Regional integration and international institutions

Regional integration is the process by which neighbouring countries lower barriers between themselves: a free trade area removes tariffs among members, a customs union adds a common tariff on outsiders, a common market adds free movement of labour and capital, and an economic union harmonises policies. Worked example: when two countries form a free trade area, a member may start buying from its partner instead of from a cheaper outside supplier — that is trade diversion, the cost that must be weighed against trade creation.