(a) What is economic integration? (b) Distinguish between a free trade area and a customs union. (c) Describe two advantages and two disadvantages of free t...
Question 1 Report
(a) What is economic integration?
(b) Distinguish between a free trade area and a customs union.
(c) Describe two advantages and two disadvantages of free trade area
Answer Details
(a) Economic integration is an arrangement in which two or more countries agree to reduce or remove trade barriers among themselves and to co-operate economically, in order to enjoy the benefits of a larger combined market. Examples include ECOWAS and the European Union.
(b) Free trade area versus customs union.
| Free trade area | Customs union |
|---|---|
| Member countries remove trade barriers (tariffs and quotas) among themselves. | Members also remove trade barriers among themselves. |
| Each member keeps its own separate tariff on goods from non-member (outside) countries. | Members adopt a common external tariff against non-member countries. |
In short, a customs union is a free trade area plus a common external tariff.
(c) Free trade area - advantages and disadvantages.
Two advantages:
- Larger market. Producers can sell to a wider combined market, encouraging economies of scale and specialisation.
- Cheaper goods and wider choice. Removing tariffs among members lowers prices and gives consumers a greater variety of goods.
Two disadvantages:
- Loss of government revenue from the tariffs that used to be charged on trade between members.
- Harm to infant and weak domestic industries, which may be unable to compete with stronger firms from partner countries, and possible trade deflection because members keep different external tariffs.
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