Globalisation: Types of Trade Agreements

This section outlines the different levels of economic integration that countries can achieve through trade agreements. We will distinguish between a Free Trade Area (FTA), a Customs Union, a Monetary Union, and a Full Economic Union, highlighting the key features and implications of each.

1. Free Trade Area (FTA)

A Free Trade Area is an agreement between two or more countries where tariffs, quotas, and other restrictive trade barriers are eliminated on goods traded between member countries. However, each member country maintains its own independent trade policies with non-member countries.

• Key Feature: Elimination of internal tariffs and quotas.
• External Trade Policy: Each member retains independent trade policies with countries outside the FTA.
• Example: NAFTA (now USMCA) historically linked Canada, Mexico, and the United States.

2. Customs Union

A Customs Union builds upon the FTA by adding a common external tariff (CET) on goods imported from non-member countries. This means that all member countries apply the same tariffs to imports from outside the union.

• Key Feature: Elimination of internal tariffs and quotas, plus a common external tariff.
• External Trade Policy: A single, unified trade policy is applied to all non-member countries.
• Example: The Southern African Customs Union (SACU) involves Botswana, Lesotho, Namibia, South Africa, and Swaziland.

3. Monetary Union

A Monetary Union is a deeper level of integration where member countries share a common currency. This typically involves a single monetary policy managed by a central bank. The most significant example is the Eurozone.

• Key Feature: Shared currency and a common monetary policy.
• Exchange Rate Policy: No exchange rate fluctuations between member countries.
• Interest Rate Policy: A single interest rate set by the central bank for the entire union.
• Example: The Eurozone, comprising countries within the European Union that have adopted the euro.

4. Full Economic Union

A Full Economic Union represents the highest level of economic integration. It involves not only a common currency and monetary policy but also the harmonization of economic policies, including fiscal policy, labour markets, and social welfare systems. This often includes the free movement of factors of production (capital, labour, and goods) between member countries.

• Key Feature: Shared currency, monetary policy, and harmonization of economic policies.
• Fiscal Policy: Coordination of fiscal policies (government spending and taxation).
• Labour Markets: Free movement of labour between member countries.
• Social Welfare Systems: Harmonization of social welfare systems.
• Example: No current example exists of a fully implemented economic union. The Eurozone is often considered to be moving towards this model, but significant policy differences remain.

Each level of integration involves increasing levels of economic interdependence and policy coordination. The choice of which level of integration to pursue depends on the specific economic and political objectives of the participating countries.