A project Report.docx

A project Report

On

Customer Satisfaction

Sbmitted By

Vandana Dhameja

Roll No. 37

Research GuideProf. Mr. Prakash Mulchandani

Submitted in partial fulfillment of the Degree of

M.COM (Part 1)

Affiliated to the University of Mumbai

Smt. Chandibai Himatmal Mansukhani College of Arts,

science, Commerce

Ulhasnagar- 421003.

2015-2016.

DECLARATION

I Vandana Dhameja, studying in Smt. Chandibai Himatmal Mansukhani college of Arts,

science, Commerce, Ulhasnanagr – 421003, Student of M.Com Part 1, Hereby declare that I

have completed my project on “Customer Satisfaction” in the academic year 2015-2016.

The information submitted by me is true and original to the best of my knowledge.

Vandana Dhameja

ACKNOWLEDGEMENTMy project is a result of the inspiring and thankful guidance and supervision of my project guide

Prof. Mr. Prakash Mulchandani, I am deeply indebted to him whose help, time, support, inspiration, stimulating suggestion and encouragement helped me in all the times of research and writing of this report.

This project has widened my horizon to various areas under general knowledge regarding the practical and real aspects of “Customer Satisfaction”

Last but not the least, this PROJECT has definitely helped me to achioeve something, which will be useful to us in future and hence am thankful to all persons who have helped in gaining such useful knowledge.

To end with, I thank the people who helped me indirectly but without their assistance this project was not possible. I thank all my friends and dear ones for their kind support.

OBJECTIVES OF STUDY

The setting of objective is the corner stone of a systematic study. The study will be fruitful one

when the basis laid down is a concrete one they represent the desired solution to the problem and help in

proper utilization of opportunities.

Objectives:

The objectives of the research are:

To find out which sales promotion tools will increase the sales

To find out how brand ambassador can influence sales promotion.

To know the features that attracts the customer for particular product.

To know the level of satisfaction of customers towards the product.

To know the Importance of Customer Satisfaction.

To understand the in depth Meaning of Customer satisfaction.

Executive Summary

Businesses monitor customer satisfaction in order to determine how to increase their customer base,

customer loyalty, revenue, profits, market share and survival. Although greater profit is the primary driver,

exemplary businesses focus on the customer and his/her experience with the organization. They work to

make their customers happy and see customer satisfaction as the key to survival and profit. Customer

satisfaction in turn hinges on the quality and effects of their experiences and the goods or services they

receive.

Customer satisfaction depends on the product’s performance relative to a buyer’s expectation, the

customer is dissatisfied.  If preference matches expectations, the customer is satisfied.  If preference is

exceeds expectation, the customer is highly satisfied or delighted outstanding marketing insurance

companies go out of their way to keep their customer satisfied.  Satisfied customers make repeat purchases

insurance products and tell other about their good experiences with the product.  The key is to match

customer expectations with company performance.  Smart insurance company’s aim to delight customers

by promising only what they can deliver, then delivering more than the promise.  Consumers usually face

a broad array of products and services that might satisfy a given need.  How do they choose among these

many marketing makers offers?  Consumers make choices based on their perception of the value and

satisfaction that various products and services deliver.

      Customer value is the difference between the values the customer gains from owning and using a

product and the costs of obtaining the products customers from expectations about the value of various

marketing offers and buy accordingly.  How do buyers from their expectations?  Customer expectations

are based on past buying experiences, the opinion of friends and marketer and competitor information and

promises.

      Customer satisfaction with a purchase depends on how well the product’s performance lives up to the

customers’ expectations.  Customer satisfaction is a key influence on future buying behavior.  Satisfied

customers buy again and tell others about their good experiences dies-satisfied customers of ten switches

to competitors and disparage the products to others.  An insurance provider open only to active duty,

retired and separated military members and their immediate families and therefore not included in the

rankings, achieved a satisfaction ranking equal to that any insurance company.

Depending on the industry and the nature of the bad experience, dissatisfied customers will complain to 10

to 20 friends and acquaintances, which is three times more than those with good experiences are. Hence,

the negative information is influential, and consumers generally place significant weight on it when

making a decision. If that is not the reason enough, fierce competitor is needed more and more to

differentiate firms from one another. With technology available to virtually every one today, the

traditional features and cost advantages are no longer relevant. Still product and service quality provides

an enormous opportunity to distinguish a firm from the rest. The Japanese have recognized this and have

though us to expect quality. Today’s consumers do, and they know more about products and services than

they ever did.

Customers are the best source of information. Whether to improve an existing product or service or

whether firms are planning to launch something new. There is no substitution for “getting it from horse’s

mouth” When you talk to your customer directly, to increase your odds for achieving success you

“mistake-proof” your decisions and work on what really matters. When you routinely ask the customers

for feedback and involve them in business they, in turn, become committed to the success of your

business.

Methodology

This project is prepared with the combination of theoretical knowledge as well as practical

knowledge and a blend of advices and suggestion from the guide of the project.

Various books helped me out in extracting the theoretical element. Also the information relevant

to the project is being surfed from internet. All these activities are conducted as per the guide

consent.

Finally, the project has been advantageously finished with various kinds of experiences

gained throughout. It had been possible with my facts and information on this subject.

ECONOMIC

INTEGRATION

markets diminish. Classes_1_Economic integration

Explanations for trade

Classical 2. Opportunity costs 3. Comparative advantage

Neo-classical 4. Production structure 5. Factor prices 6. Production volume 7. Factor abundance

1. The world economy

New trade 9. Imperfect competition 10. Intra-industry trade

Policy

8. Trade policy

11. Strategic trade policy

12. Int. trade organizations 13. Economic integration

17. Applied trade policy modeling

Economicgeography

New interactions 14. Geographical economics 15. Multinationals 16. New goods, growth, and development

Industrialorganization

InternationalbusinessGrowth theory

Part

IPa

rt II

Part

III

Part

IV

18. Concluding remarks

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the level of welfare, while leading to and increase of economic productivity of the states.

The trade stimulation effects intended by means of economic integration are part of the contemporary economic Theory of the Second Best: where, in theory, the best option is free trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist.

ObjectiveThere are economic as well as political reasons why nations pursue economic integration. The economic rationale for the increase of trade between member states of economic unions that it is meant to lead to higher productivity. This is one of the reasons for the global scale development of economic integration, a phenomenon now realized in continental economic blocks such as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic Community; and proposed for intercontinental economic blocks, such as the Comprehensive Economic Partnership for East Asia and the Transatlantic Free Trade Area.

Comparative advantage refers to the ability of a person or a country to produce a particular good or service at a lower marginal and opportunity cost over another. Comparative advantage was first described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal.[3] In Portugal it is possible to produce both wine and cloth with less labour than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.

Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.[4]Economies of scale is also a justification for economic integration, since some economies of scale may require a larger market than is possible within a particular country — for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market. A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local market.

Besides these economic reasons, the primary reasons why economic integration has been pursued in practise are largely political. The Zollverein or German Customs Union of 1867 paved the way for German (partial) unification under Prussian leadership in 1871. "Imperial free trade" was (unsuccessfully) proposed in the late 19th century to strengthen the loosening ties within British Empire. The European Economic Community was created to integrate France and Germany's economies to the

point that they would find it impossible to go to war with each other.

Stages of economic integration around the World (each country colored according to the most integrated form that it participates

with):

  Economic and Monetary Union (CSME/EC$, EU/€)

  Economic union (CSME, EU, EEU/EAEU)

  Customs and Monetary Union (CEMAC/franc,UEMOA/franc)

  Common market (EEA, EFTA, CES)

  Customs union (CAN, CUBKR, EAC, EUCU,MERCOSUR, SACU)

  Multilateral Free Trade Area (AFTA, CEFTA, CISFTA,COMESA, GAFTA, GCC, NAFTA, SAFTA, SICA)

V

T

E

Free trade around the World:

  Multilateral free trade agreements or more advanced agreements

  Bilateral free trade agreements advanced agreements

  No free trade agreements, but World Trade Organization members

A world map of World Trade Organization participation:

  Members  Members, dually represented with the European Union

TYPES OF INTEGRATION1. Preferential trading area 2. Free trade area 3. Customs union 4. Common market 5. Economic union 6. Economic and monetary union 7. Complete economic integration

These differ in the degree of unification of economic policies, with the highest one being the completed economic integration of the states, which would most likely involve political integration as well.

A "free trade area" (FTA) is formed when at least two states partially or fully abolish custom tariffs on their inner border. To exclude regional exploitation of zero tariffs within the FTA there is a rule of certificate of origin for the goods originating from the territory of a member state of an FTA.

A "customs union" introduces unified tariffs on the exterior borders of the union (CET, common external tariffs). A "monetary union" introduces a shared currency. A "common market" add to a FTA the free movement of services, capital and labor.

An "economic union" combines customs union with a common market. A "fiscal union" introduces a shared fiscal and budgetary policy. In order to be successful the more advanced integration steps are typically accompanied by unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of

the trade barriers, introduction of supranational bodies, and gradual moves towards the final stage, a "political union".

Stages of Economic integration

Trade pact type

activities inside the trade bloc common barriers in external relations

eliminating barriers for exchange of Shared policies goods

services

capital

labourgood

s(tariffs)

goods(non-tariff)

services capital labou

rmonetar

yfisca

lTarif

f

Non-

tariff

Preferential trade

agreementTIFA BI

T,TIFA

Free trade agreement

Economic partnershi

p

Common market

Monetary union

Fiscal union

Customs union

Customs and

monetary union

Economic union

Economic and

monetary union

Complete economic integratio

n

For a variety of reasons it often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not possible otherwise. A clear example of this is shown in the discussion of trade wars among large countries .

There it is shown that if countries cooperate and set zero tariffs against each other, then both countries are likely to benefit relative to the case when both countries attempt to secure short-term advantages by setting optimal tariffs.

This is just one advantage of cooperation. Benefits may also accrue to countries who liberalize labor and capital movements across borders, who coordinate fiscal policies and resource allocation towards agriculture and other sectors and who coordinate their monetary policies.

Any type of arrangement in which countries agree to coordinate their trade, fiscal, and/or monetary policies is referred to as economic integration. Obviously, there are many different degrees of integration.

. 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:

Preferential Trading,

Free Trade Area,

Custome union

Comman market

Economic Union,

Economic & Monetory Union

Complete Economic Integration

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.

The Theory of Preferential Trade Agreements: Historical Evolution and Current Trends

The theory of preferential trade agreements (PTA's), or what might be described in policy terms as the General Agreement on Tariffs and Trade (GATT) Article XXIV sanctioned free-trade areas (FTA's) and Customs Unions (CU's), has undergone two phases of evolu-tion, in two very different modes, largely re-flecting the contrasting policy concerns of the time. In this paper, we trace this evolution, offering both a historical context and an intellectual coherence to diverse analytical approaches. I. Static Analysis: Trade Creation and Trade Diversion A. Viner: Cutting Tariffs Preferentially It is well known that Jacob Viner (1950) pioneered the static analysis of PTA's. His analysis was prompted by policy concerns about PITA's, tracing from the Havana Charter for the aborted International Trade Organiza-tion (ITO). The formation of the European Community in 1957, and of the European Free Trade Agreement (EFTA), then gave a more direct policy dimension to this theory and led to important analytical insights, especially from the work in the 1950's of Richard Lipsey and Kelvin Lancaster, Harry Johnson, and James Meade.

The essential message of the Vinerian ap-proach was that PTA's, as distinct from non-discriminatory trade liberalization, could harm both a member country and world welfare. PTA's could be "trade diverting" or "trade creating." These Vinerian concepts have been reworked by many

Following Paul Krugman (1991), Jeffrey Frankel et al. (1995) have also argued that

lack of distance and, hence, reduced transport costs should define beneficial natural trading partners. But in Bhagwati and Panagariya (1996), we show that this is also an untenable argument: we construct an example where a country is better off forming a PTA with a dis-tant rather than a proximate country when these two countries are otherwise identical. B. Kemp-Wan-Ohyama: Necessarily Welfare-Improving CU While the Vinerian approach has proved to be the most potent in theory and in policy thinking, it violated the layman-like view, which may be now corrupting the policy do-main, that PTA's were a good thing since they were a move toward free trade. The beauty of the influential 1976 paper by Murray C. Kemp and Henry Wan, anticipated by Michihiro Ohyama (1972), was to show that one could always construct a welfare-improving CU among any subset of countries while the non-members were left at their initial welfare. The Kemp-Wan demonstration, however, is really a "possibility theorem." Recently, economists such as Christopher Bliss (1994) and T. N. Srinivasan (1995) have begun to put structure on the analysis; Srinivasan, for example, proceeds to compare the Kemp- Wan tariff, under alternative models, to the Article XXIV requirement that the common external tariff of a CU should, on average, be unchanged. C. Cooper-Massell-Johnson-Bhagwati: CU to Minimize Cost of Industrialization After the Treaty of Rome, many developing countries sought (unsuccessfully, in the end) to form similar FTA's or CU's on the ground that, given the protection against the industri-alized North, they could liberalize among themselves and reduce the cost of their indus-trialization, an idea that was developed inde-pendently in C. A. Cooper and B. F. Massell (1965), Harry Johnson (1965), and Bhagwati (1968). Only recently has a proper proof of this proposition been provided by Pravin Krishna and Bhagwati (1994) who saw that the argu-ment could be proved simply as a version .

The Kemp-Wan theorem with an added policy instrument thrown in to achieve the targeted degree of member-country industrialization. D. Brecher-Bhagwati: Member-Country- Welfare Effect of Policy and Parametric Changes in a Common Market Alternatively, the case where there is a common market, with full factor mobility, has been analyzed by Richard Brecher and Bhagwati (1981). That paper also considers how the effect of changes-such as in the external tariff or in technical know-how or in capital accumulation-affects the welfare of individual countries.

This analysis is clearly relevant to analysis of policy questions such as the effect of a change in the Common Ag-ricultural Policy on, say, British welfare. E. Grossman-Helpman-Krishna: The Political-Economy-Theoretic Analysis of PTA Formation Finally, with the recent interest in the the-ory of political economy and the desire to analyze why PTA's are becoming popular, the cutting-edge theory of PTA's has moved into modeling the incentives to form PTA's. The chief insight of Gene Grossman and Elhanan Helpman (1995) and of Krishna (1995) is to show how trade diversion pro-vides a principal motive for forming such PTA's. In addition, the political-economy analysis of PTA' s has been extended to other questions. Thus, Panagariya and Ronald Findlay (1996) have shown how reduced protection in a PTA can lead to incentives to raise tariffs on non-member countries-a policy issue of impor-tance since such raising of barriers is possible with administered protection. H. Dynamic Time-Path Analysis: Building versus Stumbling Blocks In contrast to the question of whether the immediate (static) effect of a PTA is

good, we may ask whether the (dynamic time-path) ef-fect of the PTA is to accelerate or decelerate the continued reduction of trade barriers to-ward the goal of reducing them worldwide.

We now have the key concepts in the dynamic time-path case of PTA's acting as "stumbling blocks" or "building blocks" toward world-wide nondiscriminatoryt rade liberalization,i n-troduced by Bhagwati (1991), just as Viner (1950) introduced the key concepts of trade di-version and trade creation for the static analysis. A. Formulating the Dynamic Time-Path Question The time-path question may be formulated analytically in two separate ways. Analytical Question L -Assume that the time-path of MTN (multilateral trade nego-tiations) and the time-path of PTA's are separable and do not influence each other, so that neither hurts nor helps the other. Will the PTA time-path then be characterized by stag-nant or negligible expansion of membership; or will there be expanding membership, with this even turning eventually into worldwide membership as in the WTO, thus arriving at nondiscriminatory free trade for all? The analysis can be extended to a comparison of the two time-paths, ranking the efficacy of the two methods of reducing trade barriers to achieve the goal of worldwide free trade for all. Analytical Question IH.

Assume instead, as is plausible, that if both the MTN and the PTA time-paths are embraced simultaneously, they will interact. In particular, the policy of undertaking PTA's will have a malign or a be-nign impact on the progress along the MTN time-path. Question I can be illustrated with the aid of Figure 1, which portrays a sample of possibil-ities for the time-paths. World welfare is put on the vertical axis, and time is put on the hor-izontal axis.

For the PTA time-paths drawn, an upward movement along the path implies growing membership; for the MTN time-paths, it implies nondiscriminatory lowering of trade barriers among the nearly worldwide WTO membership instead. The PTA and MTN time-paths are assumed to be indepen-dent of each other, not allowing for the PTA time-path to either accelerate or decelerat.

The dynamic time-path question has arisen, just as the static one did, in policy concerns and political decisions that ran ahead of the theory. It arose in the context of the U.S. fail-ure to get an MTN round started at the GATT in 1982 and the U.S. decision finally to aban-don its avoidance of Article XXIV sanctioned PTA's. This was Hobson's choice: if the MTN could not be used to continue lowering trade barriers, then PTA's would need to be used instead. But the United States has wound up becom-ing committed to "walking on both legs," em-bracing both the PTA and the MTN paths; and its spokesmen have implied that PTA's will have a beneficial impact through induced ac-celeration of MTN. The questions that we have distinguished above spring therefore from this shift in U.S. policy. In Bhagwati (1991, 1993), the challenge to international-trade theorists (to analyze these questions) was first identified and a preliminary set of arguments offered. We now systematize the theoretical literature that has developed subsequently

B. "Exogenously Determined" Time-Path. A Diversion First, consider theoretical approaches which are not meaningful for thinking about the dy-namic time-path questions at hand. 1.

Kemp-Wan. -The approach of Kemp and Wan (1976) seems to be pertinent to our questions but is not. Evidently, the PTA time-path to U* in Figure 1 can be made monotonic, provided the expanding membership of a PTA always satisfies the Kemp-Wan rule for form-ing a CU. But what this argument does not say, and indeed cannot say, is that the PTA will necessarily expand in this Kemp-Wan fashion. 2. Krugman. -The same argument applies to the theoretical approach introduced by Krugman (1991), where again the expansion of membership is treated as exogenously spec-ified, as in Viner (1950), and the world welfare consequences of the world's mechanically dividing into a steadily increasing number of symmetric blocs are examined. Srinivasan (1993) has critiqued the specific conclusions as reversible when symmetry is dropped. But the main problem is the apparent irrelevance of this approach to the incentive-structure dy-namic time-path questions that are of central importance today.

C. "Endogenously Determined" Time- Paths: Recent Theoretical Analyses The analysis of the dynamic time-path question has moved into formal political-economy-theoretic modeling. We provide here a synoptic review of the few significant con-tributions to date, organizing the literature analytically in light of the two questions dis-tinguished above. Question L.-The single contribution that focuses on Question I (i.e., the incentive to add members to a PTA) is by Richard Baldwin (1993), who concentrates, in turn, on the in-centive of nonmembers to join the PTA. He constructs a model to demonstrate that this in-centive will be positive: the PTA will create a "domino" effect, with outsiders wanting to become insiders..

FREE TRADE AREA: A free trade area (FTA) is formed when at least two states partially or fully abolishcustom tariffs on their inner border. Free trade area is a type of trade bloc, adesignated group of countries that have agreed to eliminate tariffs, quotas on most (ifnot all) goods traded between them.To exclude regional exploitation of zero tariffs within the FTA there is a rule ofcertificate of origin for the goods originating from the territory of a member state of anFTA. Unlike a customs union, members of a free trade area do not have a commonexternal tariff (with respect to non-members), meaning different quotas and customs.To avoid evasion (through re-exportation) The countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requirements arenot entitled for the special treatment envisioned in the free trade area provisions.Examples of FTA:Central European Free Trade Agreement (CEFTA)North American Free Trade Agreement (NAFTA)

o Free Trade Area:

In this case, tariff barriers to the trade of goods between member states are eliminated, but each country retains control over its own commercial policy; this means that certain types of barriers are effectively maintained.

There are certain limitations imposed by “rules of origin”: only goods that have either been completely produced in one of the member countries, or which have mainly been produced in them are allowed to circulate freely.

Characteristics of Free TradeFree trade is often defined as a set of negations, that is, trade without government interference of various kinds. There is nothing wrong with defining it as a set of negations. It does have aspects that are positive, however, and these should be stressed. The best way to understand free trade is though empowerment: who makes decisions in free trade versus protected trade? Free trade empowers markets to make the final decisions on international economic life. Protected trade, or international trade dominated by the state, empowers political actors to be the final arbiters of international economic life.

TariffsThe most common characteristic of free trade is the lack of state tariffs on imports. A tariff is a tax placed on incoming goods by the host country. it makes foreign goods, therefore, artificially more expensive than domestically produced goods, giving the latter a competitive edge.

Markets Markets, not the state or even powerful economic actors, are empowered to make

decisions in free trade systems. If foreign goods are priced according to market norms, then the winner in economic competition is who makes the best product at the lowest price. In protected trade, it often is the actor with the most political power who gets its economic interests protected.

States

Free trade takes the state out of the economic equation. States are disempowered to make any kind of economic decision concerning the global economy. Consumers and companies are then empowered to make these decisions based on their preferences rather than state policy.

Contracts Markets are based on contracts between buyers and sellers. Therefore, the removal

of the state from economic decision-making means the dominance of contracts over state regulations in global economics. In this case, free contracts are an important characteristic of free trade. Protected trade, on the other hand, is international economic activity controlled, at least in part, by the state.

Economics Economics is at the center of free trade thinking. Politics is at the center of

protected trade. Therefore, any free trade regime thinks in terms of economic categories: efficiency, markets and contracts. Protectionism thinks in terms of political categories: domestic producers, powerful interests, state power.

Globalism Free trade demands a world without borders. In an economic sense, the states of

the globe are irrelevant, only the demands of the global market has any economic relevance. Hence, under free trade, the globe becomes progressively smaller as corporations and bankers serve a global, rather than a national, market.

CUSTOM UNIONo Customs Union:

The EU reached this objective in 1968, when it was still the EEC.

The Customs Union was based on the creation of a Common Customs Tariff (CCT) with respect to the rest of the world. At the same time, customs duties between its member countries were eliminated.

As well as goods, this type of integration also seeks to promote the trading of services.

As a result, the members must agree to establish a common customs legislationV

Definition Agreement between two or more (usually neighboring) countries to remove trade barriers, and reduce or eliminate customs duty on mutual trade. A customs union (unlike a free trade area) generally imposes a common external-tariff (CTF) on imports from non-member countries and (unlike a common market) generally does not allow free movement of capital and labor among member countries.

Use customs union in a sentence

You should know if there is a customs union before you decide to bring anything back from a country you traveled to.

The customs union was something good because it allowed barriers to be removed and I always liked when barriers fell.

The customs union was a partnership that allowed for mutually beneficial trading arrangements to take place which left each nation better off.

What Are the Benefits of a Customs Union? The customs union is a form of economic integration involving two or more sovereign states that stipulates that there be free trade between the member states and a common tariff policy on trade with non-member states. The customs union is the third stage in the process of economic integration between states, after the creation of a free trade area and prior to the declaration of a common market.

Free Trade One of the defining features of the customs union is a policy of free trade between

member states. Free trade is the economic term for the elimination of import and export tariffs between states. As David Ricardo outlined in his theory of Competitive Advantage, free trade is generally desirable because it maximizes total economic efficiency by allowing competition to run its natural course. Under free trade, if nation A can produce a product more cheaply than nation B, consumers in nation B can buy the product from nation A without paying an additional tax. Without free trade, the government of nation B might impose a heavy tariff on imports of the product in question, forcing consumers in nation B to purchase nation B's products at a higher price.

Common External Tariff A common external tariff is the agreement between the parties of the customs union

that stipulates that all member states maintain the same tariffs, import quotas, non-tariff trade barriers and preferential policies towards non-member states. This prevents the practice of re-exportation within the customs union, which occurs if one member charges lower tariffs to attract foreign imports, and then re-exports those products to other members of the customs union for a profit under the internal free trade policy. The common external tariff is also useful in that it allows the members of the customs union to combine their economic power in enacting punitive or favorable tariffs towards non-member states.

A Building Block of Economic Cooperation Perhaps the most important advantage to forming a customs union is that it

represents an important step in the process of economic integration. In today's

globalized economy, economic integration is more important than ever, as advancements in transportation technology have made international trade increasingly viable, and economic interdependency has emerged as a tool to facilitate cooperation and conflict resolution. The European Union Customs Union is a prime example; established in 1958 as a feature of the European Economic Community, the EUCU laid the groundwork of international trust and economic cooperation that allowed the creation of today's economic and political union known as the European Union.

Common Market EconomicsA common market, also called a single market, refers to an economic agreement between two or more countries that stipulates that the signatory countries establish a free trade area, share a single currency and have the same tariffs on goods imported from non-member countries. Primary example of common markets include the European Union, or EU, and the European Economic Area, or EEA.

Efficient Allocation of Resources A bigger market more efficiently allocates resources than a smaller one. As goods,

services, capital and workers move across borders as if there were no borders, resources move from places of abundance to where they are needed most. A notable example is high unemployment in one country or region and a shortage of qualified labor in another. As a result of the common market, people from one place can easily move to another place, helping to boost productivity and increase their living standards.

Economies of Scale A common market is good for business. Selling products or services in a country of 1

million people differs greatly from operating in a market with 350 million potential customers, for example. As companies do not need to comply with a multitude of national regulators but only have to satisfy one common regulator, doing business becomes easier. Consumers benefit, too, through lower prices and higher quality as a result of greater competition between producers.

Shared Currency Another important aspect of a common market is a single currency. Single currency

lowers transaction costs by eliminating the exchange risks and currency conversion fees. Furthermore, a shared currency also allows easier cross-border investments and price comparisons by consumers between countries. For example, if a person in

country A goes online and finds a cheaper car in country B, he can order the car from that country, without paying any additional taxes or levies.

Problems A common market has a number of theoretical as well as practical problems. First,

as of February 2011 the implementation of a common market in its pure form has never taken place in any country. The Euro zone comes close, but it still faces many hurdles, and some states still protect their markets from foreign competition, particularly cross-border takeovers. In addition, there are also problems that would be present even in a pure common market. For example, a common market cannot be fully integrated unless people speak a common language, which is difficult provided countries' unique cultural and linguistic heritages. Technical problems also exist. As different regions of the common market may experience different stages of economic cycle, no single monetary policy, such as interest rates, can fully accommodate them. For example, Germany may have high inflation, demanding high interest rates, while Ireland can have deflation and may need low interest rates.

Aims & Objectives of Economic Integration

Economic integration refers to the coordination of national economic policies as a means of boosting international trade, market activity and general cooperation among economies. Formal international economic unions are a recent phenomenon, but former International Monetary Fund economic counselor Michael Mussa traces the roots of global economic integration to the medieval era. Despite the fact that the general aim of making trade flourish remains the same, particular objectives of economic integration agreements have changed to correspond to modern political and economic circumstances.

Increase of Trade When foreign products are subject to tariffs, exporters either have to accept the

extra cost of trade or make do with a lesser volume of exported products. A basic

element of economic integration policies is the abolition of part of the extra fees or even the full amount of them, making trade cheaper and giving exporters a bigger incentive to do business with integrated economies.

Allowing Consumers to Spend More Economic integration reduces or eliminates customs duties, which in turn results in

cheaper imported products for consumers. This way, the purchasing power of consumers grows, and with it, activity in the market. The public can start buying more imported products or spend former duty expenses on other products or services. In addition, goods that are not produced in sufficient quantities in one country can be imported and distributed in the market with low cost.

Movement of Capital Movement of capital refers to the transfer of business or individual assets among

countries. The benefits of capital movement is the investment in new markets, leading to their eventual development. Economic integration removes barriers to foreign investors, minimizing or abolishing extra tax, while advanced integration policies, such as a monetary union, can even eliminate the cost of currency exchange. Movement of capital is recognized as an essential element of economic integration by associations such as the European Union and the Caribbean Community.

Economic Cooperation The concepts of economic cooperation and equitable economic development are the

basis of economic unions. When economies within the integrated area encounter problems, it is the duty of other members to help, not only as a moral obligation, but because a failing economy can have serious effects in the whole integration process. For this reason, European Union countries have offered to bail out the troubled economies of Greece, Ireland and Portugal, while the Association of Southeast Asian Nations Vision 2020 declaration stresses the importance of "equitable economic development" among member states.

Economic integration refers to the coordination of national economic policies as a means of boosting international trade, market activity and general cooperation among economies. Formal international economic unions are a recent phenomenon, but former International Monetary Fund economic counselor Michael Mussa traces

the roots of global economic integration to the medieval era. Despite the fact that the general aim of making trade flourish remains the same, particular objectives of economic integration agreements have changed to correspond to modern political and economic circumstances.

Increase of Trade When foreign products are subject to tariffs, exporters either have to accept the

extra cost of trade or make do with a lesser volume of exported products. A basic element of economic integration policies is the abolition of part of the extra fees or even the full amount of them, making trade cheaper and giving exporters a bigger incentive to do business with integrated economies.

Allowing Consumers to Spend More Economic integration reduces or eliminates customs duties, which in turn results in

cheaper imported products for consumers. This way, the purchasing power of consumers grows, and with it, activity in the market. The public can start buying more imported products or spend former duty expenses on other products or services. In addition, goods that are not produced in sufficient quantities in one country can be imported and distributed in the market with low cost.

Movement of Capital Movement of capital refers to the transfer of business or individual assets among

countries. The benefits of capital movement is the investment in new markets, leading to their eventual development. Economic integration removes barriers to foreign investors, minimizing or abolishing extra tax, while advanced integration policies, such as a monetary union, can even eliminate the cost of currency exchange. Movement of capital is recognized as an essential element of economic integration by associations such as the European Union and the Caribbean Community.

Economic Cooperation

The concepts of economic cooperation and equitable economic development are the basis of economic unions. When economies within the integrated area encounter problems, it is the duty of other members to help, not only as a moral obligation, but because a failing economy can have serious effects in the whole integration process. For this reason, European Union countries have offered to bail out the troubled economies of Greece, Ireland and Portugal, while the Association of Southeast Asian

Nations Vision 2020 declaration stresses the importance of "equitable economic development" among member states.

, but the essential point, re-flecting the theory of the second best, remains an important contribution. The policy implications of the Vinerian the-ory, however, have been badly misunderstood in recent discussions. In particular, it has been proposed by Paul Wonnacott and Mark Lutz (1989), Lawrence Summers (1991), and others that if the countries forming a PTA are "nat-ural trading partners," then the trade-creation effects will outweigh the trade-diversion ef-fects, making the PITA beneficial to its mem-bers.

The key criterion used for defining "natural partners" is a high initial volume of trade among them. But, as first argued in Panagariya (1995) and elaborated with necessary theoretical nuances in Bhagwati and Panagariya (1996), this view is untenable, and it is easy to show that a higher initial volume of trade can be a signif-icant loss to a member country because of the "tariff revenue redistribution" between mem-ber countries that it entails. One can also con-struct plausible models in which the trade diversion has no necessary relationship to the initial volume of trade. Finally, the initial high volume may itself be a result of preferences rather than "natural" -as is probably true for the United States and Mexico because of offshore-assembly provisions, and for the United States and Canada because of the long-standing GATT-sanctioned preferential free trade in autos, a big-ticket item.

Customs Union

A customs union occurs when a group of countries agree to eliminate tariffs between themselves and set a common external tariff on imports from the rest of the world. The European Union represents such an arrangement. A customs union avoids the problem of developing complicated rules of origin, but introduces the problem of policy coordination. With a customs union, all member countries must be able to agree on tariff rates across many different import industries.

The Difference Between a Free Trade Area & a Customs Union

Countries sometimes band together to form a free trade area or a customs union to promote trade. This often occurs with countries that have common borders. The two types of trade associations are alike in many respects, but have a different approach to how external trade partners are treated.

customs union  

DefinitionAgreement between two or more (usually neighboring) countries to remove trade barriers, and reduce or eliminate customs duty on mutual trade. A customs union (unlike a free trade area) generally imposes a common external-tariff (CTF) on imports from non-member countries and (unlike a common market) generally does not allow free movement of capital and labor among member countries.

Internal and External Trade

Both free trade areas and customs unions eliminate most internal trade barriers, such as tariffs and quotas, on goods produced by its members. The basic difference between FTAs and customs unions involves the handling of trade with outside nations or trade groups. Each FTA member sets its own external trade policy. A customs union, on the other hand, imposes uniform tariffs and quotas on external trade for all of its members.Major FTAs and Customs Unions

NAFTA -- consisting of Canada, the United States, and Mexico -- is a prominent FTA. Goods produced in the United States, for example, may be imported duty-free by Canada and Mexico. However each of the three member countries sets its own trade policy for goods produced by other external countries and customs unions.

The most important customs union is the European Union, made up of 28 countries. Membership in the European Union allows goods produced by Great Britain, for instance, to be imported duty-free by France -- and by all other members of the EU. Goods produced by outside nations or customs unions are subject to the same tariffs and quotas when imported by Britain, France, or any of the other 26 members of the EU.

Complicated but Free

Members of FTAs are free to establish trade pacts with trading partners outside of the FTA. This allows a member to tailor external trade policies to protect certain industries or products, or to take advantage of some characteristic of its economy.

However, different external tariff rates among FTA members complicates internal trade of goods produced wholly or partly outside the association.NAFTA deals with this situation by stipulating rules of origin that determine how these goods are treated within the group.

Simple but Restrictive

The common external trade policy of a customs union paves the way for products imported from outside the union to move more freely between member countries. A widget imported from the United States into Germany pays the EU's Common External Tariff, and then can be shipped to Italy or any of the other 26 EU members tariff-free.

Sometimes, however, a member nation may find the common external trade policy restrictive. It may be forced to charge higher tariffs than it otherwise would.A customs union member would not be able to negotiate trade deals to take advantage of strong connections with nations outside the union. Great Britain, for example cannot negotiate special terms with Canada or other nations with which it has long-standing trading ties.

COMMON MARKETA common market, also called a single market, refers to an economic agreement between two or more countries that stipulates that the signatory countries establish a free trade area, share a single currency and have the same tariffs on goods imported from non-member countries. Primary example of common markets include the European Union, or EU, and the European Economic Area, or EEA.

DefinitionGroup formed by countries within a geographical area to promote duty free trade and free movement of labor and capital among its members. European community (as

a legal entity within the framework of European Union) is the best known example. Common markets impose common external tariff (CET) on imports from non-member countries.

Use common market in a sentence Sometimes countries will try and form a common market so that their businesses can

flourish selling to each other in an easier fashion.

The common market in the region was able to agree on the optimal resource allocation methods based on natural resources.

The country formed a common market and that made a lot of the people living there very happy and optimistic.

Efficient Allocation of Resources A bigger market more efficiently allocates resources than a smaller one. As goods,

services, capital and workers move across borders as if there were no borders, resources move from places of abundance to where they are needed most. A notable example is high unemployment in one country or region and a shortage of qualified labor in another. As a result of the common market, people from one place can easily move to another place, helping to boost productivity and increase their living standards.

Economies of Scale A common market is good for business. Selling products or services in a country of 1

million people differs greatly from operating in a market with 350 million potential customers, for example. As companies do not need to comply with a multitude of national regulators but only have to satisfy one common regulator, doing business becomes easier. Consumers benefit, too, through lower prices and higher quality as a result of greater competition between producers.

Shared Currency Another important aspect of a common market is a single currency. Single currency

lowers transaction costs by eliminating the exchange risks and currency conversion fees. Furthermore, a shared currency also allows easier cross-border investments and price comparisons by consumers between countries. For example, if a person in

country A goes online and finds a cheaper car in country B, he can order the car from that country, without paying any additional taxes or levies.

Problems A common market has a number of theoretical as well as practical problems. First,

as of February 2011 the implementation of a common market in its pure form has never taken place in any country. The Euro zone comes close, but it still faces many hurdles, and some states still protect their markets from foreign competition, particularly cross-border takeovers. In addition, there are also problems that would be present even in a pure common market. For example, a common market cannot be fully integrated unless people speak a common language, which is difficult provided countries' unique cultural and linguistic heritages. Technical problems also exist.

As different regions of the common market may experience different stages of economic cycle, no single monetary policy, such as interest rates, can fully accommodate them. For example, Germany may have high inflation, demanding high interest rates, while Ireland can have deflation and may need low interest rates.

Economic union

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital andlabour) and a common external trade policy. When an economic union involves unifying currency it becomes a economic and monetary union.

Purposes for establishing an economic union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries.

Economic union is established through trade pact.

Aims & Objectives of Economic Integration

Economic integration refers to the coordination of national economic policies as a means of boosting international trade, market activity and general cooperation among economies. Formal international economic unions are a recent phenomenon, but former International Monetary Fund economic counselor Michael Mussa traces the roots of global economic integration to the medieval era. Despite the fact that the general aim of making trade flourish remains the same, particular objectives of economic integration agreements have changed to correspond to modern political and economic circumstances.

Increase of Trade

When foreign products are subject to tariffs, exporters either have to accept the extra cost of trade or make do with a lesser volume of exported products. A basic element of economic integration policies is the abolition of part of the extra fees or even the full amount of them, making trade cheaper and giving exporters a bigger incentive to do business with integrated economies.

Allowing Consumers to Spend More Economic integration reduces or eliminates customs duties, which in turn results in

cheaper imported products for consumers. This way, the purchasing power of consumers grows, and with it, activity in the market. The public can start buying more imported products or spend former duty expenses on other products or services. In addition, goods that are not produced in sufficient quantities in one country can be imported and distributed in the market with low cost.

Movement of Capital Movement of capital refers to the transfer of business or individual assets among

countries. The benefits of capital movement is the investment in new markets, leading to their eventual development. Economic integration removes barriers to foreign investors, minimizing or abolishing extra tax, while advanced integration policies, such as a monetary union, can even eliminate the cost of currency exchange. Movement of capital is recognized as an essential element of economic integration by associations such as the European Union and the Caribbean Community.

Economic Cooperation The concepts of economic cooperation and equitable economic development are the

basis of economic unions. When economies within the integrated area encounter problems, it is the duty of other members to help, not only as a moral obligation, but because a failing economy can have serious effects in the whole integration process. For this reason, European Union countries have offered to bail out the troubled economies of Greece, Ireland and Portugal, while the Association of Southeast Asian Nations Vision 2020 declaration stresses the importance of "equitable economic development" among member states.

Economic integration refers to the coordination of national economic policies as a means of boosting international trade, market activity and general cooperation

among economies. Formal international economic unions are a recent phenomenon, but former International Monetary Fund economic counselor Michael Mussa traces the roots of global economic integration to the medieval era. Despite the fact that the general aim of making trade flourish remains the same, particular objectives of economic integration agreements have changed to correspond to modern political and economic circumstances.

Increase of Trade When foreign products are subject to tariffs, exporters either have to accept the

extra cost of trade or make do with a lesser volume of exported products. A basic element of economic integration policies is the abolition of part of the extra fees or even the full amount of them, making trade cheaper and giving exporters a bigger incentive to do business with integrated economies.

Allowing Consumers to Spend More Economic integration reduces or eliminates customs duties, which in turn results in

cheaper imported products for consumers. This way, the purchasing power of consumers grows, and with it, activity in the market. The public can start buying more imported products or spend former duty expenses on other products or services. In addition, goods that are not produced in sufficient quantities in one country can be imported and distributed in the market with low cost.

Movement of Capital Movement of capital refers to the transfer of business or individual assets among

countries. The benefits of capital movement is the investment in new markets, leading to their eventual development. Economic integration removes barriers to foreign investors, minimizing or abolishing extra tax, while advanced integration policies, such as a monetary union, can even eliminate the cost of currency exchange. Movement of capital is recognized as an essential element of economic integration by associations such as the European Union and the Caribbean Community.

Economic Cooperation The concepts of economic cooperation and equitable economic development are the

basis of economic unions. When economies within the integrated area encounter problems, it is the duty of other members to help, not only as a moral obligation, but because a failing economy can have serious effects in the whole integration process. For this reason, European Union countries have offered to bail out the troubled economies of Greece, Ireland and Portugal,

while the Association of Southeast Asian Nations Vision 2020 declaration stresses the importance of "equitable economic development" among member states.

but the essential point, re-flecting the theory of the second best, remains an important contribution. The policy implications of the Vinerian the-ory, however, have been badly misunderstood in recent discussions. In particular, it has been proposed by Paul Wonnacott and Mark Lutz (1989), Lawrence Summers (1991), and others that if the countries forming a PTA are "nat-ural trading partners," then the trade-creation effects will outweigh the trade-diversion ef-fects, making the PITA beneficial to its mem-bers.

The key criterion used for defining "natural partners" is a high initial volume of trade among them. But, as first argued in Panagariya (1995) and elaborated with necessary theoretical nuances in Bhagwati and Panagariya (1996), this view is untenable, and it is easy to show that a higher initial volume of trade can be a signif-icant loss to a member country because of the "tariff revenue redistribution" between mem-ber countries that it entails.

One can also con-struct plausible models in which the trade diversion has no necessary relationship to the initial volume of trade. Finally, the initial high volume may itself be a result of preferences rather than "natural" -as is probably true for the United States and Mexico because of offshore-assembly provisions, and for the United States and Canada because of the long-standing GATT-sanctioned preferential free trade in autos, a big-ticket item.

Economic and monetary uniono The Economic and Monetary Union (EMU) which became a reality in 2002 when the Euro came into

circulation.

To the characteristics of the Single Market, it was necessary to add greater integration and coordination in a number of other areas, such as foreign policy and justice.

II. ECONOMIC INTEGRATION Economic theory shows free trade on a worldwide basis as the first best outcome, in as much as it allows specialization and exchange to take place globally, thus leading to greater world output and welfare. PTAs among a subset of countries are therefore a second best solution. They create trade among their members as trade barriers fall, and they divert trade from efficient nonmember producers to members because of their privileged market access. It should be noted that PTAs can take a variety of forms. These range from low-level integration by means of FTAs or CUs to higher levels of integration, such as a common market,

economic (and monetary) union, or even economic and political union. A PTA also refers to two or more countries forming a union with lower tariffs (and other trade barriers) for goods and services from member countries. FTAs eliminate tariffs on goods from members entirely, and CUs are FTAs with a common external tariff. More specifically, economic integration proceeds by agreements to:

• abolish tariffs and import quotas among members (FTAs and sectoral FTAs).

• establish common external tariffs and quotas (CUs).

• allow free movement of goods, services and workers (Common Market).

• harmonize competition, structural, fiscal, monetary and social policies (Economic Union).

• unify economic policies and establish supra-national institutions (Economic and Political Union).

Thus three progressively higher levels of integration can be distinguished. The first level entails modest integration by means of an agreement to apply symmetric preferential treatment of imports and assign supporting functions and instruments to jointly operated institutions. Examples would be NAFTA’s commitment to eliminate tariffs among its members, its dispute settlement provisions, and the various working groups and committees that serve to facilitate trade and investment among the three partners. In the case of a CU, the agreement would additionally involve a common external tariff applicable to non-members, which, in turn, requires an understanding on how to apportion among the partners the tariff revenue collected. The second level of economic integration would be the harmonization of instruments over which the parties retain control, and through which, due to different national approaches, obstacles to a common market exist. This could be the case in the area of migration of workers, competition policy, and production standards.

One example of such harmonization is the European Single Act. Among other provisions this act applied the “principle of mutual recognition” to product standards. More co-operation and supranational institutions, such as a joint tribunal on competition policy, are also characteristic of this second level. The third and highest level of economic integration adds coordination of national policies and the creation of further supranational bodies which entail not only economic but increasingly political 2 Mirus integration. Examples here are the creation of a common currency and central bank, and even a supranational parliament as in the case of the EU. FREE TRADE AREA This is the preferred option for countries embarking on economic integration and for those unwilling or unable to engage in higher levels of integration. An FTA can be limited to particular sectors, thus retaining a high level of control at the national level and preventing exposure to competition for the other sectors.

The authority to decide how third countries are to be treated remains unaffected (independent trade policy) in an FTA. However, rules of origin (ROO) have to be agreed upon among members so as to determine which products can be transferred duty-free. In the case of NAFTA a product has to have been substantially transformed so that a change in tariff classification has occurred, or it must have 50% (62.5% for cars) member-country content1 to qualify for duty-free treatment. There are extensive and complex provisions on how such content is arrived at and what documentation is necessary at the border. If there were no such ROO third

country, products could be landed in the lower duty jurisdiction and then transferred duty-free to the higher tariff member thereby circumvent its tariff. As a result, in an FTA border controls are necessary for commerce among members, and arguments over interpretation of ROO can lead to delays and disputes.

These restrictive effects of ROO have led one eminent economist to observe: “It is reported that Canadian producers have on occasion chosen to pay the relevant duties rather than incur costs of proving origin.” (Krueger, 1995) CUSTOMS UNION When two or more countries agree to remove (essentially) all restrictions on mutual trade and set up a common system of tariffs and import quotas vis-à-vis non-members, the result is referred to as a CU. The adoption of a common external tariff (CET) and joint quotas necessitates closer co-operation with respect to the sharing of customs revenues collected on non-member imports. Rules of origin are no longer necessary: when a common external tariff exists, imports into the CU–area face the same tariff in each CU-member country, hence there is no incentive for transshipment of imports between members. The CET effectively creates “destination-neutrality” for imports into the CU. Both FTAs and CUs imply that the member countries remain nation states, yet when viewed in the historical context there are some subtle differences between the agreements. The German Zollverein and the European Community for Coal and Steel are examples of successful CUs.

The Zollverein preceded the formation of Germany in 1870 and thus holds fewer lessons for today. The European Community for Coal and Steel, a sectoral CU created in 1951, was not expected to be a precursor to eventual European political union. Nevertheless, it was recognized at the time that free trade and the consequent rationalization and specialization of production in coal and steel products would require a supranational body to regulate pricing practices and commercial policies. This historical precedent therefore suggests that a successful CU implies a common competition policy. Subsequently the European Common Market naturally adopted and extended this competition policy. 3 Mirus A common competition policy would replace the need for, and the application of, trade remedy laws among the CU-members. Predatory pricing (dumping) would be dealt with by the common competition watchdog, and Article 19 of the GATT/WTO could be relied upon to obtain temporary relief from import surges that threaten an industry’s survival. That said, the key feature of a CU remains the CET. Derivative issues are a matter of negotiation and will determine how successful the CU is. COMMON MARKET A common market (CM) can be considered the first stage of deep economic integration. Free mobility of the key participants in the process of production is its characteristic. In addition to goods and services, capital and people move freely inside a common market.

The benefits expected consist of further gains in efficiency through a more appropriate allocation of resources: capital moves to where skills are and people move to where opportunities beckon. In addition to the common external tariff that defines a CU and to ensure the viability of a common market, uniform regulations have to be worked out among the members regarding the movement of people and capital. This is a major task that requires, at least over time, agreement on qualifications and certifications of workers from different member countries. For a common market to become effective, therefore, co-operation in decision-making is required in yet more areas. Non-tariff barriers have to be dismantled, structural adjustment policies have to be jointly reassessed, distribution policies will face harmonization pressures, and

fiscal and monetary policies, as a dynamic consequence or by design, will show greater convergence. This convergence results from the increased economic interdependence among the members and necessitates that greater consideration be given to the effects of national policies on the welfare of CM partners. ECONOMIC UNION The next step in deep economic integration, economic union, adds to the common market harmonized fiscal, monetary and labor market policies.

Tax and monetary policies affect where a business locates, and because labor market policies affect migration patterns and production costs, these will have to be streamlined among members. There will be no room for different national transportation, regional or industrial policies, as these distort competition among firms from different member countries. To achieve such a union, it is necessary to form supranational institutions that legislate the rules of commerce for the entire area, leaving the administration to national bodies, but with recourse to supranational administrative tribunals to ensure uniform application of these rules. In an economic union supranational commercial law replaces national law. For example, the European Union’s (EU) regional adjustment policy provides infrastructure funds to regions within the EU that have 75% or less of the average EU-income level, with a 4 Mirus budget of 0.45% of the EU’s GDP. This illustrates the degree of co-operation necessitated by an economic union. An economic union is made more effective, furthermore, by a common currency. When there is no uncertainty about exchange rates among members, location decisions and trade patterns will follow efficiency considerations, and borrowing costs will not be affected by an exchange risk premium on a particular member country’s currency. At this level of integration pressures for uniform taxation policies will increase even if agreement on such may prove elusive as shown in the case of Europe. The final outcome of economic union may well be a political confederation with unified economic policies. Economic union will stop short of political union if no supra-national bodies regarding defense and foreign policy are created.

SHADES OF GRAY In practice we observe FTAs and CUs with varying degrees of supranational co-operation or sovereignty abdication. A case in point is the issue of contingent protection, specifically the imposition of anti-dumping or countervailing duties and safeguard provisions in case of an import surge. Obviously, the mere existence of such provisions represents a barrier to trade, but producer lobbies tend to be strongly opposed to withdrawing such protection when an FTA is formed. This is the likely reason for most FTAs to be characterized by the continued application of trade remedy provisions among partners. This need not be so. Partners in an FTA and a CU could agree to exempt each others’ firms from the application of contingent protection.

The Canada-Chile FTA is an example of such cooperation, showing that the distinction between FTAs and CUs cannot be drawn neatly when it comes to competition policy. It is conceivable for both NAFTA and a North-American CU (NACU) to agree to subject member-country firms to each others’ antitrust bodies. That would mean Canadian exporters would be scrutinized for anti-competitive practices like dumping by the FTC rather than the Department of Commerce (ITA) and the International Trade Commission (ITC).2 III. CUSTOMS UNION VS. FTA Each of these two forms of economic integration has a distinguishing characteristic that has significant implications. For an FTA, with each country having its own external tariff, the ROO is the

distinctive feature. For a CU the distinctive characteristic is the common external tariff (CET) applicable to third countries. ECONOMIC EFFECTS OF RULES OF ORIGIN (ROO) 5 Mirus As already discussed, ROO have the purpose of preventing trade deflection, i.e. goods or services entering the member country with the lowest tariff for the purpose of trans-shipment. A number of negative effects are ascribed to ROO in the literature on economic integration.

ROO create incentives for producers to purchase higher cost inputs from member countries to satisfy the origin requirements, thus adding to trade diversion. 2. ROO lend themselves to lobbying by interest groups seeking protection from foreign competitors by demanding stringent ROO that favor component suppliers from member countries over competing firms from third countries. 3. With different input prices in different member countries due to different tariff schedules, producers face different input costs, thus distorting production. 4. ROO tend to be complex.

Thus their application results in additional costs and bureaucratic surveillance. Different criteria, like “substantial transformation,” “change in tariff heading” (CTH)), “valueadded” or “specified process,” are possible, each bringing its own set of complexities. The criterion of substantial transformation of a product is rooted in common law and is decided by the courts in the case of a challenge. The CTH criterion is on the surface more objective, “…but in fact requires specification of what level of tariff headings to be updated with changes in technology” (Krueger, 1997, p.15) The value-added criterion poses difficulties as it requires agreement on accounting methods and audits. Finally, process-criteria must be specified for each individual product. As a result, interpretation is subjective and substantial room exists for discretion in implementation.

The NAFTA contains 200 pages of fine print regarding the ROO! Krueger (1997) relates that even where the intent of ROO is not protectionist, they have a significant cost for producers and administrators. In Europe, EFTA producers reported costs of three to five percent of the delivered cost of goods solely for providing ROO documentation, though this estimate dates back to the mid-eighties when tariffs were higher. ECONOMIC EFFECTS OF THE COMMON EXTERNAL TARIFF (CET) The effects of the negotiated CET can be summarized as follows: 1. As the negotiations are carried out at the government to government level this reduces incentives for individual lobbies. Once established, a CET remains non-negotiable. On the other hand, internal pressures, like in the well-known prisoners’ dilemma, could result in a higher CET. 2. In light of the inability to influence the (re)negotiation of the CET, efforts to increase non-tariff barriers may be observed.

Common commercial and trade policies would limit such efforts. 6 Mirus 3. There is administrative simplicity in a CET that makes it easy to implement, and it creates predictability. 4. Input costs will not differ among members solely as a result of tariffs, promoting efficiency and competition. Based on these differences, Krueger (1995) has shown that an FTA does not lead to more net trade creation than a CU for the same partners, provided the CU takes into account the levels of higher and lower tariff countries and settles on an average CET for each commodity. An FTA also will not be more welfare-enhancing than a CU for the same members, if the CET is set below the level of the high cost country. In that case, trade is created when the high cost country cuts production in the wake of tariff cuts, whereas an FTA would retain the tariff and create less trade. Together with the trade-diversion (protectionist) effect of ROO this implies more trade

creation and less trade diversion for a CU, hence the conclusion that the potential welfare effects of a CU outweigh those of an FTA.3 With borders and separate customs procedures continuing under an FTA, a CU approximates a larger single market.

In negotiations with third countries this lessens the power of interest groups compared to an FTA and makes for more pronounced scale economies and pro-competitive effects. Non-members of a PTA will behave in more conciliatory fashion vis à vis an emerging CU than an emerging FTA, as the risks of confrontation with a larger economic unit (market) with common external tariff act as a strong deterrent. As well, a large enough CU will have an influence on the prices of internationally traded goods, forcing outside countries to accept the prices prevailing inside the CU. Thus the outside countries will export to the CU at prices that include the CET and transport costs, bestowing an element of monopsony power to the CU. This effect is much less clear for an FTA of similar composition.

Therefore, on balance, the economic benefits of a CU outweigh those of an FTA. POLITICAL IMPLICATIONS FTAs are a limited form of integration and by design little sovereignty is compromised, both in economic and political terms. The institutional agreements for an FTA are not extensive: a secretariat as a monitoring device and a forum for ongoing dialogue among members are all that are necessary. The existence of ROO mitigate against expansion of an FTA inasmuch as new members need to negotiate new ROO. Each new application for entry provides an opportunity for lobbyists to renegotiate existing ROO, slowing down the process of enlargement in comparison with the given CET of a CU. 7 Mirus In addition, if a country has membership in two or more FTAs

(e.g. NAFTA and the emerging FTA of APEC), different ROO for different FTAs create administrative complexity and customs disputes. It is difficult to envision the emergence of a single market in the face of such complicated access conditions. By contrast, a CU represents tariff-unification by definition. While FTAs mean a continuing administrative presence at internal borders for the purpose of documentation monitoring, CUs foster the borderless movement of goods among members. As a result the political economy of FTAs is less conducive to further trade liberalization than that of CUs, and the ROO of the former create opacity, complexity and lobbying room for protection. A CU, in turn, requires co-operation in arriving at a CET and agreement on a sharing rule for the customs revenue that is actually raised.

For future trade negotiations a CU necessitates a harmonized trade policy, and that means an additional loss of sovereignty. The question then arises as to how much more sovereignty will have to be ceded to arrive at a CU compared to an FTA? The initial negotiations for either an FTA or a CU are not that different in substance: agreement has to be reached on the schedule of implementing free trade among the partners. Adding on the negotiation to unify tariffs towards outsiders is the extra complication for a CU. The number of partners and the differences of national tariff codes will determine the complexity of these discussions. At present WTO obligations dictate that existing schedules are not raised to facilitate a compromise with respect to the CET

. For this reason the deliberations for a CU will be more complex. Just as revenue sharing agreements exist within countries, we observe formula-based voting and international reserve

allocation at the supranational level, e.g. at the IMF. It is therefore not inconceivable that an allocation of tariff revenue can be found that mimics international practice elsewhere.4 Whether or not such an agreement represents a significant loss of sovereignty is a matter for debate. As mentioned above, one consequence of a CU is that future trade liberalization at the WTOlevel will force member countries to coordinate their negotiating position closely with each other: a common stance is necessary for a CU, and this need for a coordinated approach represents an additional loss of sovereignty compared to an FTA. The foregoing explains why it is politically easier to arrive at an FTA than a CU. Trade creation, an economic gain, is viewed as a loss by domestic industry and by other lobbying groups. Hence they oppose it. Trade diversion is at the expense of external producers, hence does not elicit a negative response. And since free movement of workers is an extremely sensitive issue anywhere, higher degree integration tends to prompt stronger political resistance. Political feasibility favors an FTA over a CU. The fact that FTAs have a higher potential for trade diversion and no greater potential for trade creation than CUs implies that FTAs are less likely to encounter political resistance. A CET is difficult to arrive at: it took the EU thirty years to overcome national quotas on clothing, footwear and steel imports. Substantial political will and preparation have to be nurtured for a CU formation. This is made more important by the fact that the economic gains from any PTA tend to be longer run, whereas the adjustment costs tend to occur right away. Not surprisingly, we rarely observe successful economic integration at a 8 Mv

An economic and monetary union is a type of trade bloc which is composed of an economic union (common market and customs union) with a monetary union. It is to be distinguished from a mere monetary union (e.g. the Latin Monetary Union in the 19th century), which does not involve a common market. This is the sixth stage of economic integration. EMU is established through a currency-related trade pact. An intermediate step between pure EMU and a complete economic integration is the fiscal union.

Contents

1 List of economic and monetary unions

1.1 Proposed

1.2 Previous

List of economic and monetary unions

Economic and Monetary Union of the European Union  (1999/2002) with the Euro for the Eurozone members of the European Union

de facto the OECS Eastern Caribbean Currency Union with the East Caribbean dollar in the CSME (2006)[1]

de facto Switzerland–Liechtenstein [2]

Additionally the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union,common market and currency union (or combinations thereof) with the mainland and in regards to third countries through thetrade pacts signed by the mainland state.[3]

Proposed[edit]

Community Currency RegionTarget date

Notes

Economic and Monetary Community of Central Africa (CEMAC)

Central African CFA franc

Africanot yet functioning common market

West African Economic and Monetary Union (UEMOA)

West African CFA franc

Africanot yet functioning common market

Gulf Cooperation Council (GCC) KhaleejiMiddle East

Possibly gold backed, but postponed due to the financial crisis.

East African Community (EAC)East African shilling

Africa 2015To be used by the future East African Federation

Community Currency RegionTarget date

Notes

Caribbean Single Market and Economy (as part of the CARICOM)

Latin America/Caribbean

2015To supplement the OECS Eastern Caribbean Currency Union

Southern African Customs Union(SACU)

South African Rand

Africa 2015de facto for the CMA member when the SADC economic union is established

Southern African Development Community (SADC)

South African Rand(interim proposal)

Africa 2016To supplement or succeed the CMAand Southern Africa Customs Union

South Asian Association for Regional Cooperation

South Asia2016[citation

needed]

Union of South American Nations(UNASUR)

Latino[4]

Latin America/Caribbean

2019

Economic Community of Central African States (ECCAS)

AfricaTo supplement the Economic and Monetary Community of Central Africa (CEMAC)

Economic Community of West African States (ECOWAS)

AfricaTo succeed UEMOA and WAMZ

Community Currency RegionTarget date

Notes

African Economic Community Africa 2028 See African Monetary Union

Union State of Russia and Belarus Russian ruble Europe

Arab League Arab Dinar Arab states

Arab Dinar has been proposed ever since the creation of the Arab Monetary Fund, expected for serious plans of doing so, after the creation of the proposed Arab Union.

Types of economic integration (English)ABSTRACT

The experience of developed market economies, socialist countries, and developing nations

with regional integration schemes is evaluated. Emphasis is on two forms of trade integration: market

integration through reductions of barriers to intraregional trade and production-and-development

integration through agreements on plurinational industrial programming and investment allocation

. The question of the optimal degree of market and of production-and-development

integration is also examined, along with the relationship between economic integration and national

sovereignty. The success of the various schemes, irrespective of the type of economy, rests on a number

of basic conditions, which include the use of prices reflecting resource scarcities,

the size of the market of an integrated area, and interference with allocation patterns brought about

by the market mechanism. Joint decisions at the expense of national sovereignty of the individual

countries also are necessary, and failure to make these decisions is responsible for the lack of progress

towards economic union in the EEC. Numerous references.  

• There are many regional trade agreements (RTAs) in the world.

• We also distinguish FTAs, customs union, common market, economic union.

• RTAs in general increase welfare through trade creation, but the discriminatory nature of an RTA may make the net welfare effect negative.

• Increased popularity of Regionalism rather than Multilateralism may be bad for the world economy.

Conclusions

• EU is most succesful and powerful economic integration scheme; many CEE countries want to join; EU’s political decision process needs to be revised.