11.6.2—Economic integration types

A preferential trade area lowers some barriers; a free-trade area removes internal tariffs while members keep separate external policies; a customs union adds a common external tariff; a common market adds freer factor movement; an economic and monetary union coordinates wider policies and may share a currency.

Each deeper stage increases integration but reduces some national policy autonomy. The real effect depends on member economies, rules of origin, trade creation, diversion and adjustment costs.

A customs union lets members trade without internal tariffs but prevents each member from setting an independent tariff on a non-member. A common market additionally allows labour and capital to move more freely.

A free-trade area is not a customs union, and sharing a currency is not required for every form of economic integration.