CH9 Flashcards
Economists believe…
free trade agreements produce gains from trade for all member countries.
Levels of Economic Integration:
- Free Trade Area
- Customs Union
- Common Market
- Economic Union
- Political Market
Free Trade Area
Eliminates all barriers to the trade of goods and services among member countries.
- Each country is allowed to determine its own trade policies with regard to nonmembers.
- European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, Switzerland
- North American Free Trade Agreement (NAFTA) - U.S., Canada, Mexico
Customs Union
An agreement between two or more countries to remove trade barriers and lower or eliminate tariffs.
- Eliminates trade barriers between member countries and adopts a common external trade policy.
- The EU began as a customs union
- Andean Community (formerly the Andean Pact) (Bolivia, Colombia, Ecuador, Peru)
Common Market
- No restrictions on immigration, emigration, or cross-border flows of capital among member countries.
- Requires harmony and cooperation on fiscal, monetary, and employment policies.
- Mercosur (Argentina, Brazil, Paraguay, Uruguay) is hoping to establish a common market
Venezuela accepted for membership but awaiting ratification by Paraguay.
Economic Union
Requires a high degree of integration, a coordinating bureaucracy, and the sacrifice of national sovereignty to the bureaucracy.
- European Union (EU)
Political Union
EU headed toward at least partial political union, and the U.S. is an even closer example of political union.
Economic Case for Integration
- All countries gain from free trade and investment
- Assumes an absence of barriers
- Motivated by desire to exploit gains from free trade and investment.
Political Case for Integration
- Linking countries together, making them more dependent on each other, promotes political cooperation
- Reduces the likelihood of violent conflict
- Gives countries greater political clout when dealing with other nations.
Impediments for Integration
While a nation as a whole may benefit from a regional free trade agreement, certain groups may lose.
- It implies a loss of national sovereignty.
Regional economic integration is onluy beneficial if…
the amount of trade it creates exceeds the amount it diverts.
Trade Creation
Related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union.
Trade Diversion
Related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
WTO rules shure ensure that…
a free trade agreement does not result in trade diversion, but they do not cover some nontariff barriers.
Europe has 2 trade blocks:
- European Union (EU) - 28 members
- European Free Trade Area (EFTA) - 4 members