Stages of Regional Economic Integration

Regional economic integration is the progressive removal of economic barriers among participating countries. Successive stages differ in the depth of market integration, the treatment of non-members, and the extent to which members pool economic policy authority.

Preferential trade to a common external tariff

• A preferential trade area grants members lower trade barriers on selected products, without generally eliminating barriers among them.
• A free trade area substantially removes tariffs and quotas on intra-member trade, while each member retains its own trade policy toward non-members; rules of origin help prevent trade deflection.
• A customs union adds a common external tariff and common trade policy toward non-members to internal free trade.

From a common market to policy union

• A common market builds on a customs union by permitting freer movement of factors of production, particularly labour and capital, among members.
• An economic union adds coordination or harmonisation of major economic policies, such as fiscal, monetary, regulatory and social policies.
• Complete economic integration places major economic policies under unified rules and institutions with substantial supranational authority.

Logic and limits of the progression

Each higher stage normally incorporates the main commitments of the preceding stage. The progression is therefore from trade preferences to a common border policy, then factor mobility, and finally policy pooling; however, actual regional arrangements may combine features, advance unevenly or stop at any stage.

• A monetary union may be part of advanced economic integration, but a common currency is not essential to every economic union.
• Deeper integration can improve market scale and efficiency, but it requires progressively greater coordination and limits independent national policy choices.