Economic Integration: Improved productivity, technological development (e.g. e-commerce) and better transport infrastructures are all contributing to globalisation. This increased interdependency makes trade issues and trade performance even more important.
Globalisation essentially means a trend towards much more global production and a greater degree of interdependence between the various countries of the world.
- Sovereign countries belonging to a free trade area trade freely amongst themselves but have individual trade barriers with countries outside the free trade area.
- In a Customs Union, countries have free trade amongst themselves, as in an FTA, but they are no longer fully sovereign over trade policy. There will be some degree of standardisation of trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union.
- Common market is a customs union, which has, in addition, the free movement of factors of production such as labour and capital between the member countries without restriction.
- Economic Union is a common market where the level of integration is more developed. The member states may adopt common economic policies, such as common currency (such as the Euro).
Trade creation will mean that consumption shifts from a high-cost producer to a low-cost producer and trade therefore expands.
Trade diversion means that trade shifts from a lower cost producer outside the union to a higher cost producer inside the union.