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What’s it? A common market is economic integration in which each member country applies uniform external tariffs and eliminates trade barriers for goods, services, and factors of production between them. It is a more advanced economic integration stage after the free trade area and the customs union but before the economic union.
Under this trading bloc, goods, services, and production factors (such as capital and labor) flow freely among member countries. The bloc has also adopted a uniform policy regarding trade with non-members.
Examples of a common market
The European Economic Community (EEC) is a well-known example and was formed in 1958. Its purpose was to provide for the free movement of goods, capital, services, and labor within the European Union.
Initially, the EEC consisted of Belgium, Germany, France, Italy, Luxembourg, and the Netherlands. Later, 22 other members joined. They then took a more advanced stage by forming an economic union (economic union) in 1993 with 27 member countries. However, in January 2020, the United Kingdom left the European Union.
The 19 countries of the European Union then formed a monetary union and adopted a single currency, the Euro, in 2002. They formed the European Central Bank and the European Commission to synergize monetary and economic policies among member countries.
Two other examples of shared markets are:
First, the Southern Common Market (MERCOSUR). Members consist of several Latin American countries such as Argentina, Brazil, Uruguay, and Paraguay. In 2016, Venezuela joined to become a full member. Apart from these countries, MERCOSUR also has several associated countries, such as Colombia, Ecuador, Bolivia, Peru, Chile, Guyana, and Suriname. MERCOSUR’s main objective is to strengthen regional economic cooperation and generate business and investment opportunities.
Second, the East African Community (EAC). Members consist of six countries in East Africa: Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda. Its formation aims to accelerate economic growth and development in the region. This collaboration involves various sectors ranging from agriculture and energy to education and technology.
Key characteristics of a common market
A common market goes beyond the free flow of goods and services within a region. It fosters a truly integrated economic environment characterized by three key features:
Unimpeded movement of goods and services: Imagine a marketplace without borders. A common market eliminates trade barriers such as tariffs, quotas, and cumbersome customs procedures. Goods and services can flow freely between member countries, reducing costs and administrative burdens for businesses. This not only simplifies trade but also expands the market size for companies, allowing them to access a wider customer base within the member states.
Uniform external trade policy: A common market speaks with one voice when it comes to trade with non-member countries. Member countries establish a common set of tariffs and regulations for goods entering the union from outside. This creates a predictable and streamlined trading environment, eliminating the complexities of navigating different trade policies within the bloc. Additionally, a unified front strengthens the bargaining power of member countries in international trade negotiations, potentially securing more favorable trade deals.
Free flow of production factors: A common market doesn’t just remove barriers for goods and services; it extends this freedom to the factors that produce them: labor and capital. This means workers can move freely to seek employment opportunities in any member country, while businesses can invest and establish themselves across the region without restrictions. This allows for a more efficient allocation of resources. Companies can access the most qualified workforce and invest in locations that offer the best opportunities, leading to increased productivity and economic growth within the member states.
The “single market” concept: Due to these three core characteristics, a common market is often referred to as a “single market.” It essentially functions as a unified economic space where goods, services, and production factors move freely, fostering deeper economic integration and collaboration among member countries.
Requirements for a true common market: It’s important to note that all three characteristics must be present for an economic bloc to be considered a true common market. For instance, if there are restrictions on the movement of labor or capital within the member countries, the level of integration remains at the stage of a customs union, where only goods and services flow freely. Additionally, full labor mobility requires measures to ensure worker rights and qualifications are recognized across member states. Similarly, full capital mobility necessitates the absence of exchange controls and the ability for companies to establish themselves freely within the region.
Difference between the common and the customs union
To distinguish the two, let us discuss the stages of economic integration. In general, it involves the following stages, from the simplest to the most advanced:
- Preferential trade area
- Free trade area
- Customs union
- Common market
- Economic union
- Monetary union
Under the preferential trade area, several countries agreed to reduce trade barriers, especially tariffs. In other words, they only relaxed trade barriers but did not remove barriers altogether.
The cooperation may include only a few goods and services. Additionally, the countries involved did not discuss how they would deal with non-members.
Furthermore, under the free trade area, member countries agree to remove almost all barriers to free trade with each other. Hence, goods and services flow freely between members.
However, for external trade, each member country maintains an independent trade policy. So, for example, each may adopt different import tariffs.
The difference in tariffs then creates a trade deflection. Non-member countries can take advantage of these tariff differences to their benefit. They export to member countries with the lowest rates and then send the goods to other members, of course, without tariffs.
To solve this problem, they may take a more advanced integration stage, namely the customs union. Under a customs union, member countries have similar trade policies regarding trade with non-member countries. By homogenizing tariffs, for example, non-member countries cannot exploit the benefits of trade deflection. Besides, member countries also remove internal trade barriers between them.
The next stage of economic integration is the common market. It combines all the customs union provisions and allows the free flow of production factors between member countries.
If then, common market member countries synergize their economic policies, we call economic unions. A famous example is the European Union. Member states form joint economic institutions and coordinate economic policies between them.
If an economic union adopts a common currency, we call it a monetary union. An example is the Eurozone, a member of the European Union that adopts the Euro currency.
Advantages of a common market
A common market offers a compelling package of advantages that go beyond simply facilitating trade. Let’s delve deeper into some of the key benefits for both businesses and consumers:
Expanding market size and economies of scale: A common market dismantles trade barriers, creating a significantly larger market for businesses within the member countries. Companies can now access a wider customer base, potentially spanning multiple countries. This expanded market allows them to achieve higher economies of scale – the cost advantages that come with producing larger quantities. By producing more efficiently, businesses can reduce their average costs per unit, leading to:
- Lower prices for consumers: The cost savings achieved through economies of scale can translate into lower prices for consumers. This increased affordability can stimulate demand and further boost economic activity within the common market.
- Increased investment and innovation: With a larger market and potentially higher profits, businesses are incentivized to invest in research and development, leading to innovation in products, processes, and business models. This fosters a more dynamic and competitive market environment.
Enhanced efficiency and productivity: a common market facilitates the free movement of production factors – labor and capital – across member countries. This allows for a more efficient allocation of resources:
- Companies can access the most qualified workforce: Businesses are not restricted by geographical boundaries when searching for talent. They can tap into the entire pool of skilled labor within the common market, allowing them to assemble high-performing teams and operate more efficiently.
- Investment flows to areas of greatest opportunity: Capital can move freely to member countries with the most favorable investment climates, ensuring that resources are directed towards areas with the highest potential for growth and productivity.
Fostering innovation and competition: The increased competition within a common market is a double-edged sword. While it can be challenging for some businesses, it ultimately benefits consumers and the overall economy:
- Companies must innovate to compete: With more competitors vying for market share, businesses are forced to innovate and improve their products and services constantly. This focus on innovation leads to a wider variety of higher-quality goods and services available to consumers.
- Consumers benefit from greater choice and lower prices: Increased competition drives down prices as businesses strive to attract customers. This creates a win-win situation for consumers, who benefit from a wider selection of products at potentially lower prices.
Increased employment opportunities: The free movement of labor within a common market opens doors for workers seeking better employment opportunities. This geographical mobility allows skilled workers to find jobs that match their qualifications and career aspirations, potentially leading to higher wages and improved living standards.
A More stable and prosperous region: Common markets can foster greater economic and political stability within the member countries. Increased economic integration encourages collaboration on various fronts, leading to a more unified and prosperous region. Additionally, the economic interdependence created by a common market can incentivize member countries to resolve disputes peacefully to maintain a healthy trading environment.
Disadvantages of a common market
While a common market offers a multitude of advantages, it’s important to acknowledge the potential drawbacks that need to be carefully considered:
The double-edged sword of competition: Increased competition within a common market is a catalyst for innovation and efficiency. However, it can also pose a significant challenge to some domestic businesses:
- Vulnerability of less competitive firms: Companies accustomed to operating in a protected environment can struggle to compete against more efficient rivals from other member countries. This can lead to business closures and job losses, particularly in sectors that were previously shielded by trade barriers.
- Loss of government revenue: The decline of inefficient businesses can translate into a decrease in government tax revenue. This can strain social safety nets and limit resources available for public services.
- Erosion of national industrial policies: Governments may have less control over promoting specific domestic industries as resources flow freely within the common market. This can be a concern for countries with strategic industries or a desire to foster specific sectors of their economy.
Challenges of labor mobility: While a common market allows for the free movement of labor, several factors can hinder this mobility in practice:
- Skill and educational mismatches: Workers may face limitations due to a lack of qualifications or recognition of their existing skills across member countries. This can create bottlenecks in worker movement and hinder the optimal allocation of labor within the common market.
- Language barriers and cultural differences: Cultural differences and language barriers can make it difficult for workers to adapt to a new work environment in another member country. This can discourage some workers from seeking opportunities abroad, even if they possess the necessary skills.
- Brain drain and unequal development: The free movement of labor can lead to a phenomenon known as brain drain, where skilled professionals migrate to member countries with higher wages and better living standards. This can exacerbate existing inequalities within the common market, with some regions losing valuable human capital.
Policy coordination and regulatory harmonization: A successful common market requires a significant degree of policy coordination and regulatory harmonization among member countries. This can be a complex and time-consuming process:
- Differing national regulations: Member countries may have varying regulations on areas like labor standards, environmental protection, and product safety. Harmonizing these regulations can be challenging, as countries may need to find compromises that balance economic integration with national priorities.
- Challenges of collective decision-making: The process of reaching consensus on common policies can be slow and cumbersome, especially in a large and diverse common market. This can lead to frustration and hinder the smooth functioning of the economic bloc.
Potential for social discontent: The economic disruptions caused by increased competition and worker mobility can lead to social discontent within some member countries:
- Job losses and income inequality: The closure of inefficient businesses can lead to job losses and income inequality, particularly in sectors that are most exposed to foreign competition. This can create social unrest and strain the social safety nets of member countries.
- Loss of cultural identity: Increased integration can lead to concerns about the erosion of national cultures and identities. This can be a particularly sensitive issue for countries with strong cultural traditions.
