Integration in goods and factors: the role of flows and revenue

The regional economic integration efforts illustrated by the European Community (EC) and the proposed North American Free Trade Agreement (NAFTA) are examined. The paper compares gains from integration when trade and factor flows are impeded by revenue-generating policies with those when trade impediments do not generate revenue. The elimination of non-revenue generating restrictions among member countries has very different effects from those predicted in the elimination of tariff restrictions. The optimal international integration strategy for a small country is outlined and discussed.