CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - Types of trade agreement - Notes 2 / 5
Types of trade agreement
Free trade area
There is no restriction on the movement of goods and services between countries
Individual countries can impose their own restrictions on non-member countries
For example, the North American Free Trade Agreement (NAFTA) is a free trade area that includes Canada, the USA and Mexico
Customs union
= Free trade area + the following features:
There are common external tariffs applying to imports from non-member countries into the union.
For example, Mercosur is a customs union comprising Argentina, Brazil, Paraguay, Uruguay and Venezuela.
Common and single markets
= Customs union + the following features:
There are free markets in each of the factors of production and a move to standardise market regulations (eg safety and packaging rules).
Where there are common policies on product regulation this is sometimes called a 'single market'.
Eventually a common market becomes a single market with no restriction of movement or regulatory differences.
For example a citizen in the European Union (EU) has the freedom to work in any other country of the EU.
Economic union
= Common markets + the following features:
Will involve a common Central Bank and a common interest rate and a single currency.
For example, within the EU, most member countries are part of the eurozone; they share a single currency and co-ordinate economic policies.