ABSTRACT
Regional integration is characterized by a lowering of transaction costs between member states relative to non-members. An important aspect is the impact of regional integration on regional and world welfare, that is, whether regional integration is trade-creating or trade-diverting. A fundamental question is whether regional integration facilitates or impedes the development of a multilateral order. Depending on the extent of economic integration, different types of regional integration have to be distinguished include preferential trade agreements, free-trade areas, customs unions, common economic areas, a common market, a monetary union, and political union. The European Free Trade Association was founded in 1960 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom in order to secure free trade in industrial goods. The North American Free Trade Agreement between the US, Canada and Mexico started in 1994. The advantage of the multilateral approach consists in creating a set of rules that are legally binding nearly all over the world.
