Levels of integration
From least to most.
Five levels of economic integration, each deeper than the previous:
1. Preferential Trade Agreement (PTA). Selective tariff reductions between members on chosen goods/sectors. Limited scope.
Example: Commonwealth preferences (historically); various developing-country PTAs.
2. Free Trade Area (FTA). Zero internal tariffs on (almost) all goods. Each member sets own external tariffs against non-members.
Examples:
- USMCA (formerly NAFTA): USA, Mexico, Canada.
- ASEAN Free Trade Area.
- AfCFTA (African Continental Free Trade Area).
3. Customs Union. Zero internal tariffs + COMMON EXTERNAL TARIFF (CET). All members charge same tariff on imports from outside.
Examples:
- Mercosur: Brazil, Argentina, Uruguay, Paraguay (+ associates).
- EU Customs Union (with non-EU members like Türkiye for some goods).
4. Common Market (Single Market). Customs union + free movement of LABOUR, CAPITAL, and SERVICES (not just goods).
Examples:
- EU Single Market.
- East African Community (in principle).
5. Monetary Union. Common market + shared currency and monetary policy (single central bank).
Example: Eurozone (20 EU members in 2024 using euro). Note: Eurozone is monetary union without full FISCAL union — major tension during eurozone crisis 2010-2012.
Trade-offs of deeper integration:
- Gains: larger market, scale economies, more competition, factor mobility, deeper political ties.
- Costs: loss of sovereignty (tariff setting, monetary policy, regulation); risk of asymmetric shocks; bureaucracy.
Notable example: Brexit. UK left EU 2020 — moved from common market member to FTA partner. Result: increased trade frictions, regulatory divergence, reduced UK-EU trade. Demonstrates that LEAVING deep integration is costly.
- 5 levels: PTA, FTA, customs union, common market, monetary union.
- Deeper = more gains AND more sovereignty cost.
- EU is the deepest example.
- Brexit shows costs of EXITING integration.