Trading blocks in Europe

In this video, we will provide some theoretical background information on economic integration that will help you better understand what we will say subsequently on the practice of such integration in Europe. First of all, what do we mean by the term economic integration? Well, quite simply, this term refers to common efforts of two or more states to make economic exchange easier, for example the trading in goods or the moving of people for the purpose of employment in another country. On the level of theory, we can distinguish four basic steps for such efforts. Imagine that a number of states want to embark on economic integration.

According to the theory, the first step is to concentrate on the exchange of goods, and then only on goods that originate from the participating countries. Free movement of such goods can be achieved through the creation of a free trade area. This means that the participating states together form a common territory in which they abolish obstacles to the trade in goods such as customs

duties in the terminology of the World Trade Organisation, WTO: tariff barriers, or quantitative restrictions, in the terminology

of the WTO: non-tariff barriers. In a second step, the states may decide to also include a common approach to goods originating from outside the common territory by creating a customs union. A customs union typically has a common customs tariff, meaning that for the importation of a good from outside, the same customs duties have to be paid regardless of into which of the states participating in the customs union it is imported. In the third step, the states may agree to widen the focus beyond goods by also including the movement of persons, services, and capital. They then create a common or internal market in which they abolish all obstacles to the free movement of goods, persons, services, and capital.

We therefore speak of the four freedoms. Note that such a common or internal market may or may not be combined with a customs union. Finally, the last step is that of an economic and monetary union, which ultimately even includes a common currency. The process of economic integration involves various theoretical steps. You can deepen your understanding with the chart that you find further on in this step. Here, you can also see which of the steps are relevant for the European Union, namely the customs union, the internal market, and economic and monetary union. Thus, from an economic perspective, the EU is a highly integrated trading block.

Whilst it is helpful to have a clear and simple theoretical framework, the actual practice of economic integration is more complicated. Trade agreements between states do not always fall squarely within one of these categories, though we may say that the free trade area remains the most widely used approach. At the same time, some modern attempts for economic integration go further by combining, in particular, aspects relating to the trade in goods and services with that of investment. The much debated negotiations between the US and the EU on the Transatlantic Trade and Investment Partnership, TTIP, are an example. Let us now turn to an overview on the most important trading blocks that exist in Europe.

I have already mentioned the European Union with its at present 28 Member States. We have provided a map in the related links on this step. Today, the EU covers many more issues than economic matters. However, the customs union, the internal market, and economic and monetary union remain at its traditional core. Note that in the mid-1990s, the EU’s customs union was extended to Turkey, which hopes to become an EU member state eventually. It is interesting to note that with respect to the trade in goods, Turkey is the country with the highest degree of integration with the EU.

The basis for the legal relationship between Turkey and the EU when it comes to economic matters is the so-called Ankara Agreement, signed in 1963. To turn to further European trading blocks, we have already heard about the European Economic Area, EEA, which was founded in the early 1990s. The EEA in particular extends the core of the EU’s economic law to Iceland, Liechtenstein, and Norway. There are also rules to make sure that EEA law and its interpretation remain in line with the relevant EU law. Note that the EEA does not have common rules on external trade. There is no customs union here.

The same is true for the European Free Trade Area, EFTA, founded in 1960 as an alternative to the European communities. Once much larger, this organisation now consists only of Iceland, Liechtenstein, Norway, and Switzerland. In terms of content, the original EFTA was about trade in goods. Now, it is about goods, persons, services, and capital, though the common rules go less far than the EU’s internal market. Even though there are no common rules on external trade, the EFTA states like to negotiate trade agreements with third countries together.

As for Switzerland, which is not a part of the EEA, we have mentioned in the previous step that it has concluded a large number of mostly economic agreements with the EU, the so-called Swiss-EU bilateral or sectoral agreements. These provide for a partial extension of the EU’s internal market to Switzerland. Further to the east of Europe, there is the Eurasian Economic Union, including Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan. Finally, note that associations between the EU and three European micro-states are under negotiation, namely Andorra, Monaco, and San Marino. The idea is that the EU’s internal market is extended to the three states beyond the arrangements that already exist.

Overall, you can see that there are quite a number of European organisations dealing with economic integration. Which one is relevant in a concrete situation, for example in a cross-border trade dispute, depends on the countries involved.