Common Market

Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Common Market?

A common market is established between two or more countries by removing all trade barriers and eliminating separate tariff programs to maximize trade relations. The primary purpose of these markets is to facilitate trade, boost economic efficiency, and enhance political cooperation among member nations.

Common Market

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The whole market is based on a legal and official intergovernmental agreement between interested nations to eliminate trade and business operations barriers. The member countries introduce a common external tariff imposed on non-member countries interested in importing into the common market. Therefore, one of the most well-known examples of a common market is the European Union (EU).

Key Takeaways

  • A common market is an official trade agreement that enables two or more nations to join international trade and eradicate all trade barriers.
  • Hence, the first common market was established in 1957 in Europe among six countries called the European Economic Community (EEC).
  • The common market economic integration is a valuable process. It helps nations boost their economy.
  • Moreover, these markets aim to create a more integrated and cohesive economic zone, which can lead to several benefits for member countries.

Common Market Explained

A common market refers to an official treaty signed between two or more countries to come together and form a market space without barriers to import and export between the member countries. Moreover, the common market members sign such agreements to promote business and create long-term business and political relationships with others. It simplifies business operations, lets domestic and small firms indulge in the global market, and helps them grow.

Furthermore, countries with common motives and shared interests form markets to help each other. Such agreements allow businesses and provide leverage and support in political scenarios. Besides, the history of the common market dates back to the 19th century, and the first market formed was the European Economic Community. It was established by the Treaty of Rome, signed on March 25, 1957, and officially came into force on January 1, 1958.

Moreover, the Association of Southeast Asian Nations (ASEAN) and the North American Free Trade Agreement (NAFTA), which has since been replaced by the United States-Mexico-Canada Agreement (USMCA), are two other areas and organizations that have, to varied degrees, worked towards achieving common market goals.

In addition to trade, common markets often allow for the free movement of capital. Hence, individuals and businesses can invest, buy assets, or operate across member countries without significant restrictions. Some markets also facilitate the free labor movement, allowing workers to seek employment opportunities in other member countries. A common market doesn’t need a limited number of nations in it, and it can expand over time when the members decide to invite or bring other countries into it.

The European Union’s common market has also been instrumental in promoting economic growth and integration among its member states.

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Features

The features of the common market are –

  • Two or more countries sign a formal agreement to establish a common marketplace with the removal of trade barriers.
  • It allows explicitly certain countries to free labor, capital, and services movement.
  • The member countries can still trade with non-member countries on different terms and policies.
  • Hence, the countries in the agreement can let non-member countries import in the common market on a fixed tariff.
  • Common markets often work to reduce economic disparities among member countries. Hence, this involves policies and investments to raise living standards in less developed regions.
  • While primarily an economic arrangement, these markets can foster political cooperation and stability among member countries, as they share economic interests and interdependencies.

Examples

Check out these examples for a better idea:

Example #1

Suppose three imaginary countries, namely South America, Southeast Asia, and North America, work independently in the global commodity market and work their best to maximize trade and explore business opportunities. In a political scenario, the leaders of all three nations meet and sign a treaty and agree to form a marketplace with little or no trade barriers; the countries will share free labor support, including minimum tax systems, tariffs, and capital for the common objective of free trade and building long term business relationships to help each other. As these nations cooperate on trade negotiations with non-member countries, they strengthen their global standing and collectively address economic challenges.

Therefore, this marketplace established by the three governments is a straightforward common market example. Furthermore, the countries also decided that if a fourth nation wanted to import their goods into their market, the country must pay a predetermined external tariff to the three members.

Example #2

In 2022, the Israeli finance minister was positive about Joe Biden’s (the US president) visit, looking forward to the meeting that will lead to a common market in the Middle East that shall also include Saudi Arabia. From the US side, they were also looking to expand regional economic cooperation.

At a business conference organized by the daily Calcalist, the Israel Finance Minister was asked what he expected from Biden’s visit. Lieberman replied, “It is time to create a new, united market in the Middle East—Israel. Moreover, it will fundamentally alter this reality in both the economic and security spheres”. He further stated that Biden’s visit will focus on developing this new Middle Eastern market.

The common market is supposed to belong to Israel, Saudi Arabia, Jordan, and other Gulf countries. Israel has already regulated relations with four Arab countries under the 2020 US diplomatic drive. The idea is to increase peace among the nations and explore business opportunities.

Pros And Cons

Here are the pros and cons of the common market:

Pros

  • The common market forms long-term business and political relationships between countries.
  • It removes trade barriers, and nations unite, forming a uniform policy and world market, which gets more significant.
  • All the members can use their natural resources and utility to the best of their ability, and optimum utilization becomes efficient.
  • Healthy competition increases, and companies can sell their products freely.
  • As the market gets more prominent, a higher economy of scale is maintained.
  • Small countries explore better markets with business opportunities that should have been present earlier.
  • Moreover, as the business grows, more employment generation is induced, which benefits the workforce drive.
  • From a consumer’s perspective, a common market allows them to choose between a variety of goods and products that are reasonably priced and readily available.

Cons

  • As the competition increases, so does the risk of constant innovation, which may prove fatal for small domestic businesses.
  • The vulnerable companies slow down in business, leading to layoffs and, ultimately, low revenue generation.
  • Some enterprises become dependent on government subsidies and protection.
  • Laborers with skill and knowledge get ahead, and the mediocre workforce is treated with minimum wages.
  • Common markets often require complex decision-making processes involving multiple member states and institutions.
  • Furthermore, these markets can lead to trade imbalances, with some countries exporting more than they import while others face a trade deficit.

Common Market vs Customs Union vs Free Trade Area vs Economic Union

  • The common market focuses on the free movement of capital and labor, and free trade eradicates trade barriers. The economic union is responsible for monetary and fiscal policy coordination. In contrast, a customs union is a preliminary phase of the common market.
  • The first customs union was induced in 1834, the economic union was established in 1959, and the first free trade area was set up in 1860 between France and Britain.
  • A common market is a popularized concept compared to free trade areas. On the contrary, custom and economic unions are more politically driven than business-driven.
  • Moreover, these markets aim to enhance economic integration, whereas custom unions focus on simplifying trade procedures. Free- trade’s significant benefit is eliminating tariffs on most goods. In contrast, economic union aims at a common currency and coordinated fiscal policies.

Frequently Asked Questions (FAQs)

1. Do common markets have a common currency?

Common markets do not necessarily have a common currency, but some may choose to adopt it as part of their economic integration efforts. Whether or not this market has common money depends on the specific agreements and goals of the participating countries.

2. Can non-sovereign territories or regions participate in common markets?

In some cases, non-sovereign territories or regions may be allowed to participate in common markets as long as they have the consent of their sovereign governing authorities. These arrangements are often unique and subject to negotiation.

3. How can a country or region exit a common market?

Exiting this market is complex, often involving negotiations with other member countries. The terms of exit can vary depending on the specific agreements in place.

4. How do common markets affect intellectual property rights?

These markets often involve harmonizing intellectual property regulations to protect patents, trademarks, and copyrights. Hence, it encourages innovation and provides a consistent framework for intellectual property protection.

This article a guide to what is Common Market. We explain its examples, comparison with custom and economic unions and free trade area, features, and pros. You may also find some useful articles here –

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