Common Market Essay

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A common market is an advanced stage in economic integration, a process in which two or more countries, usually within a geographic region, agree to reduce barriers to economic transactions among themselves. It goes beyond a preferential trade agreement, in which the countries concerned offer each other lower tariffs than their normal rates, a free trade area, where member countries eliminate trade barriers among themselves, and a customs union, where they also establish common trade polices with respect to non-members. It does not go as far as an economic union, in which all or most economic policies are unified.

In a common market, apart from trade without tariffs or quotas and a common external trade policy, factors of production (labor and capital) can move freely among member countries. Like other forms of economic integration, the motivations are both political and economic. The major political benefit is seen as improved bargaining power with other countries; in some cases, it is also thought that binding the economies of member states closely reduces or eliminates the risk of future wars among them. Economic benefits of a common market go beyond those of free trade among members, which allows them to specialize in products in which they are most efficient. Since labor and capital can move freely, there can be dynamic gains as these factors move from areas where they are in surplus to those where they are scarce, resulting in higher incomes in the common market as a whole. Other benefits include economies of scale, more competition, and increased foreign direct investment because of the larger market.

The term common market was also widely used in the English-speaking world in the 1960s and 1970s to refer to the group of countries in western Europe (originally six, with several stages of expansion bringing the number to 27 in 2008) that had embarked on a process of close economic integration, though this group’s official name has been the European Economic Community, the European Community, and now the European Union.

A true common market is not easily achieved. Since there are no restrictions on internal cross-border flows of labor and capital, a high degree of cooperation among members is required, particularly in policies about employment, taxation, investment, competition, social security, and immigration, and countries have to give up a considerable amount of sovereignty to supranational institutions. In the European Union, in accordance with the treaty establishing its predecessor, the European Economic Community, in 1957, all internal tariffs and quotas on goods were progressively abolished by 1968, and most formal barriers to the movement of labor and capital were removed by 1970, but in reality, freedom of movement was far from complete.

Differences in technical standards and health and safety regulations often meant products made in one country were not acceptable in another; delays at frontiers imposed considerable costs on trade; preferential treatment for national suppliers often excluded firms from partner countries from government contracts; educational qualifications in fields such as accountancy, architecture, and nursing were not mutually recognized, effectively limiting mobility of skilled labor; and national laws regarding financial services often made it difficult for banks or insurance companies established in one country to operate in another. It was only after the Single European Act of 1987, involving hundreds of directives and regulations aimed at removing these barriers, that the member countries began moving swiftly toward a single market in goods, services, labor, and capital. It is generally agreed that by 1992, the European Union had substantially become a common market.

Several other regional groups, past and present, have had the term common market as part of their name, but they have not reached the necessary level of integration. The Central American Common Market, comprising five small economies, was established in 1960, but did not go beyond reducing internal trade barriers before it suspended activity due to disputes among members. It was revived in 1990, with the objective of forming a customs union. The Andean Common Market, which was set up in 1969 and subsequently became moribund, was also revived in 1990 and is moving toward a customs union.

Mercosur (“Common Market of the South”) aspires to be a common market, and has become the largest trading bloc in South America, but still has not achieved a full free trade area or customs union, and remains a preferential trade area with some coordination of tariffs on imports from non-members. The East African Common Market, inaugurated in 1967, attempted to coordinate development plans of the member countries, but did not allow free movement of labor and capital; due to disputes about the distribution of benefits, and political differences among leaders, it was officially abandoned in 1977. Subsequently, a large number of African countries have joined COMESA, the common market for eastern and southern Africa that was formed in 1994; as of 2008, it has reduced trade tariffs and quotas and hopes to set up a customs union in the near future. Only Caricom, the Caribbean Community and Common Market, established in 1973, has made substantial progress in eliminating internal trade barriers and some progress toward free movement of labor.

Bibliography:

  1. Balassa, “Trade Creation and Trade Diversion in the European Common Market: An Appraisal of the Evidence,” Manchester School of Economic and Social Studies (June 1974);
  2. International Monetary Fund, “Central and Eastern Europe: Assessing the Early Benefits of EU Membership,” IMF Survey (November 20, 2006);
  3. Jaime Ros, “Free Trade Area or Common Capital Market? Notes on MexicoUS Economic Integration and Current NAFTA Negotiations,” Journal of Interamerican Studies and World Affairs (v.34, 2001);
  4. Swann, The Economics of the Common Market (Penguin Books, 1990);
  5. Viner, The Customs Union Issue (Carnegie Endowment for International Peace, 1950).

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