Economic Unions Research Paper Starter

Economic Unions

(Research Starters)

Economic unions are a natural response to the realities of globalization and represent one stage in the process of economic integration. In theory, nations move from free trade agreements to form customs unions and then common markets before forming economic unions. In practice, however, the path is not always that clear. Economic unions often are characterized by a common currency and centralized bank, in which case they are sometimes referred to as economic and monetary unions. The best example of an economic and monetary union today is the European Union (EU). In many ways, the EU today is a living laboratory for observing the effects of macro economic policy cooperation on regional growth and cross-border economic, trade, and investment ties.

Globalization brings with it many changes. From a business point of view, globalization increases the marketplace in which a business can sell its goods and services. On the other hand, globalization often makes doing business more difficult, requiring, for example, the management of an international supply chain, dealing with the intricacies of managing an international workforce, or marketing to different cultures. In addition, globalization affects not only businesses; it also affects the countries within which a business operates. Before globalization, most countries are able to be economically self-sufficient and did not rely on international trade or imported goods to survive. However, with increasing globalization comes an increasing reliance on the goods and services of other countries. Thus, while an international company can market its goods and services in other countries, those other countries can market their own goods and services locally to the new company. To help facilitate the economic realities of globalization, a number of nations are forming economic unions.

An economic union is a type of common market that permits the free movement of capital, labor, goods, and services. Economic unions harmonize or unify their social, fiscal, and monetary policies (often including having a united currency). Examples of economic unions include:

  • The African Union,
  • Andean Community (Comunidad Andina),
  • Arab Maghreb Union (Union du Maghreb Arabe),
  • Association of Caribbean States,
  • Association of South East Asian Nations,
  • Caribbean Community,
  • Commonwealth of Independent States,
  • East African Community,
  • European Union, and
  • Pacific Community.

Although in practice, the path from national economic self-sufficiency to economic integration varies from situation to situation; in general, there are four stages to this transformation:

  • Free trade agreements,
  • Customs unions,
  • Common markets, and
  • Economic unions (Holden, 2003).

These stages are summarized in Figure 1.

Free Trade Agreements

The first stage toward economic integration is represented by the free trade agreement. Free trade is the exchange of good and services between countries or sovereign states without high tariffs, non-tariff barriers (e.g., quotas), or other inhibiting requirements or processes. Free trade does not apply to capital or labor. Free trade agreements (also referred to as preferential trade agreements) eliminate import tariffs and quotas between the signatories to the agreement. They may apply to all aspects of international trade between the signatories or may be limited to a few sectors. Often, free-trade agreements include formal mechanisms that are to be used to resolve disputes. The primary advantage of the free trade agreement is that it liberalizes trade among the member nations. However, free-trade agreements otherwise place few limitations on the member nations. In order for a free-trade agreement to properly function, it must also include rules of origin that apply to all third party goods imported from outside the free-trade area.

Customs Unions

The next stage in economic integration comprises the development of customs unions. Customs are duties or taxes that are imposed by a country, sovereign state, or common union on imported goods. In some situations, duties or taxes may also be imposed on exported goods. Customs unions remove internal trade barriers, and require participating states to harmonize external trade policies. Part of this harmonization includes the development of a common external tariff. These are shared customs duties, import quotas, preferences, or other non-tariff barriers imposed by a customs union or common market on imports to any or all countries in the union or market. Common external tariffs are actually a simple form of economic union. Customs union may prohibit the use of trade remedies with the union and may also negotiate multilateral trade initiatives. Because all goods imported into a customs union are subject to the same tariff no matter their point of origin, custom unions have no need for rules of origin as required in free trade agreements. However, in order to gain the benefits of a customs union, participating nations must by necessity relinquish their right to establish an independent trade policy. As a result, member nations also experience some restriction of foreign policy.

Common Markets

The third stage in economic integration is the development of a common market. This is a group of countries or sovereign states within a geographical area with a mutual agreement to permit the free movement of capital, labor, goods, and services among its members. Although common markets promote duty-free trade for the member nations, they impose common external tariffs on imports from countries that are not members. Common markets have unified or harmonized social, fiscal, and monetary policies. This feature of common markets severely limits the ability of member nations to implement independent economic policies. However, common markets offer gains in economic efficiency that could not otherwise be realized. Because of the nature of common markets, both labor and capital can move within the area of the common market, leading to a more efficient allocation of resources than could otherwise be achieved.

The Economic Union

The fourth stage in economic integration comprises the economic union. This is a type of common market which permits the free movement of capital, labor, goods, and services. Economic unions harmonize or unify their social, fiscal, and monetary policies. When economic unions also have a common currency with a concomitant central bank for all member states, they may be referred to as economic and monetary unions. Economic unions include significant harmonization of policy among the member states, particularly the formal coordination of monetary and fiscal policies, and labor market, regional development, transportation, and industrial policies.


The European Union

Arguably, the best known economic union today is the European Union (EU) comprising 27 different sovereign states in Europe. According to the Delegation of the European Commission to the United States, the roots of the EU trace back 50 years ("Economic & Monetary," 2007). The EU started as a "customs union that allowed trade to move freely among its member states" (p. 1). The EU facilitates the flow of labor, capital, goods, and services by providing a single market among the member states. The EU went a step further and became an economic and monetary policy with "coordinated fiscal policies and a common currency, the euro, €" (p. 1). In many ways, the EU today is a living laboratory for observing the effect of macro economic policy cooperation on regional growth and cross-border economic, trade, and investment ties.

The roots of today's EU began in 1970 with the publication of the first feasibility report for a European monetary union. At this time, much of Europe was suffering from...

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