Common Market

This article focuses on the common market. It provides an overview of the relationship between common markets, nations, and the global economy. The stages of economic integration, free trade agreements, customs unions, common markets, and economic unions, are discussed. The issues related to common markets and industry regulation are addressed. A case study of the Caribbean region's common market, referred to as the CARICOM Single Market and Economy, is included as an opportunity to see how common markets operate in real world conditions.

Keywords Common Market; Customs Union; Economic Integration; Economic Union; Emerging Markets; Free Trade Agreement; Global Economy; Globalization; International Trade; Market; Nations; Tariffs; Trade; World Bank

International Business > Common Market

Overview

Economic globalization is increasing the economic integration between nations. Economic integration, which refers to the joining of commercial and financial activities among countries through the abolishment of nation-based economic institutions and activities, includes four stages: Free trade agreements (FTA), customs unions (CU), common markets, and economic unions. Common markets, which refer to customs unions with provisions to liberalize movement or mobility of people and capital and eliminate non-tariff barriers to trade, tend to be based on geographic proximity. For example, the Common Market of the South (MERCOSUR), established in 1991, is an example of a common market based on geographic relationship and proximity. The Common Market of the South, which began as a customs union with the goal of becoming a common market of member nations, is a trade agreement between the neighbor countries of Argentina, Brazil, Uruguay, and Venezuela. Founding member Paraguay was suspended in 2012. In 2013, a number of other Latin American countries were associate members, with Bolivia awaiting ratification and full membership.

Common markets, also referred to as single markets, are growing in number and importance in the global economy. Common markets set the prices for goods that are traded between member nations. Understanding how common markets work and why they are increasing in number and size around the world is crucial for all those interested in trade, development, economics, business, and politics. The following section provides an overview of the relationship between common markets, nations, and the global economy. This section serves as the foundation for later discussion of the four stages of economic integration: Free trade agreements, customs unions, common markets, and economic unions. The issues related to common markets and industry regulations are addressed. A case study of the Caribbean region's common market, referred to as the CARICOM Single Market and Economy, will be included as an opportunity to see how common markets operate in real world conditions.

Common Markets & the Global Economy

Common markets, including the European Union's common market and Caribbean Community's common or single markets, are emerging in every region of the world engaged in international trade. The new global economy is characterized by growth, in populations and in output and consumption per capita, interdependence of nations, and international management efforts. Indicators of global growth and economic interdependence include the huge increases in communication links, world output, international trade, and international investment since the 1970s. The global economy is built on global interdependence of economic flows linking the economies of the world. The global economy is characterized by economic sensitivity. National economic events in one region often have profound results for other regions and national economies. National economies exist not in isolation but in relationship and tension with other economies worldwide.

Global Management & Governance

The global economy includes numerous economic phenomena and financial tools shared between all countries. Examples include common markets (and related stages of economic integration) as well as the price of gold, the price of oil, and the related worldwide movement of interest rates. The new global economy is characterized and controlled through global management or governance efforts. International organizations, both public and private, work to establish norms, standards, and requirements for international financial governance. These international organizations, including the G-20, Financial Stability Forum, the International Organization of Securities Commissions Organization for Economic Co-operation and Development (OECD), and the Basle Committee on Banking Supervision, develop and encourage implementation of standards, principles, best practices, and economic architecture (Preston, 1996).

Global Markets

The global economy is a product of economic globalization. Global markets are characterized by an increasing mobility in capital, research and design process, production facilities, customers, and regulators. Global markets, created through socio-economic changes, political revolutions, and new Internet and communication technology, have no national borders. The modern trend of globalization, and resulting shifts from centralized to market economies in much of the world, has created opportunities for increased trade, investment, business partnerships, and access to once closed global markets.

Economic environments around the world are changing due to the forces of globalization. Globalization is characterized by the permeability of traditional boundaries of nations, culture, and economic markets. The fundamental economic forces and events influencing globalization around the world include the end of communism; the shift from an economy based on natural resources to one based on knowledge industries; demographic shifts; the development of a global economy; increased trade liberalization; advances in communication technology; and increased threat of global terrorism (Thurow, 1995). Globalization creates a turbulent global socio-political environment characterized by competing political actors, shifting power relations, and politically-driven changes in national economies around the world. Businesses work to find opportunity and profit in the political and economic changes. The political turbulence and upheaval has resulted in a move from centralized economies to a decentralized global economy and has created numerous common markets and emerging markets. Emerging markets refer to capital markets in developing countries that have chosen to liberalize their financial systems in order to increase capital flows and foreign investment.

Economic Growth & Common Markets

The increase in the number and size of common markets in the global economy has the potential to increase economic growth for member nations. According to the World Bank, economic growth of nations refers to the quantitative change or expansion in a country's economy. Economic growth occurs in two distinct ways. Economic growth of a nation occurs when a nation grows extensively by using more physical, natural, or human resources or intensively by using resources more efficiently or productively. According to the World Bank, intensive economic growth of nations requires economic development. The growth of nations varies between regions, nations, and historical eras. Economic and political changes promote or depress the growth of nations depending on variables such as national leadership, political and economic stability, natural resources, international relations, and infrastructure. The current era of the global economy, a product of economic globalization, is creating strong, though variable, national economic growth and development worldwide. Ultimately, common markets, and related stages of economic globalization, connect the economies and welfare of nations (Jones, 2005).

Applications

Common Markets & the Stages of Economic Integration

Customs markets are one stage in the process of economic integration between nations. Economic integration between nations includes the following four stages (Holden, 2003):

  • Free Trade Agreements (FTA)
  • Customs Unions (CU)
  • Common Markets
  • Economic Unions.

Nations choose different levels of economic integration based on variables such as the strength of their national economy and trade relationships and forecasted trade prospects. Nations may have multiple trade relationships and levels of economic integration with other countries or none at all. Nations that reject or do not pursue the stages of economic integration, as described above, are characterized as autarky. Autarky, or an autarkic nation, refers to self-sufficient countries that do not participate in international trade. Autarky, which means self-sufficiency in Greek and provides independence from other states, results in both benefits and costs (Anderson & Marcouiller, 2005). The stages of economic integration are rarely fixed or permanent but instead are generally fluid and overlapping. Economic integration, as described below, is an evolving process responsive to the shifting socio-economic climates.

Free Trade Agreements

Free trade agreements are agreements that allow for the exchange of goods and services across country or regional borders without tariffs, quotas, or other restrictions being levied. Examples of free trade agreements include the North American Free Trade Agreement (NAFTA) and the Central European Free Trade Agreement (CEFTA). Free trade agreements may be limited to a business or industry sector or applied to all levels and types of international trade. Free trade agreements tend to impose two main requirements on member nations:

  • Member nations must agree to follow dispute-resolution procedures.
  • Member nations must agree to follow rules of origin procedures for all third-party products entering the free trade area. Rules of origin, which refers to laws, regulations and administrative procedures used to establish a product’s country of origin, is an expensive process for all free trade agreement member nations.

Free trade agreements tend to be applicable to a geographical region and form a free trade area. A free trade area, according to the Organization for Economic Co-operation and Development, refers to a grouping of countries within which tariffs and non-tariff trade barriers between member nations are generally abolished without instituting common trade policy toward non-members.

Customs Unions

Customs unions, which are free trade areas that also establish a common tariff and other shared trade policies with non-member countries, require trade policy harmony and cooperation between member nations. Customs unions establish a common external tariff (CET) and import quotas on products entering the custom union region from other countries but also offer free movement of labor and capital among member nations. Customs unions offer four main benefits to member nations:

  • Customs unions eliminate the need for rules of origin and, as a result, provide member nations with significant administrative cost savings and efficiency gains.
  • Customs unions establish common trade remedy policies such as anti-dumping and countervail measures.
  • Customs unions require a level of cooperation that makes trade dispute-resolution procedures between member nations unnecessary.
  • Customs unions work together as a single entity to negotiate multilateral trade initiatives as a single bloc.

The benefits gained from participation in customs unions come at a cost to political and economic independence of member nations. Member nations exchange their independent trade and foreign policy freedoms for the benefits described above.

Common Markets

Common markets, as described by the Organization of Economic Co-operation and Development, are customs unions with provisions to liberalize the movement or mobility of people, capital and other resources and eliminate non-tariff barriers to trade such as the regulatory treatment of product standards. Common markets are a significant step toward economic integration for member nations. Common markets tend to share labor policies as well as fiscal and monetary policies. Common markets, which facilitate increased economic interdependence, tend to produce increased economic efficiency and economic growth for all member nations.

Economic Unions

Economic unions are common markets with provisions for the harmonization of certain economic policies such as macroeconomic and regulatory policies. The European Union is one example of a large-scale effective economic union. Economic unions, the last and greatest stage of economic integration between nations, share nearly all economic policies and regulations including monetary policies, fiscal policies, labor policies, development policies, transportation policies, and industrial policies. Economic unions generally share a common currency and a unified monetary policy that controls and coordinates national interest rates and exchange rates. Economic unions require supranational legal and economic institutions to regulate commerce and ensure uniform application of the economic union rules and regulations.

Issues

Common Markets & Industry Regulation

Common market member nations unite to set the prices for the trade of goods and the common or unified regulation of industries. For example, the European Union promotes and facilitates common regulation for numerous sectors, industries, and goods. The European Union establishes prices and procedures for the production, trade, regulation, import, or export of goods such as sugar, armaments, pharmaceuticals and energy.

  • Sugar market: The European Union's Common Organization of the Sugar Market (CMO), established in 1968, is an example of a common market organized around a good or industry. The European Union's Common Organization of the Sugar Market was founded to guarantee a fair income to community sugar producers and sufficient sugar supply for the community market.
  • Armament market: Beginning in 2003, the European Commission started encouraging member nations to create a common market for armaments. A common market for armaments is believed to have the potential to help European Union member nations catch up with the defense industry of the United States. The European armament market would accomplish the following goals: Standardize hardware and open up public procurement of defense equipment; help the transfer of defense equipment between member states; and reduce costs and increase efficiency.
  • Pharmaceutical market: The European Union's pharmaceutical market includes four pharmaceutical common market directives endorsed by the European Union Parliament. These four pharmaceutical directives include legislation on drug advertising, wholesale distribution, classification of drugs, and labeling. The European Union prohibits the advertising of prescription-only preparations and has rules on the distribution of free samples (Rogers, 1992).
  • Energy market: The European Union's energy market provides an example of the extent to which the European Union can control and enforce the common market agenda. The European Union requires member nations to provide equal access and pricing of energy resources to all member nations. As of 2006, The European Union Commission placed 17 out of 25 member states on formal notice for the countries' failure to make their energy markets more competitive. Member nations violated the energy market rules through unfair price controls favoring state-owned firms and restrictions on the foreign takeovers of domestic institutions.

Ultimately, the success of common markets requires economic and policy coordination and cooperation between all member nations. In most instances, the controlling common market or economic union will sanction or punish member nations that exhibit signs of or favor protectionism over liberal trade views or pro-globalization views (Yeoh, 2006).

Case Study: The CARICOM Single Market & Economy

The Caribbean Community or Commonwealth established a common market, referred to as the CARICOM Single Market and Economy (CSME), in 1972 to create one large market among the participating member states. The CARICOM Single Market and Economy replaced the existing free trade area. The CARICOM Single Market and Economy facilitated the free movement of labor and capital, and integrated agricultural, industrial and foreign policies which had not been possible within the free trade area.

The CARICOM Single Market and Economy includes fifteen member nations: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, and 5 associate member nations of Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Turks and Ciacos.

The CARICOM Single Market and Economy is based on the following single market or common market principles:

  • Free Movement of Goods and Services: The CARICOM Single Market and Economy promotes the free movement of goods and services by eliminating barriers to intra-regional movement and coordinating standards to avoid discrepancies between the acceptability of goods and services being traded.
  • Right of Establishment: The CARICOM Single Market and Economy prioritizes the right of establishment to allow CARICOM owned businesses to be established in any Member State without restrictions.
  • A Common External Tariff: The CARICOM Single Market and Economy may establish a common external tariff or a rate of duty to be applied by all members of the common market to a product imported from a third-party country.
  • Free Circulation: The CARICOM Single Market and Economy facilitates the free movement of goods imported from outside regional sources that require tax collection upon their first entrance into the region and contains provisions for sharing collected customs revenue.
  • Free Movement of Capital: The CARICOM Single Market and Economy promotes the free movement of capital by eliminating trade barriers such as foreign exchange controls, facilitating currency conversion, and integrating capital markets.
  • A Common Trade Policy: The CARICOM Single Market and Economy prioritizes joint negotiations to reach a common trade policy agreement between members on internal and international trade issues to maintain a common external trade policy.
  • Free Movement of Labor: The CARICOM Single Market and Economy encourages free labor movement by removing obstacles to intra-regional travel, coordinating social services, maintaining the consistency of social security benefits, and harmonizing standards, regulations, and measures.
  • Harmonization of Laws: The CARICOM Single Market and Economy harmonizes laws such as the harmonization of business and intellectual property laws.
  • Economic Policy: The CARICOM Single Market and Economy unifies economic policy through the coordination of macro-economic policies, the harmonization of foreign investment policies, and the adoption of procedures to obtain, create, and trade technology.
  • Monetary Policy: The CARICOM Single Market and Economy unifies monetary policy through the coordination of exchange rate and interest rate policies.
  • Fiscal Policy: The CARICOM Single Market and Economy unifies fiscal policy through the coordination of indirect taxes and national budget deficits.

The CARICOM Single Market and Economy is intended to be an engine of economic growth and development for the Caribbean region. The CARICOM Single Market and Economy was formed for the purpose of expanding trade opportunities as well as to attract investment to the region. The Caribbean region’s single or common market may, in time, create increased or full employment and increased or full exploitation of natural resources and capital. Increased efficiency and productivity has the potential to improve the standards of living and promote economic development in the Caribbean region (Smith-Hillman, 2006).

Conclusion

In the final analysis, common markets are a significant stage in the process of economic integration between nations. Common markets are formed after nations have received all the benefits from free trade zones and customs unions and have identified new needs or potential gains from increased economic integration. The full process of economic integration involves four overlapping stages including free trade agreements, customs unions, common markets, and economic unions. Economic environments around the world are changing due to the forces of economic globalization and integration. Globalization creates a turbulent global socio-political environment characterized by competing political actors, shifting power relations, and politically-driven changes in national economies around the world. Business opportunities (including international investments and joint ventures) in the global economy are increasingly tied to trade pacts, alliances and agreements between nations such as the CARICOM Single Market and Economy, the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, the Mercosur trade pact between Argentina, Uruguay, Brazil, and Paraguay, and the Asia Pacific Economic Cooperation (APEC) trade zone. Ultimately, the global economy is marked by change, innovation, and growth in trade relationships between nations.

Terms & Concepts

Common Markets: Customs unions with provisions to liberalize movement or mobility of people, capital and other resources and eliminate other forms of trade barriers including the regulatory treatment of product standards.

Customs Unions: Free trade areas that also establish a common tariff and other shared trade policies with non-member countries.

Economic Integration: The integration of commercial and financial activities among countries through the abolishment of nation-based economic institutions and activities.

Economic Unions: Common markets with provisions for the harmonization of certain economic policies such as macroeconomic and regulatory.

Emerging Markets: Capital markets in developing countries that have chosen to liberalize their financial systems in order to increase capital flows and foreign investment.

Free Trade Agreements: Agreements that allow for the exchange of goods and services across country or regional borders without tariffs, quotas, or other restrictions being levied.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

International Trade: The purchase and sale of goods or services between residents of different countries.

Market: A arrangement created to allow buyers and sellers to obtain information and engage in a voluntary exchange of goods and services.

Nations: Large aggregations of people sharing rules of law and an identity based on common racial, linguistic, historical, or cultural heritage; rarely act unilaterally.

Tariffs: A tax imposed on a good imported into a country.

Trade: The export and import of goods and services.

World Bank: An international economic development assistance organization that was founded in 1944.

Bibliography

The crisis of the European Common Market. (2013). Stratfor Analysis, 75. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89052603&site=ehost-live

Delhey, J. (2007). Do enlargements make the European Union less cohesive? An analysis of trust between EU nationalities. Journal of Common Market Studies, 45, 253-279. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25118236&site=ehost-live

Duina, F., & Blithe, F. (1999). Nation-states and common markets: the institutional conditions for acceptance. Review of International Political Economy, 6, 494-530. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=3960399&site=ehost-live

EU industry: A common market for armaments? (2003). EIU ViewsWire.

Ghazalian, P. (2013). MERCOSUR enlargement: predicting the effects on trade in primary agricultural commodities. Economic Change & Restructuring, 46, 277-297. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88901702&site=ehost-live

Glossary of statistical terms. (2003). Organization for Economic Co-operation and Development. Retrieved August 20, 2007, from http://stats.oecd.org/glossary/detail.asp?ID=3130

Haines-Ferrari, M. (1993). MERCOSUR: A new model of Latin American economic integration? Case Western Reserve Journal of International Law, 25, 413. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9709190002&site=ehost-live

Holden, M. (2003). Stages of economic integration: From autarky to economic union. Government of Canada Depository Services Program. Retrieved August 20, 2007, from http://dsp-psd.pwgsc.gc.ca/Collection-R/LoPBdP/inbrief/prb0249-e.htm

Jones, B., Jones, B., Olken, B., & Olken, B. (2005). Do leaders matter? National leadership and growth since World War II. Quarterly Journal of Economics, 120, 835-864. Retrieved August 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18333501&site=ehost-live

Morijn, J. (2006). Balancing fundamental rights and common market freedoms in Union law: Schmidberger and Omega in the light of the European Constitution. European Law Journal, 12, 15-40. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=19507122&site=ehost-live

Mukhametdinov, M. (2007). MERCOSUR and the European Union: Variation among the factors of regional cohesion. Cooperation & Conflict, 42, 207-228. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25424139&site=ehost-live

O'Brien, D. (2011). CARICOM: Regional integration in a post-colonial world. European Law Journal, 17, 630-648. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=63850430&site=ehost-live

Preston, L. (1996). Global economy/global environment: Relationships and regimes. EarthWorks. Retrieved Monday, August 19, 2007 from http://www.utexas.edu/depts/grg/eworks/proceedings/engeo/preston/preston.html

Rogers, A. (1992). Europe: EC pharmaceutical directives. Lancet, 339(8791), 483. Retrieved August 21, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=9203161633&site=ehost-live

Smith-Hillman, A. (2006). First a glimmer, now a…? The prospect of a Caribbean competition policy. Journal of World Trade, 40, 405-422. Retrieved August 21, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=20781019&site=ehost-live

The CARICOM single market and economy. (2006). The Caribbean Community. Retrieved August 21, 2007, from http://www.caricom.org/jsp/single%5fmarket/single%5fmarket%5findex.jsp?menu=csme

Thurow, L. (1995). Surviving in a turbulent environment. Planning Review. 23, 24.

Van Poeck, A., Vanneste, J., & Veiner, M. (2007). Exchange rate regimes and exchange market pressure in the new EU member states. Journal of Common Market Studies, 45, 459-485. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25118229&site=ehost-live

Yeoh, P. (2006). EU free market rules: strategic options for transition economies. Managerial Law, 48, 495.

Suggested Reading

Avery, W., & Cochrane, J. (1972). Subregional integration in Latin America: The Andean common market. Journal of Common Market Studies, 11, 85. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=6279869&site=ehost-live

Document: Proposals for the creation of the Latin American common market. (1966). Journal of Common Market Studies, 5, 83. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=6276738&site=ehost-live

Newlyn, W. (1965). Gains and losses in the East African common market. Yorkshire Bulletin of Economic & Social Research, 17, 130-138. Retrieved August 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=7160477&site=ehost-live

Essay by Simone I. Flynn, Ph.D.

Dr. Simone I. Flynn earned her Doctorate in cultural anthropology from Yale University, where she wrote a dissertation on Internet communities. She is a writer, researcher, and teacher in Amherst, Massachusetts.