Lecture 6 Trade integration

10/7/2013 ECON 335 International Economy Lectures 6: Trade Integration International Trade Liberalization: Regional Approach  EU, EFTA, NAFTA, Mercosur, ASEAN etc  free trade among small number of nations; while maintaining some barriers with rest of the world  these are called preferential trading arrangements Next some definitions: Preferential Trading Agreement  Two or more countries when they reduce their respective duties on imports of all goods (except services and capital) from each other, retaining their original tariffs against the outside world  A good historical example is Great Britain and its former colonies Commonwealth Preference System 10/7/2013 Free-trade area (FTA)  Two or more countries when they abolish all import duties and quantitative restrictions in their mutual trade in all goods (except services and capital); retaining their original tariffs against rest of the world  Examples of free-trade areas:     the European Free Trade Area (EFTA), 1960 Free Trade Agreement between USA and Canada, 1988 North American Free-Trade Agreement (NAFTA), 1994 Association of Southeast Asian Nations (ASEAN): AFTA (1992) Customs union:  Two or more countries when they abolish all import duties on their mutual trade in all goods (except services and capital) and, in addition, adopt a common external tariff schedule on all imports of goods (except capital) from rest of the world 10/7/2013  A historical example: in 1834 a large number of sovereign German states formed the "Zollverein”  A more recent example is the European Economic Community (EEC, 1957) Common market:  Two or more countries when they form a customs union and, in addition, allow free movement of all factors of production (labor and capital) among them  An example is European Community (EC), 1967 Economic union:  Two or more countries when they form a common market and, in addition, proceed to unify their fiscal, monetary, and socioeconomic policies  Examples are "Benelux", 1960 (was first a customs union starting in 1948) and European Union (EU), 1999 10/7/2013 Trade Creation and Trade Diversion: Regional Integration and Welfare  The overall welfare effects of economic integration are ambiguous and require caseby-case judgment  Reason: integration is both a policy of protection and a move toward free trade  The effect of the protectionist element of integration is called trade diversion and  the effect of the trade liberalization element is called trade creation  The free-trade area's overall effect on welfare is determined by comparing the trade-creation and trade-diversion effects  If trade creation dominates, the formation of a free-trade area will enhance welfare Figure Sdom PX PD P0 P1 SM + t G a c J C b e d SNM + t H SM SNM Ddom Q3 Q1 Q0 Q2 QX ... toward free trade  The effect of the protectionist element of integration is called trade diversion and  the effect of the trade liberalization element is called trade creation  The free -trade area's... 10/7/2013 Trade Creation and Trade Diversion: Regional Integration and Welfare  The overall welfare effects of economic integration are ambiguous and require caseby-case judgment  Reason: integration. .. the world  Examples of free -trade areas:     the European Free Trade Area (EFTA), 1 960 Free Trade Agreement between USA and Canada, 1988 North American Free -Trade Agreement (NAFTA), 1994