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08
Apr

An Agreement Between Countries In A Geographic Region To Reduce Tariff And Nontariff Barriers

Common markets are difficult to create because they require substantial cooperation in labour policy and economic policy. Since work and capital can flow freely within the block, the benefits to individual members vary; Skilled workers can move to higher-wage countries and private equity can go to countries with higher returns. In the EU, for example, Germany has seen an influx of Polish and Czech workers because these workers can earn much higher wages in Germany than in their home countries. (Cavusgil, Rammal, Freeman, 2011, p.253) The EU has made great strides towards economic union. Seventeen EU countries have thus launched a monetary union in which a single currency, the euro, is circulating today. Monetary union and the euro have significantly increased the ease with which European financial institutions set up branches throughout the EU and offer banking, insurance and savings products. The single currency also facilitates trade and investment for European companies operating within the EU. (Cavusgil, Rammal, Freeman, 2011, p.254) In order to strengthen economic integration, The Member States of the Economic Union are working to remove border controls, harmonize product and labelling standards and define a comprehensive energy, agriculture and social services policy. An economic union also requires its member to standardize laws and regulations relating to competition, mergers and other corporate behaviour. In order to facilitate the free movement of services, Member States are harmonising the admission procedures of professionals so that a qualified doctor or lawyer in one country can practise in any other country. (Cavusgil, Rammal, Freeman, 2011, p.254) Experience with regional economic integration shows that the best performing economic blocs tend to have the following characteristics.

The customs union is the second level of regional integration, similar to a free trade area, with the exception of the fact that Member States harmonize their foreign trade policy and introduce common tariff and non-tariff barriers to imports from third countries. MERCOSUR, an economic bloc in Latin America, is an example of this type of agreement. The introduction of a common customs system means that outside of MERCOSUR, a MERCOSUR member faces the same tariff and non-tariff barriers. Setting the most appropriate common external tariff is a challenge, as Member States must agree on the percentage of the tariff and the distribution of customs revenue between Member States. (Cavusgil, Rammal, Freeman, 2011, p.253) The Free Trade Area is the simplest and most common regime in which Member States agree to phase out formal barriers to trade in goods and services within the bloc, while each Member State has an independent international trade policy with countries outside the bloc.