Common Market
A market that permits the exchange of goods and services among a group of particular nations.
What is a Common Market?
A common market, also referred to as a trade bloc, is a market that permits the exchange of goods and services among a group of particular nations.
It is the result of a regional or intergovernmental agreement that enables agreeing nations to trade with one another with few or no trade barriers.
Unlike a free trade zone, a trade bloc allows for labor mobility and shared economic policies between the participating countries. It also has a common external tariff.
The common market shares many of the same characteristics as a customs union. Still, it also allows for member-to-member movement of the factors of production (labor, capital, and technology). Immigration and international investment restrictions are removed.
Non-market participants who wish to import goods into the market may be subject to common external tariffs (CET).
Trading on these markets means exchanging goods and services between members of the same trade bloc. So, instead of selling and buying their goods, participants in this market can increase their score by trading goods there.
These types of markets are created to establish free trade zones among their participants; trade barriers are lower for exchanging goods, services, and capital in these markets.
Common Market Real-World Examples
This market is a form of economic integration where all participating nations impose uniform external tariffs and do away with trade restrictions on goods, services, and factors of production.
A trade bloc permits unrestricted trade in goods and services between member countries. As a result of the increased trade, consumers will pay less money.
A trade bloc also allows unrestricted movement of labor and capital among its member states. This greater resource mobility results in more effective resource allocation and higher economic growth.
And an expansion of political and economic cooperation among member countries is a typical outcome of a trade bloc. Moreover, this increased cooperation may result in a more stable international system and more effective solutions to common issues.
After the free trade zone and the customs union but before the economic union, it is a more advanced stage of economic integration.
Examples of a trade bloc include:
1. European Economic Community
The European Economic Community (EEC), established in 1958, is a well-known example. The free movement of people, capital, services, and labor within the European Union was one of its main goals.
Initially, Belgium, Germany, France, Italy, Luxembourg, and the Netherlands made up the EEC. Later, 22 more participants joined.
Then, in 1993, they advanced to a new level by creating an economic union with 27 member nations. However, the United Kingdom left the European Union in January 2020.
The European Union's 19 nations subsequently established a monetary union and adopted the Euro as their sole currency in 2002.
They established the European Central Bank and the European Commission to coordinate monetary and economic policies among member nations.
2. Common Market for Eastern and Southern Africa
The Common Market for Eastern and Southern Africa (COMESA) is yet another illustration. COMESA was founded in 1994 and currently has 19 member countries.
Angola, Burundi, Comoros, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Sudan, Seychelles, Swaziland, Uganda, Zambia, and Zimbabwe are the countries that makeup COMESA.
The COMESA organization has its Common External Tariff (CET) and is working to create a trade bloc.
3. Association of Southeast Asian Nations
Another illustration of this market is the Association of Southeast Asian Nations (ASEAN). There are ten member states in ASEAN, which was founded in 1967.
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam are the countries that makeup ASEAN. Both a common currency and a common external tariff are absent from ASEAN.
However, several free trade agreements exist between ASEAN and other regional economic blocs.
Common Market characteristics
A group of nations that agree to have a common external tariff on all goods from outside members and abolish all trade barriers between member nations make up these markets.
It is typically based on a free trade area with no tariffs for goods and reasonably unrestricted movement of capital and services. However, it is not yet very advanced in removing other trade barriers.
The traits of a trade bloc are as follows:
- By removing trade restrictions like tariffs and quotas, goods and services can move freely between member nations
- Members adopt uniform trade policies for non-members
- Labor and capital can move freely between the member nations as production factors
The market is frequently referred to as a single market because it supports the free flow of goods, services, and production factors due to these three characteristics.
These three requirements must be satisfied to be regarded as a trade bloc. For example, consider a scenario where labor and capital cannot freely transfer between the member states. In that case, the economy is still integrating at the customs union level.
The ability to remain and accept employment in every member state is necessary for full labor mobility. Full establishment rights for businesses in all nations are also necessary for full capital mobility, which calls for the absence of exchange controls.
Conditions Required to be Defined as a Common Market
It was established to encourage economic cooperation and lower trade barriers among its member states. Trade blocs typically involve nations with similar economic interests geographically close to one another.
The following economic integration requirements must be satisfied for a market to be categorized as a trade bloc:
- Tariffs: All imports from non-member nations must be subject to common external tariffs.
- Free Movement of Goods: The free movement of goods requires that all internal tariffs and quotas currently placed on goods traded among member countries be removed.
- Free Movement of Services: All barriers to the delivery of services across international borders must be removed.
- Free Movement of Labor: The free movement of labor requires that all restrictions placed on the ability of workers to move freely across international borders be removed.
- Free Movement of Capital: Eliminating all restrictions on the transfer of capital between member nations is a requirement for the free movement of capital.
The resulting market is not a trade bloc if one of the requirements is not met. For instance, the arrangement would be classified as a customs union if production factors like labor and capital cannot move freely and without restriction among member countries.
Benefits of a Common Market
A trade bloc contract is advantageous if you buy in short supply and save money if you sell surplus goods.
All production factors would be completely free to move between the member nations, increasing allocation efficiency and productivity even more.
The following are a few benefits:
1. Bigger Market Size
First, the market is expanding. Businesses don't have to worry about unfair competition because of trade barriers when they sell products in the markets of member countries. They can achieve greater economies of scale on a larger market, which lowers average costs.
2. Improvement in resource allocation
The second is more effective resource allocation. The production inputs are free to move between the member nations for their more effective use.
It results in stronger economic growth and helps to raise productivity. In the end, this results in a more prosperous economy.
3. Healthy Competition
Third, there is more competition. Domestic businesses and those from other member nations are becoming more and more competitive.
Innovation is encouraged by increased competition, which forces businesses to become more aggressively competitive.
4. Better employment opportunities
Increasing the number of job opportunities is the fourth advantage. Between member nations, there is greater geographic mobility of the workforce. In other member nations, they can search for better opportunities.
Costs of a Common Market
If you are purchasing products in surplus, a common market contract may cost you more money than it is worth. In addition, the fact that this market is not as automated as it appears to be is a major drawback.
Manual offers and acceptance are required for all production contracts higher than the common market minimum.
The trade bloc, however, also has several other drawbacks.
First, the risk of competition rises. Competition fosters economic innovation and efficiency. However, it also makes it more likely that domestic businesses won't survive.
Ineffective businesses will eventually go out of business. As a result, unemployment increases, and business tax revenue declines. Again, companies that typically receive government subsidies or protection are the most vulnerable.
The workforce is also stationary in both the vertical and horizontal planes. Workers can relocate from one member nation to another. However, their mobility may still be constrained because of their lack of training and education.
Additionally, the relocation of production components to other union nations impedes the expansion of the home economy.
As a result, professionals and skilled workers leave their home countries searching for opportunities and higher living standards in other union members. This phenomenon is known as "brain drain."
Summary
The Treaty of Rome created the first common market in 1957. It was established to encourage economic cooperation and lower trade barriers among its member states.
An economic bloc called a common market consists of a free trade zone with standard tariffs and other trade laws.
The goal of the trade bloc is to encourage the free flow of people, capital, goods, and services between the member states.
Common External Tariffs, Free Movement of Goods, Services, Labor, and Capital, Increased Trade and Economic Growth, Greater Political and Economic Cooperation among Members, etc. are some examples of trade bloc Characteristics.
Common markets can be discovered on a regional or international scale. The COMESA, ASEAN, NAFTA, and SADC are a few examples of the trade bloc.
The advantages of a trade bloc include increased political and economic cooperation among member states, as well as increased economic growth and investment.
Trade bloc can act as a forum for resolving interpersonal conflicts and as a safety net for the stability of the global economy.
However, they also have some drawbacks, such as the potential for monopolies and an increase in the danger of "contagion" during economic downturns. Nevertheless, the trade bloc generally represents a step forward for regional cooperation and integration.
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