Table of Contents
- Examples of a common market
- Common market characteristics
- Difference between the common and the customs union
- Common market pros and cons
What’s it: Common market is economic integration in which each member countries apply uniform external tariffs and eliminate 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. Apart from that, they have also adopted a uniform policy regarding trade with non-members.
Examples of a common market
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, energy to education, and technology.
Common market characteristics
Following are the characteristics of the common market:
- Goods and services flow freely among member countries by eliminating trade barriers such as tariffs and quotas.
- Member countries adopt uniform policies for trade with non-member countries.
- Production factors, such as labor and capital, can move freely between member countries.
Due to these three characteristics, the common market is often considered a single market because it supports the free flow of goods, services, and production factors. These three characteristics must be met to be considered a common market. For example, suppose production factors such as labor and capital cannot move freely between member countries. In that case, economic integration is still at the customs union stage.
Full labor mobility involves the right to stay and accept employment in all member states. Meanwhile, full capital mobility requires a lack of exchange controls and full establishment rights for companies in all countries.
Difference between the common and the customs union
To distinguish the two, let us discuss the stages in 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 benefits. They export to member countries with the lowest rates and then send them 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.
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.
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 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.
Common market pros and cons
Some of the advantages of the common market are:
First, the market is getting bigger. Companies can freely sell in member countries’ markets without worrying about unfair competition due to trade barriers. A broader market allows them to achieve higher economies of scale, reducing average costs.
Second, the allocation of resources to be more efficient. The factors of production move freely among member countries for their more efficient use. It contributes to increasing productivity and results in more robust economic growth. This ultimately leads to a more prosperous economy.
Third, competition increases. The number of competitors is increasing, not only from domestic but also from companies from other member countries. Increased competition promotes innovation, in which companies must operate more competitively.
Furthermore, a more competitive environment reduces the firm’s monopoly power. Efficient firms survive in the market while inefficient one’s exit. Efficient firms benefit from economies of scale and lower costs. Meanwhile, inefficient companies will lose market share and close if they cannot rebuild their competitive strategy.
Fourth, wider employment opportunities. The workforce is more geographically mobile among member countries. So, they can look for better opportunities in other member countries.
Fifth, consumers benefit more. They can access a more varied, cheap, and quality product due to innovation and a competitive environment.
However, the common market also has several drawbacks.
First, competition risk increases. Indeed, the competition promotes innovation and efficiency in the economy. But, it also increases the failure risk of domestic firms to survive.
Inefficient companies will eventually close down. That creates more unemployment and reduces business tax revenue. The most vulnerable are companies that usually receive government subsidies or protection.
Second, the workforce is vertically and horizontally immobile. Indeed, workers can move from one country to another member country. However, their mobility may still be limited due to inadequate skills and education.
Also, the migration of production factors to other member countries hinders domestic economic growth. Brain drain is an example of the aftermath, where professionals and a skilled workforce come out to seek better living standards and opportunities in other member countries.