Economic integration has been one of the main economic developments affecting international trade in the last years. Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to provide large markets for member-countries of the resulting integrated areas. There are mainly four levels of economic integration:
- Free trade area: is the least restrictive and loosest form of economic integration among nations. In a free trade area all barriers to trade among members countries are removed. Each member country maintains its own trade barriers vis-à-vis con-member countries.
- Customs union: is one step further in the economic integration process. As in the free trade area, goods and services are freely traded among members. In addition, however, the customs union establishes a common trade policy with respect to non-members. Typically this takes the form of a common external tariff, whereby imports from non-member are subject to the same tariff when sold to any member country.
- Common market. The common market has the same features as a customs union, but, in addition, factors of production (labour, capital and technology) are mobile among members. Restrictions on immigration and cross-border investment are abolished.
- Economic union: it is the last step in an economic integration process. In addition to free movement of goods, services and production factors, it also requires integration of economic policies, both monetary and fiscal. Under an economic union members harmonize monetary policies, taxation and government spending. In addition, a common currency is used by members and this could involve a system of fixed exchange rates.