Economic community

What Is an Economic Community?

An economic community is a type of regional trade agreement that involves a high degree of economic integration among its member states, going beyond a simple free trade area or a customs union. Within the broader category of international economics and trade blocs, an economic community typically establishes a common market, allowing for the free movement of goods, services, capital, and labor across national borders. This level of integration aims to foster closer economic ties, increase trade, and enhance overall economic prosperity for its members. The ultimate goal of an economic community is often to facilitate economic growth and stability by eliminating internal trade barriers and coordinating economic policies.

History and Origin

The concept of an economic community gained significant traction in the aftermath of World War II, as European nations sought to rebuild their economies and prevent future conflicts through deeper integration. One of the earliest and most influential examples is the European Economic Community (EEC), which was established by the Treaty of Rome on March 25, 1957. The original signatories—France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands—aimed to create a common market to facilitate trade, investment, and the movement of workers among member states. Thi⁷s treaty laid the groundwork for eliminating customs duties and establishing common policies across various sectors. The⁶ EEC expanded over the years, ultimately evolving into the European Community (EC) and later being integrated into the broader framework of the European Union (EU) in 1993, which represents an even deeper form of economic union and even aspects of a political union.

##⁵ Key Takeaways

• An economic community facilitates the free movement of goods, services, capital, and labor among member countries.
• It typically involves a common external policy regarding non-member countries.
• The primary objective is to promote economic growth, efficiency, and stability through deep integration.
• Economic communities aim to eliminate internal tariffs and quotas to boost intra-bloc trade.

Interpreting the Economic Community

An economic community signifies a substantial commitment to economic integration among participating nations. For businesses, it means simplified trade across borders, reduced costs due to eliminated tariffs, and access to a larger pool of labor and capital. For consumers, it can lead to lower prices and a wider variety of goods and services. The success of an economic community is often measured by increased intra-bloc Gross Domestic Product (GDP), higher levels of foreign direct investment (FDI) within the community, and reduced trade friction among members. It represents a deeper level of cooperation than more basic agreements by attempting to harmonize regulations and economic policies.

Hypothetical Example

Consider a hypothetical "Pacific Rim Economic Community" (PREC) formed by three neighboring countries: Nation A, Nation B, and Nation C. Prior to the PREC, each nation had its own distinct tariffs and regulations for imports and exports. For example, Nation A imposed a 10% tariff on steel from Nation B, and Nation C had strict labor certification requirements that hindered service providers from Nation A.

Upon forming the PREC, all internal tariffs between Nation A, B, and C are eliminated, and a common external tariff is established for goods from outside the PREC. Additionally, the nations agree to mutual recognition of professional licenses and the free movement of workers, allowing a skilled engineer from Nation A to easily work in Nation B, or a financial analyst from Nation C to seek employment in Nation A. This deeper integration within the economic community would lead to more efficient supply chains, increased competition, and potentially lower prices for consumers across all three member nations.

Practical Applications

Economic communities are seen as powerful engines for regional development and stability. They manifest in various forms globally:

• Trade Facilitation: By removing internal barriers, economic communities significantly streamline trade processes, leading to increased intra-bloc commerce and potentially a more favorable balance of trade for members.
• Investment Attraction: The larger, integrated market created by an economic community makes it more attractive for both internal and external investors, driving capital formation and job creation.
• Policy Coordination: Members often coordinate policies on issues like competition, agriculture, and monetary policy, which can lead to greater economic stability and predictability.
• North American Free Trade Agreement (NAFTA): While not a full economic community, NAFTA (now replaced by USMCA) demonstrated aspects of regional economic integration by largely eliminating tariffs among the U.S., Canada, and Mexico. Advocates pointed to increased trade and economic output, while critics noted job losses in certain industries due to shifts in manufacturing. Thi⁴s agreement, like many regional trade agreements, operated under specific provisions allowed by the World Trade Organization (WTO).

##³ Limitations and Criticisms

Despite their potential benefits, economic communities face several limitations and criticisms:

• Loss of Sovereignty: Member states may have to cede some national control over economic policy, such as setting their own tariffs or managing their internal labor markets, to the community's supranational bodies.
• Trade Diversion vs. Trade Creation: While economic communities aim for trade creation (shifting production from a high-cost domestic producer to a low-cost member producer), they can also lead to trade diversion. This occurs when trade shifts from a lower-cost non-member country to a higher-cost member country simply because of preferential tariff treatment within the bloc, potentially reducing overall global welfare.
• ² Uneven Distribution of Benefits: The benefits of integration may not be evenly distributed among member states. Smaller or less developed economies might struggle to compete with larger, more established members, potentially leading to increased regional disparities.
• Bureaucracy and Decision-Making: Deeper integration often requires complex institutional structures and decision-making processes, which can be slow and cumbersome.
• Impact on Non-Members: Regional trade agreements, including economic communities, can sometimes create negative externalities for countries outside the agreement, as their access to member markets may be hindered by preferential treatment given to insiders.

##¹ Economic Community vs. Free Trade Area

The primary distinction between an economic community and a free trade area lies in the depth of economic integration.

While a free trade area removes tariffs and quotas on most goods and services traded between its members, each member retains its own trade policies with countries outside the agreement. An economic community goes further by establishing a common external policy (becoming a customs union) and, crucially, allowing the free movement of factors of production (labor, capital) across member states, thus forming a common market. This deeper integration aims to achieve greater efficiency and competitive advantages that are not typically realized in a simpler free trade area.

FAQs

What is the main goal of an economic community?

The main goal of an economic community is to foster deep economic integration among member states, leading to increased trade, economic growth, and stability by allowing the free movement of goods, services, capital, and labor, and often by coordinating economic policies.

How does an economic community benefit its members?

Members of an economic community can benefit from access to a larger market, lower prices for goods due to reduced trade barriers, increased investment opportunities, and improved efficiency through specialization and coordinated economic policies.

Is the European Union an economic community?

The European Union (EU) originated as an economic community (the European Economic Community or EEC) and has since evolved into an even more integrated economic union, including a common currency (the Euro for many members) and a high degree of political cooperation, surpassing the typical definition of just an economic community.

What are the challenges in forming and maintaining an economic community?

Challenges include the potential loss of national sovereignty, ensuring an equitable distribution of benefits among member states, the complexity of harmonizing diverse national regulations, and the risk of trade diversion from more efficient non-member producers.