What are the Different Types of Economic Integration?

Economic cooperation or integration may take any one or a combination of any of the following forms:

(i) Economic Union, (ii) Customs Union, (iii) Free Trade Area, (iv) Sectoral or Partial Integration, (v) Preferential Trading, (vi) Long-term Trade Agreements.

These different forms of integration visualise different degrees of economic cooperation in the descending order.

An Economic Union is a case of absolute integration. It implies complete economic integration of a group of countries. There is, thus, free mobility of factor resources and commodities in such a union. The economic activities and policies (fiscal, monetary and general) of the member nations are perfectly harmonised, coordinated and collectively operated. Benelux (Belgium, the Netherlands and Luxembourg) and the European Common Market (ECM) are such economic unions.

An economic union is, therefore, commonly referred to as a common market.

A Customs Union involves a common external tariff against non-member countries, while within the union itself there is unrestricted free trade. From the customs union gradually, complete economic union is evolved. For instance in the case of ECM, the Rome Treaty (1958) laid the basis of a customs union of the six member countries, leading finally to an economic union by 1970.

A Free Trade Area involves the abolition of all trade restrictions within the group, but each individual country in the group is free to maintain any sort of relation with the non-member countries. Countries in a free trade area have, thus, no common external tariffs to maintain.

The European Free Trade Association (EFTA), 1959, and the Latin American Free Trade Association (LAFTA) serve as examples of such free trade areas.

A Sectoral of Partial Integration refers to the establishment of a common market in a given product or products. The European Coal and Steel Community (ECSC), 1952, is such a sectoral integration by which members of the "Inner Six" have created a common market in coal and steel products within their territories.

Preferential Trading is a sort of trading technique involving various measures for promoting trade among the members of the group.

Generally, agreements may be entered into to ensure to each contracting party a favoured treatment as compared to others. Such an agreement is usually referred to as the most-favoured nation agreement. It may relate to commerce, industry and navigation, or it may relate either to commodities or merely to customs duties. Ordinarily, the most-favoured nation clause is bilateral in operation.

The trade liberalisation programme of the OEEC can be regarded as an example of preferential trading. In 1950, the Code of Liberalisation was adopted by the members of the OEEC in order to increase intra-European trade.

The Long-term Trade Contract is a type of bilateral arrangement, either in a single product or many products of trade between any two nations. Its minimum duration may be an year or more. For instance, India had once entered into a trade agreement with Japan for the supply of iron ore for a period of five years. Such an agreement tends to stabilise the export of a given product or products of the country concerned.