU) involves the removal of tariff barriers between members, and acceptance of a common (unified) external tariff against non-members.
• Countries that are part of a CU only need to make a single payment (duty), once the goods have passed through the border. Once inside the union goods can move freely without additional tariffs. Tariff revenue is then shared between members.
• Advantage: A common external tariff effectively removes the possibility of arbitrage and is one of the fundamental building blocks of economic integration.
• Disadvantage: CU members are not free to negotiate individual trade deals with non-members. For example, if a member wishes to protect a declining or infant industry it cannot do so through imposing its own tariffs.

Common Market

• A common (or single) market is the most significant step towards full economic integration.
• A common market is the extension of free trade from just tangible goods, to include all economic resources. This means that all barriers are eliminated to allow the free movement of goods, services, capital, and labour.
• Tariffs and all non-tariff barriers are also reduced and eliminated.
• For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding product standards, monopoly power and other anti-competitive practices.
• There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP)

Economic Union

• An Economic Union is a type of trade bloc which is composed of a common market with a customs union. It has common trade policy towards non-members, although members are free to pursue independent macro-economic policies.
• The member countries have common policies on product regulation, freedom of movement of goods, services and factors of production (capital and labour) and a common external trade policy.
• The European Union (EU) is the best known Economic union, and came into force on November 1st 1993, following the signing of the Maastricht Treaty (formally called the Treaty on European Union.)

Monetary Union

• Monetary union is the first major step towards macro-economic integration, and enables economies to converge even more closely.
• In monetary union, members adopt a single, shared currency, such as the Euro for the Euro-17 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean.
• This means that there is a common exchange rate, a common monetary policy, including interest rates and the regulation of the quantity of money, and a single central bank, such as the European Central Bank or the East Caribbean Central Bank.

Fiscal Union

• A fiscal union is an agreement to harmonise tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses.
• The majority of EU states agreed a fiscal compact in 2012. Though it is a less binding version of a full fiscal union.

Economic and Monetary Union

• Economic and Monetary Union (EMU) is a key stage towards compete integration, and involves a single economic market, a common trade policy, a single currency and a common monetary policy.

Complete Economic Integration

• Complete economic integration involves a single economic market, a common trade policy, a single currency, a common monetary policy, together with a single fiscal policy, including common tax and benefit rates – in short, complete harmonisation of all policies, rates, and economic trade rules.