Countries often enter into different types of agreements with respect to their trade policies. The objective of such agreements is to reduce the trade barriers among countries.
These types of agreements are generally referred to as trade blocs or regional trading agreements (RTA), under which a group of countries agree to reduce or eliminate trade barriers.
These agreements will have internal rules that the members of the group follow for behavior among themselves. They will also have external rules that the members follow for dealing with non-members.
Types of Trade Blocs
There are different types of trade blocs depending on the levels of commitments and arrangement between the members.
Preferential Trade Areas
Preferential trade areas have the lowest level of commitment to the reduction of trade barriers. Here the members lower the trade barriers but do not eliminate the barriers among themselves. Such an agreement does not address how individual members will deal with the non-members.
Free Trade Area
The next level of commitment is the free trade area where all the trade barriers among the members are removed. So, all members are free to import and export goods and services among themselves. These members will continue to maintain independent trade policies with non-member countries. An example of a free trade agreement is NAFTA (North American Free Trade Agreement) under which Canada, Mexico and the US have agreed to eliminate the barriers among themselves. However, each member maintains independent policy while dealing with other countries.
This is the third type of trade bloc, under which the member countries not only eliminate internal trade barriers, but also adopt common policies on how to deal with non-member countries. An example is Customs union of Russia, Belarus and Kazakhstan, which was formed in 2010. These countries are eliminating trade barriers among themselves but have also agreed to some common set of policies for dealing with nonmember countries.
The above three types of trade blocs only addressed trade barriers related to goods and services. The following trade blocs, apart from these trade barriers, also address other factors such as flow of resources.
In a common market, the members eliminate internal trade barriers, adopt common external trade barriers and allow free movement of resources, for example labor, among member countries. Examples include Mercosur (Southern Cone Market), East African Common Market, and West African Common market.
In an economic union, members eliminate internal barriers, adopt common external barriers, allow free movement of resources, and adopt a uniform set of economic policies. The European Union is an example of an economic union. With one currency, they adopted one monetary policy.
The final level is the full integration of the member states. The example is the United States.
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