157.PreferentialtradeagreementsItem 157 – Grade 3

Economicintegration !Itmeansthatthetradeprocessesandpoliciesofcountriesgraduallyconvergeandtheirfiscalandmonetarypoliciesbecomemoreclosely

harmonized

• Bilateraltradeagreements!Anagreementrelatingtotradebetweentwocountries.Theaimisusuallytoreduceorremovetariffsand/orquotasthathavebeenplacedonitems

tradedbetweenthetwocountries.• Multilateraltradeagreements

Anagreementrelatingtotradebetweenmultiplecountries.Theaimisusuallytoreduceorremovetariffsand/orquotasthathavebeenplacedonitems,buttheagreementinthiscaseappliestoallofthemultiplecountriesinvolved.

Ibquestion

•Distinguishbetweenbilateralandmultilateral(WTO)tradeagreements.

International economics – 3.4 Economic Integration

158.TradingblocsItem158–Grade3

Atradingbloc!Agroupofcountriesthatjointogetherinsomeformofagreementinordertoincreasetradebetweenthemselvesand/ortogaineconomicbenefitsfrom

cooperationonsomelevel(Thiscomingtogetheriseconomicintegration)1. Preferentialtradingareas(PTA)

!Atradingblocthatgivespreferentialaccesstocertainproductsfromcertaincountries.Thisisusuallycarriedaboutbyreducing,butnoteliminating,tariffs.!Ex)ThereisonebetweentheEUandtheAfrican,CarribbeanandPacific

GroupofStates(ACP).ThisisanagreementbetweentheEUand78countiesintheACP.

Ibquestion

•Explainthatpreferentialtradeagreementsgivepreferentialaccesstocertainproductsfromcertaincountries

byreducingoreliminatingtariffs,orbyotheragreementsrelatingtotrade.

•Distinguishbetweenafreetradearea,acustomsunionandacommonmarket.

•Explainthateconomicintegrationwillincreasecompetitionamongproducerswithinthetradingbloc.

•Compareandcontrastthedifferenttypesoftradingblocs.

2. Freetradeareas!Anagreementmadebetweencountries,wherethecountriesagreetotradefreelyamongthemselves,butareabletotradewithcountriesoutsideofthe

freetradeareasinwhateverwaytheywish.

Explanationforthisdiagram

• Inthishypotheticalcase,countriesA,B,andChavesignedafreetrade

agreementandarenowtradingfreelyamongthemselves.• HOWEVER,undertheagreement,eachcountrymaytradewithanyother

countryinanywayseesfit

• CountryAhaspoliticalgrievanceswithcountryDandsohasplacedacompleteembargoonforeigntrade

• CountryBprotectsitseconomyfromcountryDbyplacingtariffsonanumber

ofitsimports• CountryChasagoodrelationshipwithcountryDandtradesfreelywithit• Examplesoffreetradearea:

!NorthAmericanFreeTradeArea(NAFTA),whichconsistsofUSA,Canada,andMexico!EuropeanFreeTradeAssociation

!SouthAsiaFreeTradeAgreement

3. Customsunions!Itisanagreementmadebetweencountries,wherethecountriesagreetotradefreelyamongthemselves,andtheyalsoagreetoadoptcommonexternal

barriersagainstanycountryattemptingtoimportintothecustomsunion

Explanationforthediagram• CountriesA,B,andChavejoinedinacustomunionandaretradingfreely

witheachother

• IfcountryDwishestoexportgoodstothecustomsunions,thegoodswillbetreatedinthesameway,nomatterwhichcountrythegoodsenter

• IfthecustomsunionhasagreedtoplacetariffsontheproductsofcountryD,

thenthosetariffswillbeimposed,nomatterwhatthepointofentrytothecustomsunion

• Examplesofcustomunions:

!TheEUhasone!Switzerland-Liechtensteincustomsunion!TheEastAfricanCommunity(Kenya,Uganda,andTanzania)

!Mercosur(Brazil,Argentina,Uruguay,Paraguay,andVenezuela)4. Commonmarkets

!Acustomsunionwithcommonpoliciesonproductregulation,andfreemovementofgoods,services,capital,andlabour

• Examples:TheEU,TheCARICOMSingleMarketandEconomy(CSME)

5. Economicandmonetaryunion!Itisacommonmarketwithacommoncurrencyandacommoncentralbank!Example:TheEurozone,whichincludesthemembercountriesoftheEUthat

haveadoptedtheeuroastheircurrencyandhavetheEuropeanCentralBankastheircentralbank

6. Completeeconomicintegration!Itisthefinalstageofeconomicintegration,atwhichpointtheindividualcountriesinvolvedwouldhavenocontrolofeconomicpolicy,fullmonetary

union,andcompleteharmonizationoffiscalpolicy!ThisiswhattheEurozoneismovingtowards

EvaluationoftradingblocsThebenefitsofbeingamemberofatradingbloc

(Whicharesimilartothoseoffreetrade)!Agreatersizeofmarketwiththepotentialforlargerexportmarkets,increasedcompetitionleadingtogreaterefficiency,morechoice,andlowerpricesfor

consumers.!Theconsequencesmaynotbeeven,assomedomesticproducersarelikelytogainfromthelargermarketwhileothersmayfindthemselvesunabletocompete,

!Theremaybefurtherstimulusforinvestmentduetothelargermarketsize,andforeigninvestmentmightbeattractedfromoutsidetheblocasawayofgettingafootinthedoorofthelargermarket

!Thereisalsoanargumentthat,alongwiththeeconomicgains,atradingblocwillfostergreaterpoliticalstabilityandcooperation.!Itisalsopossiblethattradenegotiationsmaybeeasierinaworldmadeupofa

numberoflargetradingblocs,ratherthanamong149sovereignstatesThedisadvantagesofbeingamemberofatradingbloc

!Sincetradingblocsfavourincreasedtradeamongmembers,butenactdiscriminatorypoliciesagainstnon-members,thiscanbedamagingtotheachievementsofthemultilateraltradingnegotiationsftheWTO.Thereisconcern

thatthebreakdowninWTOtalksinGenevainJuly2006willleadtoanincreaseinthenumberofindividualtradenegotiations.Thesemayunderminetheinternationaltraderulesandlimitthepotentialgainstotradeachievablewith

moreliberalizedworldtrade.Thismaynotbeasmuchofaproblemforlargeeconomiesasitmightbeforsmallorpooreconomiesthathavelittlebargainingpower.

159.Tradingblocs(HL)Item159–Grade3

• Tradecreationandtradedivisions !Relatestotheconceptofcustomunions

Tradecreation

• It occurs when the entry of a country into a customs union leads to the

productionof a goodor service transferring fromahigh-cost producer to alow-costproducer!Thisisanadvantageofgreatereconomicintegration

Example

Ibquestion

•Explaintheconceptsoftradecreationandtradediversioninacustomsunion.

•Explainthatdifferentformsofeconomicintegrationallowmembercountriestogainfromeconomiesofscale.

Tradediversion• It occurs when the entry of a country into a customs union leads to the

production of a good or service transferring from a low-cost producer to a

high-costproducer!Thisisadisadvantageofgreatereconomicintegration

Example

160.MonetaryunionItem160–Grade4

Economicandmonetaryunion

!Itisacommonmarketwithacommoncurrencyandacommoncentralbank!Example:TheEurozone,whichincludesthemembercountriesoftheEUthathaveadoptedtheeuroastheircurrencyandhavetheEuropeanCentralBank

astheircentralbankAdvantages

• Exchangeratefluctuationsthatusedtoexistbetweencountrieswilldisappearwithacommoncurrency!thisshouldeliminateexchangerateuncertaintybetweenthecountriesinvolved,whichshouldincreasecross-border

investmentandtrade• Acurrencywhichhastheenhancedcredibilityofbeingusedinalarge

currencyzoneshouldbemorestableagainstspeculationthantheindividual

currencieswere.• Businessconfidenceinthemembercountriestendstoimprovesasthereis

lessofaperceivedriskinvolvedintradingamongthecountries.Thisinturn

shouldleadtobothinternalgrowthandtradegrowth.• Transactioncostsareeliminatedwithinthemonetaryunion.Whencountries

havedifferentcurrenciesthereisachargewhencurrenciesareexchanged,

butthiswillnothappenwiththeexistenceofasinglecurrency.• Acommoncurrencymakespricedifferencesmoreobviousbetweencountries

andshould,overtime,leadtopricesequalizingacrossborders.

Ibquestion

•Explainthatamonetaryunionisacommonmarketwithacommoncurrencyandacommoncentralbank.

•Discussthepossibleadvantagesanddisadvantagesofamonetaryunionforitsmembers.

Disadvantages• Whencountriesenteramonetaryunion,interestratesaredecidedbythe

centralbank,meaningthatindividualcountriesarenolongerfreetosettheir

owninterestratesandsothetoolofmonetarypolicyisnolongeranoptiontoinfluencetheinflationrate,theunemploymentrate,andtherateofeconomicgrowth.

!Thisisespeciallydamagingifonecountryintheunionisexperiencinganeconomicsituationthatisnotbeingexperiencedbytheothers!Ex)Ifonecountryisexperiencinghighinflationduetostrongconsumer

demand,theywouldwanttoincreaseinterestratestoreducethedemandbutthiswouldnothappensinceothercountriesarenotexperiencinginflation

• Amonetaryunionwillbeweakandvulnerablewithoutfiscalintegration,in

theformofcommontreasury,harmonizedtaxrates,andacommonbudget,whileacommoncentralbankisseenasessentialinmonetaryunion!Thisisbecausesomecountrieswillbemorefiscallyirresponsiblethan

othersandthismaythreatenthestabilityoftheunion• Individualcountriesarenotabletoaltertheirownexchangeratesinorderto

affecttheinternationalcompetitivenessoftheirexportsorthecostsoftheir

imports• Theinitialcostsofconvertingtheindividualcurrenciesintoonecurrencyare

verylarge.Thecostsinclude:Takingtheoldcurrenciesoffthemarket,

printinganddistributingthenewcurrency,convertingdatabasesandsoftware,rewritingallpricelistsandinvoicesystems,repricingallgoodsandservicesintheeconomy,andrecalibratingallmachinerythattakescoinsand

notesetc.

Whenwouldthemembershipbemostbeneficialandwhenwoulditmakea

difference?

• Ifcountriesareinasituationwheretherewerelargefluctuationsbetweentheexchangeratesofthecountriesinvolved,wheretheunionisgoingtocreateasinglecurrencywithasignificantproportionoftheworld’sforeigncurrency

marketandwherebusinessconfidencewillbestronglyboostedbetweenmembercountries

!ItislikelytobeBENEFICIAL

• If countries are in a situation where fluctuations in exchange rates areminiamal,wherethecommoncurrencywouldnotbesiginigicantonheworldmarket, so would stull be susceptible to speculation, and where business

confidenceisalreadyhigh! It is likely to be DISADVANTAGEOUS