What’s it: An economic union is a form of regional economic integration in which goods, services, and factors flow freely between member countries. Plus, members also integrate economic policy. It is a more advanced form of the common market.
Well, before discussing economic union further, I will summarize the types of economic integration, from the simplest to the most complex.
- Free trade area → goods and services flow freely between member countries. However, each member has a different policy regarding external tariffs when trading with non-member countries.
- Customs unions → free trade area + each member has a uniform policy on external tariffs.
- Common market → customs union + free flow of factors of production
- Economic union → common market + common economic policy.
- Monetary union → economic union + single currency.
Economic union features
As I discussed earlier, the economic union is the final stage before the monetary union. Some of the main features of economic unions are:
- Goods, services, and production factors (capital and labor) flow freely among member countries.
- All members adopt a uniform set of policies when trading with non-members.
- Members establish the general institutions and economic policies for trade unions.
- Economic unions integrate monetary and fiscal policy. Member countries coordinate and harmonize government policy, taxation, and spending.
Economic union goals
Economic unions aim to eliminate internal barriers while simultaneously adopting external barriers to the movement of strategic resources.
Also, other objectives of economic unions usually include increasing economic efficiency by expanding the market economy. Members seek to build closer political and cultural ties between them.
Members also agree to harmonize economic policies. They then form a unified economic and financial market.
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Examples of an economic union
Among the famous examples of economic unions is the formation of the European Union (EU). Other examples are:
- CARICOM Single Market and Economy (CSME)
- Central American Common Market
- Eurasian Economic Union
- European Union
- Gulf Cooperation Council
European Union (EU)
The EU is the world’s largest trading bloc. These economic unions import goods and services from more than 100 countries, making them the world’s largest import market. Also, the EU is one of the largest exporters in the world.
Several EU members have adopted a common currency with the Euro. They formed a monetary union. The Euro becomes the official currency for 19 of the 28 EU members, which together form the Eurozone.
The EU coordinates economic policy, law, and regulation among its members. Such coordination is essential to address economic and financial problems.
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One of the principles for the formation of this region is free trade among its members. The EU is also committed to liberalizing world trade beyond its borders.
CARICOM Single Market and Economy (CSME)
CSME is a collaboration among Caribbean Community and Common Market (CARICOM) countries in the Caribbean. CSME aims to build a single market economy. Members agree to adopt the free movement of goods, services, people, capital, and technology.
CSME seeks to provide more excellent job prospects, expand opportunities to produce and sell goods and services, and encourage increased investment.
CSME consists of 12 member countries, including Barbados, Belize, Antigua and Barbuda, Dominica, Jamaica, Grenada, Guyana, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
Central American Common Market
Central American Common Market is formed by six countries in Central America, including Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. This cooperation is to facilitate regional economic development through free trade and economic integration.
The Central American Economic Council is the group’s main policy-making organ. This council is composed of ministers of the economy and seeks to coordinate regional economic integration.
Eurasian Economic Union (EEU)
This cooperation is also known as the Eurasian Union. It is a political and economic union of countries in central and northern Eurasia. The agreement on establishing a union was signed in 2014 by Russia, Belarus, and Kazakhstan. Additional treaties to both Armenia and Kyrgyzstan entered into force the following year.
The EEU has a single integrated market and introduces the free movement of goods, capital, services, and workers. This collaboration also provides joint policies in macroeconomics, industry and agriculture, transportation, energy, foreign trade and investment, customs, technical regulations, competition regulations, and antitrust regulations.
Gulf Cooperation Council (GCC)
The GCC consists of all the Arab states in the Persian Gulf, excluding Iraq. Councilmember states include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. GCC was founded in 1981.
All member states are currently monarchies. They consist of two absolute monarchies (Saudi Arabia and Oman), three constitutional monarchies (Qatar, Kuwait, and Bahrain), and one federal monarchy (the United Arab Emirates).
Economic union advantages
Some of the advantages of the economic union are:
- More investment flows in member countries. The capital flows freely between them. Some companies may wish to expand their locations close to centers of raw materials or labor.
- Taxes are uniform among member countries. It facilitates a greater flow of goods and services among members.
- Workers are more flexible in choosing jobs in member countries.
- The integration of market economies, finance, and common economic policies allows economic unions to become the world’s new economic powers.
- Several members have the opportunity to be in a rapidly growing economic and monetary area. They can take advantage of more developed financial markets to develop the economy.
- The unemployment rate decreases as workers find it easier to find work in other member countries. In other words, economic unions increase the geographic mobility of workers.
Disadvantages of economic union
- Land and property prices soared. Investors are looking for cheap land and property among member countries. They do so easily because of the free flow of capital.
- The issue of standardization of regulations is often complicated. Each member must standardize according to common standards.
- Internal economic interest motives often result in unequal treatment among members. Members with a broader economy are likely to be more dominant in making decisions and policies.
- Independence and economic independence are lost. Economic policies in member countries must conform to mutual agreement. And, it may not fit their economic background.
- Regional brain drain. Those with higher education leave their home country to pursue better opportunities in other member countries.
- International companies quickly expand the markets of member countries. That reduces the chances of smaller domestic companies developing.
- A crisis in one member can quickly spread to other members. It could lead to an even bigger crisis, shaking not only regional but international economies.