Economic Integration and the Terms of Trade

Economic integration is the process by which countries reduce or remove barriers between them and coordinate their economic policies, forming trading blocs. Integration ranges from loose free-trade arrangements to full monetary and economic union, with each stage involving deeper cooperation and a greater loss of national policy independence.

Forms of economic integration

• A free trade area (FTA) removes tariffs and quotas on trade between members, but each member keeps its own trade policy toward non-members (for example, NAFTA/USMCA).
• A customs union is a free trade area plus a common external tariff: members trade freely among themselves and impose the same tariff on imports from outside.
• A common market is a customs union that also allows the free movement of factors of production—labo