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What is an Economic Union?

James Doehring
James Doehring

An economic union is an agreement between two or more sovereign nations to coordinate trade policies. Progression to a formal economic union typically involves several stages of increasing cooperation between nations. Member states in these various stages commonly share land borders, though there are many exceptions to this. Economic unions increase the efficiency of trade by eliminating trade barriers and cooperating on monetary policy.

The first stage in this process involves establishing free trade agreements (FTAs). FTAs involve eliminating import tariffs, or taxes, between member states to encourage internal trade. Products originating outside of the free trade zone must be identified as such, because each member state may have different tariff policies for foreign goods. Without this identification process, foreign goods will typically enter the free trade zone through the country with the lowest import tariffs. Other than agreeing to identify these foreign products, FTAs place few restrictions on the economic affairs of member states.

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Tracking the source of foreign goods can be a costly procedure for members of an FTA because it requires a large amount of documentation. Establishing a common external tariff policy between member states can remedy this problem. This is called a customs union and is the next stage towards full economic integration. Customs unions increase the efficiency of trade, but result in less freedom for member states to form their own foreign trade policies. Since foreign trade is closely related to foreign policy, customs unions typically only form between nations with shared foreign policy objectives.

Further increasing trade efficiency requires eliminating all barriers to the movement of financial capital and labor across the borders between member states. This stage in the process towards economic union generally requires a considerable level of close cooperation between governments. Qualifications and certifications of workers, for example, must be harmonized before cross-border commuting is feasible. Increasing economic interdependence to this level often requires governments to coordinate fiscal and monetary policy as well.

A formal economic union can be established by forming multinational financial institutions like central banks and other bodies to regulate commerce. At this point, a common currency can be adopted to increase efficiency and eliminate uncertainty associated with money exchange rates. Member states will often coordinate the areas of regional development and transportation policy to further harmonize trade and growth. The largest modern example of an economic union is the Eurozone, which was officially formed by eleven European nations on 1 January 1999.

Discussion Comments


I think an economic union is difficult to manage politically, because you need some sort of a central decision making body with representatives from each nation.

Can you imagine Canada and the United States being part of an economic union? We already have trade agreements with countries in the region and I think this is a great way to support our neighbors and strengthen the region economically, not to mention US businesses who can operate in these countries more easily.

But an economic union requires a country to loose some sovereignty and I'm not okay with that. It would be a nightmare to have to have other countries approve the economic policies in my country.


I'm so glad that economic unions in places like Africa are being set up. These countries already have very low income and populations have trouble feeding themselves.

If there are economic unions, then, they won't have pay tariffs to import and export products to each other. Considering that many African nations produce one or two type of produce, this is a great opportunity to diversify the food that's available and to sell it to people for cheaper.

African nations and other developing nations need to form economic unions. This is exactly the kind of support they need to lift themselves out of poverty.


I've read a lot about the European Union recently in the news. When the European Union was formed, everyone was raving about how successful it is going to be and how it will benefit member states.

I think it has benefited many of its member states. European Union members have all adopted the Euro as the common currency (except for Britain) and the Euro is doing pretty well compared to other world currencies.

As more countries entered the Union though, things have seemed to have changed. Several of the last entries to the Union are having serious economic issues and have had to take huge loans from International Organizations and unemployment is on the rise.

So, with the European Union, I think there is no general consensus about it being successful and beneficial to all its members economically. I think this might be the case for all economic unions in general.

What do you think? Do the benefits of being in an economic union outweigh the risks?

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