Chapter 10

Question 1

Binding a tariff

Answer 1

Commitment not to raise tariffs

Question 2

Trade agreements- two categories

Answer 2

1. Preferential trade agreements (PTAs)

2. Free trade agreements (FTAs)

Question 3

PTAs- preferential trade agreements

Answer 3

agreements that involve partial non-reciprocal preferences offered by a country to another country/group of countries

• mostly unilateral preferences- offered by one country and the other country does not have to offer the same preferences (nonreciprocal)
• represent the shallowest form of economic integration

Example: GSP, AGOA, Andean Trade Preference Act

Question 4

FTAs- free trade agreements

Answer 4

Remove all (or most) barriers to trade among participating nations

• Reciprocal agreements- all nations participating offer the same
• Often referred to as RTA (regional trade agreements), but geographical proximity is not a requirement

Question 5

Two types of FTAs

Answer 5

1- free trade area

2- custom unions

Question 6

Free trade area

Answer 6

Removes all (or most) trade barriers among participating nations, but allows them to maintain separate trade-policies with non-participating nations.

Example: NAFTA

Question 7

Custom union

Answer 7

Free trade among themselves and a common trade policy with nonparticipating nations

• represents a deeper degree of economic integration

Example: European Union

Question 8

Common market

Answer 8

A form of economic integration that goes beyond a custom union.

• free movement of goods and services
• common external trade policy
• remove all or most restrictions on the movement of labor and capital across member nations.

Stronger degree of economic integration than free trade and custom union.

Example: Today’s EU

Question 9

Economic union

Answer 9

Deepest form of economic integration among sovereign nations.

• all features of a common market (free movement g&s, common external trade, free movement of labor and capital) + a closer coordination and harmonization of participating countries major economic policies (such as fiscal policies, environmental policies and in some cases monetary policies)
• does not require them to have the same currency

Example: EU

Question 10

Trade creation

Answer 10

Occurs when a country replaces high-cost domestic production with low-cost import from a member country of a shared FTA.

Example: NAFTA- labor moved from US to Mexico

–> trade creation improves the welfare of the importing country

Question 11

Trade diversion

Answer 11

Occurs when low-cost imports from a nonmember country are replaced with high-cost imports from a member country to a shared FTA.

Example:
Brazil cheaper than Mexico, however preferential treatment (zero-tariff) to M so consumers chose to purchase from Mexico instead.

Trade diversion- the creation of NAFTA (in this case) has diverted some US trade from Brazil to Mexico.

Reduces national welfare in the importing country- substitutes cheaper imports with expensive from NAFTA members.

Question 12

Graph- trade creation

Answer 12

Area a+b

Question 13

Welfare loss due to trade diversion

Answer 13

Area c

Question 14

c>a+b

Answer 14

Reduce national welfare

Question 15

c < a + b

Answer 15

Gains in national welfare

Question 16

Trade deflection

Answer 16

In the case of free trade area when nonmembers circumvent the unfavorable treatment by shipping their goods to one of the member nations in the free trade area in order to get access to the whole area

Question 17

Rules of origin

Answer 17

Rules in an FTA to specify what goods are eligible for preferential treatment (to prevent trade deflection)

Question 18

NAFTA

Answer 18

• Free trade zone
• January 1st 1994
• eliminated tariffs on goods and services
• gradual phase-out of all non tariff barriers

Question 19

Founding members of EEC

Answer 19

Belgium, France, Germany, Italy, Luxembourg and the Netherlands

1957

Question 20

The European Commission

Answer 20

• Main executive body of the EU
• 28 commissioners (one from each country)
• commission president and vice-president

Question 21

The European Council

Answer 21

Provides general political and policy direction on matters concerning the EU, but does not engage in any legislative activity.

• 28 heads of state
• Council President

Question 22

The European Parliament

Answer 22

Main legislative body of the EU.

- making laws

Question 23

The Court of Justice of the EU

Answer 23

Working with courts of law in individual member states- ensures adherence and uniform application of the European Law

The judicial arm of the EU

Question 24

ASEAN- The Association of South East Asian Nations

Answer 24

• 1967
• work toward regional political stability during the Vietnam war
• establish stronger economic cooperation
• founding members: Indonesia, Philippines, Malaysia, Singapore and Thailand

then joined: Brunei, Vietnam, Laos, Myanmar and Cambodia= 10 members

1992- AFTA- free trade area

Question 25

COMESA- The Common Market for East and Southern Africa

Answer 25

Original PTA- 1978
- transform into a common market and an economic community

1993- COMESA
- taking advantage of a larger market to attract FDI

Question 26

MERCOSUR- Southern Common Market

Answer 26

1991- Argentina, Brazil, Paraguay and Uruguay

Later- Bolivia, Chile, Peru, Columbia, Ecuador and Venezuela

Question 27

Spaghetti bowl phenomenon

Answer 27

Overlapping preferential trade agreements- complicate the “rules of origin” and increase administrative costs.

Question 28

Regional trade blocs in the developing world

Answer 28

Count for a relatively small share of global trade

Question 29

Other Regional trade blocs

Answer 29

• ANCOM- Andean community
• CARICOM- Caribbean community
• ECOWAS- Economic community of West African Nations
• SADC- Southern African Development Community