Economic integration refers to the process by which countries come together to reduce trade barriers and coordinate economic policies in order to increase trade and investment among each other. There are various levels of economic integration, including free trade areas, customs unions, common markets, economic unions, monetary unions, and political unions.
Each level of integration involves different commitments and obligations for participating countries. Economic integration can bring many benefits to participating countries, such as increased economic growth, higher living standards, and greater efficiency in production and trade. However, it can also lead to economic challenges, such as job displacement and increased competition for certain industries.
6 Types of Economic Integrations
1. Free Trade Area
The USMCA is a free trade agreement, also known as NAFTA 2.0, signed between the United States, Mexico, and Canada. The USMCA is aimed to strengthen financial services, macroeconomic policies, and exchange rates. In addition, changes were made in protecting the environment, increasing mutual trade and intellectual property rights, and abolishing the 10-year patent right that provides the production of generic drugs and third-party content in internet services.
2. Customs Unions
The customs union requires the abolition of customs tariffs between member countries, harmonization processes to facilitate mutual trade, and a standard customs tariff against countries that are not members of the customs union. Despite this, it is observed that customs union member countries protect their own domestic markets and domestic producers by excluding certain products from tax exemptions and placing quotas on certain products. For example, the EU is a member of the customs union with Turkey, fresh fruit and vegetable trade in implementing customs duties, olive oil, and products such as tomato paste with a limited quota for duty-free export permits.
3. Common Market
As a natural consequence of the customs union, the next stage of commercial integration established between the union member countries is the common market if the production factors, such as labor and capital, are enabled to move freely within the union.
The European Union has fulfilled the requirements of being a single market. It provided four essential elements of free movement within the Community. Free movement of goods, persons, services, and capital within the European Union.
RCEP: The world's largest free trade area
The RCEP includes China, Japan, South Korea, Australia, New Zealand, and the 10 members of the Association of South East Asian Nations (ASEAN). The new free trade zone, to which Brunei, Vietnam, Laos, Cambodia, Thailand, Myanmar, Malaysia, Singapore, Indonesia, and the Philippines are parties as ASEAN members, will be larger than both the US-Mexico-Canada Agreement and the European Union.
What makes RCEP attractive is that it allows members to maintain various bilateral or multilateral agreements with non-Community countries that are currently in force.
4. Economic Union
A common trade policy is implemented against third countries by removing all trade barriers between the member states of the economic union. Coordination of tax policies of the countries that are members of the economic union is aimed. Ensuring the free movement of labor and capital among the member countries, the localization of the common currency, and the community economy are among the final targets. Union member states' participation in integration may be limited to various stages. For example, 20 countries in the EU with 27 members use the Euro as their official currency.
5. Monetary union:
A monetary union refers to countries adopting a common currency and monetary policy. This includes setting interest rates, controlling the money supply, and managing exchange rates. The EU is a monetary union with a common currency called the Euro.
6. Political Union
A political union is a political entity of governments that tends to act by forming a single authority. The former Soviet Union was an example of a political union. Today, it is very difficult for countries to form such a union democratically, that is, by their own will. Because political unity means that countries give up their political will to a great extent. The EU, as an economic union among 27 European countries, has the potential to transform into a political union.
The Future of Regional Trade Blocs
Free trade agreements and regional trade bloc formations are important in international trade. It is common practice for union members to sign an FTZ with third countries individually or by the union's decision. USMCA (former NAFTA, 3 countries), EU (27 countries), and RCEP (15 countries) have signed FTAs with many countries. These three commercial communities account for 80% of world trade.
Future projections vary. Many economists and political scientists argue that the influence of commercial communities on world trade will increase. This approach predicts that commercial communities will grow. Countries applying to become members of the EU and ASEAN are indicative of this. RCEP is a very large common market if there are no political problems among its members.
However, some economists claim these communities will disintegrate; the closest example is the EU. The main element in this expectation is the increasing extreme nationalism around the world, the different political attitudes of my countries, and the evolution of economic expectations into conflicts of interest.
Conclusion
Economic integration is a process that allows countries to reduce trade barriers and coordinate economic policies in order to increase trade and investment among each other. It can take many forms, including free trade areas, customs unions, common markets, economic unions, monetary unions, and political unions.
Economic integration can bring many benefits to participating countries, such as increased economic growth, higher living standards, and greater efficiency in production and trade. However, it also entails challenges such as job displacement and increased competition for certain industries. It's important for countries to carefully consider the costs and benefits of economic integration and to work together to address any potential challenges that may arise.
Written by: Aykut Alan
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