Question

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

Short answer

A free trade association focuses on reducing or eliminating tariffs between member countries but maintains individual trade policies with non-member countries. A common market goes further by allowing free movement of goods, services, and people between member countries while still maintaining individual trade policies with non-member countries. An economic union exhibits the highest level of integration by not only allowing free movement of goods, services, and people but also harmonizing economic, monetary, and social/environmental policies among its member countries.

Step-by-step solution

Define Free Trade Association

A free trade association (FTA) is an agreement between countries to reduce or eliminate tariffs and trade barriers on goods and services traded between them. The main goal is to promote trade and cooperation, but each country still maintains its own trade policies with non-member countries.

Define Common Market

A common market is a group of countries that have a free trade association and have agreed to allow the free movement of goods, services, and people across their borders. This means that not only are there no tariffs or trade barriers between the member countries, but there are also no restrictions on the movement of labor and capital. However, individual countries still maintain their own trade policies with non-member countries.

Define Economic Union

An economic union represents a higher level of economic integration, where the member countries not only have a common market but also coordinate and harmonize their economic policies. This can include tax and fiscal policies, monetary policies, and even social and environmental policies. In some cases, an economic union may have a single currency shared by its members, and a central banking system to oversee monetary policies.

Compare Tariff Policies

A free trade association only addresses the elimination of tariffs within the member countries, but each member country maintains its own trade policies with the rest of the world. A common market retains these characteristics. However, in an economic union, member countries often harmonize their external trade policies, creating a unified approach to trade with non-member countries.

Compare Movement of Goods, Services, and People

In a free trade association, the focus is on the free trade of goods and services but not necessarily on the free movement of people. A common market takes it a step further by allowing both goods, services, and people to move freely within the borders of the member countries. An economic union not only enables this free movement but may also harmonize policies on labor, taxes, and other economic issues that can affect the free movement of people.

Compare Levels of Economic Integration

A free trade association represents the lowest level of economic integration, simply focusing on promoting trade between member countries through the removal of tariffs. A common market represents a higher level of integration by not only promoting trade but also allowing the free movement of goods, services, and people. An economic union represents the highest level of integration, as it not only includes the characteristics of a common market but also harmonizes economic policies, monetary policies, and social/environmental policies between its member countries. Overall, the main differences between a free trade association, a common market, and an economic union lie in their tariff policies, the movement of goods, services, and people, and the level of economic integration achieved by each.