The limited size of domestic markets, the availability of natural and technological resources in national units, and the desire to retain some form of protection against full global competition are all factors which promote the formation of regional economic groupings. National markets are usually too small to support efficient industries, exploiting economies of scale or specialization. The elimination of tariffs within an economic community and a common external tariff to non-members should divert trade from external to internal community sources. For industries favorably affected by trade diversion, trade expansion should enable the exploitation of economies of scale and specialization formerly unattainable because of the small size of the domestic market. Production should be allocated among members on the basis of comparative advantage and, following free trade theory, it should then be at its most efficient and low cost. Economic integration is essentially then a strategy of export promotion and free trade among members and of import substitution and protection towards nonmembers (Balassa, 1973; Berendsen, 1978).

As Balassa and Stoutjesdijk (1975) have noted, trade diversion and regional protection may have harmful effects. Goods imported from regional partners may be inferior or higher in price. Less competitive conditions may slow the adoption of new technologies. One of the problems of any economic community is, therefore, to minimize these disadvantages. Relevant policies include both the promotion of efficient and competitive intra-regional exchange by setting external tariffs at sufficiently low levels and, also, the maximum exploitation of member state comparative advantage.