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Common Market: Definition, Examples, Pros & Cons

Written by Paul Boyce Posted in Microeconomics
Last Updated May 2, 2023

What is a Common Market?

A common market is a type of economic integration where member countries agree to eliminate trade barriers such as tariffs, quotas, and restrictions on the movement of goods, services, and capital between themselves. In addition to the removal of trade barriers, common markets also involve the coordination of economic policies, including regulations and tax policies, among the member countries.

Common markets are a step beyond a free trade area, which only removes trade barriers on goods and services. In a common market, the free movement of capital and labor is also allowed, creating a more integrated economic system.

The European Union is an example of a common market, with its member countries agreeing to the free movement of goods, services, capital, and people among themselves. Other examples of common markets include the Southern Common Market (MERCOSUR) in South America and the European Free Trade Association (EFTA) in Europe.

Key Points

The common market is a form of economic integration that aims to remove barriers to trade and allow for the free movement of goods, services, capital, and people between countries within a geographic region.
The main objective of a common market is to promote economic growth and development by increasing competition, creating economies of scale, and encouraging innovation and investment.
Member countries of a common market typically agree to adopt common standards and regulations to ensure a level playing field for businesses and consumers.
The European Union is an example of a common market, with its 27 member states allowing for the free movement of goods, services, capital, and people within its borders.

Characteristics of Common Market

The following are the key characteristics of a common market:

Free movement of goods and services: Member countries of a common market agree to eliminate trade barriers, such as tariffs and quotas, on goods and services traded among themselves. This allows for the free flow of goods and services across borders.
Free movement of capital: A common market allows for the free movement of capital, which means that businesses can invest and move money across borders without restrictions.
Free movement of people: A common market allows for the free movement of people, allowing workers to move freely across borders to seek employment or to provide services.
Harmonization of regulations: To ensure fair competition and reduce trade barriers, member countries in a common market typically agree to harmonize regulations and standards on goods and services.
Coordination of economic policies: Member countries in a common market coordinate their economic policies, including fiscal policies, monetary policies, and tax policies.
Common external tariffs: In some cases, a common market may have a common external tariff, which means that member countries apply the same tariffs on goods and services imported from outside the common market.
Shared institutions: A common market may have shared institutions, such as a common court system or regulatory body, to ensure that rules are applied consistently across all member countries.

Overall, the aim of a common market is to promote economic integration among member countries by eliminating barriers to trade and investment while harmonizing regulations and policies.

Advantages of Common Market

There are several advantages of a common market, including:

1. Increased trade

One of the main advantages is increased trade among member states, leading to greater economic growth, job creation, and consumer benefits. By eliminating trade barriers, member states can trade goods and services more freely, creating greater efficiency, specialization, and economies of scale. This can also stimulate innovation and competitiveness among member states.

2. Greater competition

Greater competition is another key advantage, encouraging producers to become more innovative, efficient, and competitive, leading to technological advancements and more productive industries. This can result in the development of new industries, attracting more investment and trade opportunities, and creating more employment opportunities and economic growth.

3. Increased investment

Common markets offer the advantage of increased investment among member states, leading to the development of new industries, expansion of existing ones, and creation of new jobs. This can also promote innovation and technology transfer, providing additional benefits and opportunities, and ultimately stimulating economic growth and prosperity.

4. Lower prices

Common markets help lower prices for goods and services, as they eliminate trade barriers and increase competition, leading to greater economies of scale and specialization. They can also reduce transaction costs and administrative burdens associated with international trade, resulting in increased efficiency for producers and lower costs for consumers. This fosters greater access to goods and services, promoting sustainable economic growth and job creation.

5. Increased political cooperation

Political integration can foster increased cooperation among member states, reducing tensions and promoting regional stability. Through greater cooperation, member states can develop common policies, share resources and expertise, and address regional challenges, such as security threats and environmental degradation, more effectively, leading to sustainable development and peace.

6. Improved access to resources

Another advantage is improved access to resources among member states, through greater sharing and access to capital, labor, technology, and other resources. This can promote efficiency, innovation, and productivity, leading to the development of new industries, job creation, and increased economic growth.

Additionally, they provide opportunities for joint initiatives and resource pooling, further promoting regional integration, cooperation, and economic development.

7. Shared benefits

They provide the advantage of shared benefits among member states, promoting greater economic and social equality, reducing disparities, and facilitating collaboration on common challenges. This fosters sustainable solutions, benefiting all member states.

Disadvantages of Common Market

There are also some disadvantages of a common market, including:

1. Loss of sovereignty

One such disadvantage is the potential loss of sovereignty for member states, as they must agree to certain rules and regulations that limit their ability to pursue independent economic policies, potentially leading to unequal representation and decision-making power among member states.

2. Unequal benefits

Unequal benefits in common markets can arise due to differences in economic and political power, as well as variations in economic structure and levels of development among member states. These differences can lead to economic disparities and tensions, potentially undermining the stability. They may need to provide support and assistance to struggling member states to promote greater equality and balanced development.

3. Unequal competition

Another disadvantage is unequal competition among member states, with larger and more powerful member states potentially dominating the market and crowding out smaller or less developed member states. This can lead to decreased competition and innovation, discouraging investment and reinforcing economic disparities. Differences in regulatory environments can also create barriers to competition and trade, further exacerbating economic disparities.

4. Dependency

Dependency is a potential disadvantage, particularly for smaller or less developed member states, as they may become vulnerable to external economic shocks and reliant on larger member states for economic growth and development. This can limit economic diversification and development, potentially leading to economic instability.

5. Trade diversion

Trade diversion is a potential disadvantage, as they may divert trade from more efficient producers outside the common market to less efficient producers within it, leading to reduced economic efficiency and higher costs. This can also create tensions with non-member states and limit member states’ access to a wider range of goods and services.

6. Complex decision-making

Complex decision-making is another potential disadvantage, as more member states join, decision-making can become challenging, potentially delaying the implementation of new policies and initiatives. It can also create unequal representation and decision-making power among member states, leading to tensions and disagreements, and potentially undermining the effectiveness of the common market.

7. Lack of flexibility

Lack of flexibility is another potential disadvantage, as member states may be limited in their ability to pursue independent economic policies and may face slow responses to economic challenges due to lengthy decision-making processes. This can hinder economic development and lead to economic instability.

Common Market Examples

European Union (EU)

One example of a common market is the European Union (EU), which is a political and economic union of 27 member states primarily located in Europe. The EU is a single market where goods, services, capital, and people can move freely between member countries without tariffs or other trade barriers. The EU also has a common external tariff, which means that member countries apply the same tariffs on goods imported from outside the EU.

Additionally, the EU has a shared court system, regulatory body, and currency (the Euro) among its member states. The EU also coordinates its economic policies and regulations, and member countries have agreed to a number of common policies and standards in areas such as agriculture, consumer protection, and environmental protection.

Southern Common Market (Mercosur)

Mercosur is a South American economic bloc founded in 1991 with Argentina, Brazil, Paraguay, and Uruguay as its full members, and Venezuela as a suspended member and Bolivia as a new member. Its primary goal is to promote economic integration and free trade through a customs union while coordinating economic policies among its members.

Despite challenges, Mercosur remains an important economic and political bloc in South America, working towards greater integration, cooperation, and social policies aimed at reducing poverty and inequality in the region.

Caribbean Community (CARICOM)

CARICOM is a regional organization founded in 1973 to promote economic integration, cooperation, and development among its 15 full member states. It established a common market and aims to coordinate economic policies, address social and environmental issues, and promote democracy and human rights.

Despite challenges, CARICOM remains an important organization in the Caribbean, working towards greater integration and cooperation within the region and with external partners.

Common Market for Eastern and Southern Africa (COMESA)

COMESA, the Common Market for Eastern and Southern Africa, is a regional economic organization founded in 1994 with 21 member states in Eastern and Southern Africa. Its primary goal is to promote economic integration and development through a customs union, investment promotion, and infrastructure development.

COMESA also works to address social and environmental issues, promote peace and security, and strengthen the capacity of its member states to respond to crises and disasters. Despite facing challenges such as political instability and poverty in some member states, COMESA remains an important economic and political bloc in the region, working towards greater integration and cooperation.

Association of Southeast Asian Nations (ASEAN)

ASEAN is a regional intergovernmental organization founded in 1967 with ten member states in Southeast Asia. Its main goal is to promote economic integration, cooperation, and development through a free trade area, coordination of economic policies, investment promotion, and addressing social and environmental issues in the region.

Despite challenges, ASEAN remains an important organization in Southeast Asia, working towards greater integration and cooperation among its members.

Common Market vs Customs Union

A common market and a customs union are both forms of economic integration, but they have some key differences:

Free movement of factors of production: A common market allows for the free movement of goods, services, capital, and people, while a customs union only eliminates trade barriers on goods.
External trade policies: In a customs union, member countries agree to adopt a common external tariff on goods imported from outside the union. However, in a common market, member countries may have different external trade policies.
Harmonization of regulations: A common market usually involves the harmonization of regulations and standards on goods and services, while a customs union does not necessarily require such harmonization.
Coordination of economic policies: A common market involves the coordination of economic policies, including fiscal policies, monetary policies, and tax policies, while a customs union does not require such coordination.
Shared institutions: A common market may have shared institutions, such as a common court system or regulatory body, to ensure that rules are applied consistently across all member countries. However, a customs union may not have such shared institutions.

FAQs

What is a common market?

A common market is a type of economic integration where member countries agree to allow the free movement of goods, services, capital, and labor within the designated area, while maintaining their own economic policies outside of the common market.

What are some examples of common markets?

The European Union (EU) is the most well-known example of a common market, but there are others, such as the Southern Common Market (MERCOSUR) in South America, the East African Community (EAC), and the Gulf Cooperation Council (GCC) in the Middle East.

How is a common market different from a free trade area?

A free trade area is a type of economic integration where member countries agree to remove trade barriers, such as tariffs and quotas, between themselves, but maintain their own economic policies outside of the free trade area. A common market goes beyond a free trade area by allowing the free movement of capital, labor, and services in addition to goods.

What are the challenges of a common market?

The challenges of a common market include the need for harmonization of economic policies and regulations, which can be difficult to achieve among diverse member countries. There can also be unequal distribution of benefits and costs among member countries, and potential loss of sovereignty for member countries in certain policy areas.

About Paul

Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.

Common Market Definition and Examples