Lecture 6 Trade integration

1 ECON 335 International Economy Lectures 6: Trade Integration International Trade Liberalization: Regional Approach  EU, EFTA, NAFTA, Mercosur, ASEAN etc..  free trade among sma

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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

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

 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

Trade Creation and Trade Diversion:

Regional Integration and Welfare

 The overall welfare effects of economic

integration are ambiguous and require

case-by-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

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