- Free Trade Area - This is when member states remove tariffs and quotas with one another. However, restrictions on trade with non-member states are kept individual to each nation.
- Customs Union - This is the same as above, but in addition there are common external restrictions on trade with non-member states.
- Common Markets - This takes it one step further and the members operate as a single market. This means as well as the features of the above arrangements there is also a common taxation system, common laws regarding production, employment and trade, free movement of labour and capital and no special treatment by governments to their own domestic industries. Additionally to this, we sometimes see fixed exchange rates between members and common macroeconomic policies.
|Trade Creation Diagram|
|Trade Diversion Diagram|
- Increased market size - allows firms to potentially exploit economies of scale to lower costs.
- Better terms of trade with world markets because of the power of the customs union.
- Increased competition which will stimulate efficiency and bring costs down.
- Resources may flow to the geographical centre for the lower transport costs leaving depressed regions on the edge of the union.
- Mergers will be encouraged which will boost monopoly powers.
- Diseconomies of scale.
- The administration costs of maintaining the union.