2 management - School of International Business and ...

Günter S. Heiduk
3.2.5 THEORY OF INTEGRATION POLICY
The free trade as well as the tariff model has shown that countries accomplish welfare effects when
agreeing to open up the borders. Additional room for positive welfare effects exists if countries
cooperate in liberalizing cross-border labor and capital movements, harmonizing regulations and
laws, creating a monetary union and/or even coordinate fi scal policies. It goes without saying that all
types of economic integration between a number of countries that is smaller than the total number
of countries creates discrimination to the outsiders («third countries«). The institutionalized integra-
tion models are divided into three groups indicating an increasing degree of integration:
– Regional trade agreements (preferential trade agreement, free trade agreement, customs union),
– Common Market,
– Monetary Union,
– Economic Union.
Preferential trade agreements are characterized by a set of preferred treatments between member
states, usually tariff reductions in special industries. The preferred treatment can be unilateral or
bilateral. A free trade agreement obliges the member states to abolish tariffs among themselves,
but leaves the national tariffs to third countries in the competence of each member state. In order
to avoid negative effects for those countries with higher tariffs (third country exporters tend to enter
the FTA where the tariffs are the lowest and distribute their products without further tariffs within the
FTA) it is necessary to establish »rules of origin«. In addition to free trade among the member states
a customs union requires a common external tariff. The common market concept adds internal free
movement of persons, labor and capital as well as harmonization of regulations and laws or at least
their mutual recognition. The monetary union requires the establishment of an independent central
bank that is responsible for the monetary policy as well as an irrevocable exchange rate system or
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