Economic Union

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Blog Author :

Shraddha Sureka

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Economic Union Definition

The Economic Union is a group of countries coming together to allow the goods and services to move freely in and out of these countries to remove the trade barriers and create better employment of skills and resources. It even allows free movement of production factors such as capital investment and labor and has a common internal and external trading policy.

Economic-Union
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• An economic union refers to a group of countries coming together to facilitate the free movement of goods and services, removing trade barriers, and optimizing the utilization of skills and resources. 

• The primary goals of an economic union include increasing efficiency, improving consumer satisfaction, raising the standard of living, boosting competitiveness, and strengthening diplomatic ties between member nations.

• The benefits of an economic union are numerous, including creating development opportunities and accelerating economic growth. However, it may also bring certain disadvantages, such as potential instability and possible revenue loss due to trade patterns changes.

Objectives of Economic Union

#1 - Increase Efficiency

Production costs reduce as the free flow of goods, services, and production factors occur. It increases the profit margins of the member countries, which leads to greater specialization and better use of resources as each country produces those goods in which it has a comparative advantage and trades all other goods so that more is produced in totality.

#2 - Consumer Satisfaction

When the free flow of goods and services occurs, and the customs duties are removed, the price of imported goods and services reduces. It increases in consumption because consumers can afford a greater quantity at the given income level.

#3 - Higher Standards of Living

Due to the free movement of production factors, people are presented with greater employment opportunities leading to higher incomes and better utilization of skills. With higher disposable income, people can afford a better lifestyle.

#4 - Increase Competitiveness

When the group of countries comes together to form an economic union, they give one another strength because cost of production reduce. It makes them more competitive in the world economy and more profit.

#5 - Strengthening Diplomacy

Due to allegiance between the countries, they gain a stronghold in world diplomacy as their interdependence increases to the union. In contrast, the union is less dependent on the rest of the world.

Economic Union Examples

Before Brexit, the European Union was an Economic Union and a Monetary Union. A few countries within the union still did not accept the Euro as their currency, including Britain and Switzerland, which still used their currencies. So they were part of the economic Union but not of the Monetary Union.

Another example could be the Gulf Cooperation Council or the GCC. It comprises several Arab states and is a political and economic union in the Middle East. Even though one of the objectives was to have a common currency by 2010, Oman and UAE announced their withdrawal in 2006 and 2009, respectively.

The Eurasian Economic Union is also a free flow of goods and services and common fiscal policies for industry, agriculture, and energy. Even here, the common currency’s goal is not yet met and is one of the future objectives.

Benefits

  • Opportunity for Development: Smaller countries that might not get the necessary resources on their own can do so being part of the Economic Union. For example, companies in a smaller or a weaker country may not gather the required funding from banks when it attempts to generate it on their credit score. However, a guarantee from a stronger company in the union helps it do so, allowing such companies to utilize their potential to a greater level.
  • Speeds up Development: When weaker countries can acquire the resources more quickly, they can speed up their development and become stronger, leading to a betterment in the standard of living of the people of these countries, which gives strength to the economy of the union as a whole.

Disadvantages

  • Unstable: As seen in the case of the European Union, after Grexit and Brexit, it is clear that having a common economic policy might become unstable when the debt crisis becomes overwhelming for underperforming countries. The acronym used for some such countries in the European Union is PIIGS, Portugal, Italy, Ireland, Greece & Spain. These are considered the weakest economies of the European Union and are therefore considered a burden on the stronger economies.
  • Loss of Revenue: When the countries lift the customs and trade restrictions, they lose their revenues from taxes. The stronger economies might not be highly impacted by it, but the weaker economies are. At times, the benefits from the union might not be sufficient to cover this loss of revenue. Therefore the countries need to conduct a thorough cost-benefit analysis before becoming a part of the union.

Frequently Asked Questions (FAQs)

1. What are the features of an economic union?

The features of an economic union include the elimination of internal trade barriers, a common external trade policy, a unified market for goods, services, and labor, and coordination of economic policies among member countries. Additionally, it often involves a single currency and a centralized monetary authority.

2. What is the difference between an economic union and a common union?

The main difference between an economic union and a customs union is the degree of economic integration. While both aim to reduce trade barriers, an economic union goes beyond that by also harmonizing economic policies and establishing a common market with the free movement of goods, services, and labor among member countries.

3. What is the difference between free trade area and economic union?

The key difference between a free trade area and an economic union lies in the level of economic integration. In a free trade area, member countries eliminate tariffs and quotas on trade among themselves but maintain their own external trade policies. In contrast, an economic union eliminates internal trade barriers and adopts a common external trade policy, creating a more tightly integrated economic entity.