Economic Zones

Globalization has opened up markets around the world. It encourages competition between countries that offer the same product. These countries compete with each other to sell the same product to the same buyers in the same market. By being able to choose who to trade with, countries primarily look for the best prices. This is why several states have signed free trade agreements. These agreements provide them with a market to sell their products without too much competition.

For economic reasons, several states in the same region believe it is advantageous to join forces by signing free trade agreements. States sign these agreements in order to remove barriers and increase trade between them. Two main barriers must be removed to facilitate free trade.

The first barrier is customs tariffs. These tariffs are a tax levied on goods that cross a country’s borders. Tariffs can significantly increase the price of a product.

The second barrier to trade that must be removed is government subsidies to companies. To have real free trade, the government should intervene as little as possible in trade. This is called laissez-faire. If a government gives subsidies to some companies, this becomes unfair to other companies in the same industry. With these government subsidies, a company could more easily lower its prices. With lower prices, this company could sell more goods and make more profit. This is considered unfair by the trading partners in a free trade agreement. If a government decides to subsidize a company anyway, it can face severe economic sanctions.

As of January 2020, there were 303 regional trade agreements. Each of these agreements involves a greater or lesser degree of economic integration based on four measures. Adopting one or more measures determines the level of economic integration between the signatory states. These measures are described below according to their level of integration, from least integrated to most integrated.

First is the adoption of free trade, which facilitates the exchange of goods, services and investments (capital) without tariffs between members of the agreement.

Next, in addition to having no tariffs between them, states can create a customs union. This means that all the signatory states apply the same tariff on imports from non-member countries.

Next is the establishment of a common market. This involves a free trade agreement, a customs union and the free movement of people and services. People often move between member countries for work. Paraguayan workers can work in a Brazilian, Uruguayan or Argentinean company without going through customs. They can move freely between countries.

Finally, once free trade, a customs union and a common market have been established, the last measure to promote economic integration is the adoption of an economic union. All signatory states unify their economic policies to form a large zone with the same economic rules. Some economic unions even share a common currency, such as the European Union which has the euro and the Economic Community of Central African States (CEMAC) which has the CFA franc. Having a common currency between several countries is the highest level of economic integration.

Economic integration brings several benefits to the signatory states, but the higher the level of integration, the less sovereignty a country has. When a state applies common laws with other states, it no longer makes its own laws, which limits its sovereignty to varying degrees. For example, a free trade agreement does not limit sovereignty as much as an economic union, which requires member states to adopt several common laws.

Economic forums are not economic integration. While they also aim to increase trade between countries, these countries retain their full sovereignty. Members discuss strategies to achieve their goals without making joint decisions. Participating states do not have to make any commitments.