Question

What is the difference between a free trade association, a common market, and an economic union?

Short answer

The difference between a free trade association, a common market, and an economic union lies in the degree of economic integration among member countries. A free trade association removes trade barriers, but does not include the free movement of factors of production or harmonized economic policies. A common market goes a step further by allowing the free movement of capital and labor, though still maintaining separate economic policies. An economic union represents the deepest level of integration, removing trade barriers, allowing the free movement of factors of production, and harmonizing economic policies under a central authority.

Step-by-step solution

1. Define each type of economic integration

To differentiate between a free trade association, a common market, and an economic union, we must first understand the definitions of each: A. Free Trade Association: An agreement between countries to remove trade barriers, such as tariffs and quotas, to promote free trade of goods and services between member countries. It does not include the free movement of factors of production (capital and labor) and countries maintain their separate economic policies. B. Common Market: A type of economic integration that goes beyond a free trade association. In addition to removing trade barriers for goods and services, it also allows the free movement of factors of production (capital and labor) between member countries. However, member countries still maintain their individual economic policies. C. Economic Union: A deeper form of integration than a common market. It includes the removal of trade barriers, the free movement of factors of production, and harmonization of economic policies such as monetary, fiscal, and taxation policies, under a central authority. This often leads to political integration as well.

2. Highlight the differences

Now that we have defined each type of integration, let's highlight their differences: A. Free Trade Association vs. Common Market: The main difference between a free trade association and a common market is the inclusion of free movement of factors of production. While both share the goal of eliminating trade barriers, common markets also permit the free flow of capital and labor between member countries, thus promoting deeper integration. B. Common Market vs. Economic Union: The key distinction between a common market and an economic union is the level of harmonization of economic policies. In an economic union, member countries not only remove trade barriers and allow the free movement of factors of production, but they also centralize and coordinate their monetary, fiscal, and taxation policies under a central authority. C. Free Trade Association vs. Economic Union: A free trade association is the least integrated form of economic partnership compared to an economic union. While both types of integration aim to eliminate trade barriers, a free trade association does not allow the free flow of factors of production or harmonize economic policies between member countries, whereas an economic union does both. In summary, free trade associations, common markets, and economic unions represent different degrees of economic integration, with the free trade associations being the least integrated and economic unions being the most integrated. Each one goes a step further in integrating the economies of the member countries, moving from removing trade barriers, to allowing the free movement of factors of production, and ultimately, to harmonizing economic policies under central authority.