Economic Integration

Statement

Economic integration refers to the process whereby neighbouring countries integrate as one economic unit to achieve a more efficient allocation of resources. It proceeds through progressive levels:

• Free Trade Agreement (FTA) — member countries remove barriers to trade amongst themselves while retaining their own trade barriers against non-member countries.
• Customs union — member countries remove barriers to trade amongst themselves and impose a common (external) tariff on non-member countries.
• Common market — member countries operate as a single market: no internal trade barriers, and unrestricted movement of capital and labour between members (sometimes with common economic laws).

Notes

The three levels are progressive — each adds to the last. An FTA only frees trade between members; a customs union adds a shared external tariff, so members face the rest of the world as a bloc; a common market goes further still by freeing factor movements, not just goods and services. The H2 syllabus focuses mainly on FTAs. Forming such agreements reshapes trade flows — beneficially through trade creation, but at a cost through trade diversion. Real-world reference points: the China–Singapore FTA, the Caribbean Community (a customs union) and the European Union (a common market).