First, at the most basic level, Preferential Trading Agreements (PTAs) lower trade barriers among members. Such preferential trade is usually limited to the portion of actual trade flows from LDCs, and is often non-reciprocal. An example of such an agreement is the Papua New Guinea - Australia Trade and Commercial Relations Agreement (PATCRA II) that has been in effect since 1977.
Second, a Free Trade Agreement/Area (FTA) is a reciprocal arrangement whereby trade barriers (usually tariffs) between participating nations are abolished. However, each member determines its external trade policies against non-FTA members independently. Most commonly, barriers to trade are reduced over time, but in most cases, not all trade is completely free from national barriers. A prominent example of a FTA is the North American Free Trade Agreement (NAFTA).
The third level of economic integration is the Customs Union. In a Customs Union, trade barriers among members are eliminated. Also, the participating nations adopt a common external trade policy (e.g. common external tariff regime or CET). A Customs Union is equivalent to an FTA plus a common external trade policy. The Customs Union of the Southern Cone -Mercosur-represents such an arrangement.
The fourth level of economic integration is the Common Market. In a Common Market, countries remove all barriers to movement of both goods and factors, and retain the common external trade policy. It is equivalent to a customs union plus free mobility of factors. One example of Common Market is the Common Market for Eastern and Southern Africa (Comesa).
The fifth level of economic integration is the Economic Union. In an Economic Union, besides the free goods and factor movements, member countries also adopt common macroeconomic policies. One example of Economic Union is the European Union (EU).