2. Types of integration associations

The degree of economic integration can be categorized into seven stages:

1. Preferential trading area

2. Free trade area, Monetary union

3. Customs union, Common market

4. Economic union, Customs and monetary union

5. Economic and monetary union

6. Fiscal union

7. Complete economic integration

These differ in the degree of unification of economic policies, with the highest one being the political union of the states.

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.

A "customs union" introduces unified tariffs on the exterior borders of the union (CET, common external tariffs). A "monetary union" introduces a shared currency. A "common market" add 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. 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".

Stages of Economic integration

Trade pact type

activities inside the trade bloc

common barriers in external relations

eliminating barriers for exchange of

Shared policies

goods

services

capital

labour

goods(tariffs)

goods (non-tariff)

services

capital

labour

monetary

fiscal

Tariff

Non-tariff

Preferential trade agreement

TIFA

BIT,TIFA

Free trade agreement

Economic partnership

Common market

Monetary union

Fiscal union

Customs union

Customs and monetary union

Economic union

Economic and monetary union

Complete economic integration

  [partial] — [substantial] — [none or not applicable]

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. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

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 members.

Multilateral

• Asia-Pacific Trade Agreement (1976)

• Economic Cooperation Organization (ECO) (1992)

• Generalized System of Preferences

• Global System of Trade Preferences among Developing Countries (GSTP) (1989)

• Latin American Integration Association (LAIA/ALADI) (1981)

• Melanesian Spearhead Group (MSG) (1994)

• Protocol on Trade Negotiations (PTN) (1973)

• South Asian Preferential Trade Arrangement (SAPTA) (1999)

• South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) (1981)

Bilateral

• European Union – ACP countries, formerly via the trade aspects of the Cotonou Agreement, later via Everything But Arms (EBA) agreements

• India – Afghanistan (2003)

• India – Mauritius

• India – Nepal (2009)

• India – Chile (2007)

• India – MERCOSUR (2009)

• ASEAN – PR China (2005)

• Laos – Thailand (1991)

A currency union (also known as monetary union) is where two or more states share the same currency, though without their necessarily having anyfurther integration such as an Economic and Monetary Union, which has, in addition, a customs union and a single market.

There are three types of currency unions:

1. Informal - unilateral adoption of foreign currency

2. Formal - adoption of foreign currency by virtue of bilateral or multilateral agreement with the issuing authority, sometimes supplemented by issue of local currency in currency peg regime

3. Formal with common policy - establishment by multiple countries of common monetary policy and issuing authority for their common currency

The theory of the optimal currency area addresses the question of how to determine what geographical regions should share a currency in order to maximize economic efficiency.

A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency.

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.

Customs unions are established through trade pacts.

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. The countries often share a common currency.

Purposes for establishing an 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.

Fiscal union is the integration of the fiscal policy of nations or states. Under fiscal union decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. For example, in federal nations such as the United States, fiscal policy is determined to a large extent by the central government, which is empowered to raise taxes, borrow and spend.

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 harmonization.

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.