Chapter 10 Flashcards
Binding a tariff
Commitment not to raise tariffs
Trade agreements- two categories
- Preferential trade agreements (PTAs)
2. Free trade agreements (FTAs)
PTAs- preferential trade agreements
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
FTAs- free trade agreements
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
Two types of FTAs
1- free trade area
2- custom unions
Free trade area
Removes all (or most) trade barriers among participating nations, but allows them to maintain separate trade-policies with non-participating nations.
Example: NAFTA
Custom union
Free trade among themselves and a common trade policy with nonparticipating nations
- represents a deeper degree of economic integration
Example: European Union
Common market
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
Economic union
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
Trade creation
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
Trade diversion
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.
Graph- trade creation
Area a+b
Welfare loss due to trade diversion
Area c
c>a+b
Reduce national welfare
c < a + b
Gains in national welfare
Trade deflection
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
Rules of origin
Rules in an FTA to specify what goods are eligible for preferential treatment (to prevent trade deflection)
NAFTA
- Free trade zone
- January 1st 1994
- eliminated tariffs on goods and services
- gradual phase-out of all non tariff barriers
Founding members of EEC
Belgium, France, Germany, Italy, Luxembourg and the Netherlands
1957
The European Commission
- Main executive body of the EU
- 28 commissioners (one from each country)
- commission president and vice-president
The European Council
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
The European Parliament
Main legislative body of the EU.
- making laws
The Court of Justice of the EU
Working with courts of law in individual member states- ensures adherence and uniform application of the European Law
The judicial arm of the EU
ASEAN- The Association of South East Asian Nations
- 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
COMESA- The Common Market for East and Southern Africa
Original PTA- 1978
- transform into a common market and an economic community
1993- COMESA
- taking advantage of a larger market to attract FDI
MERCOSUR- Southern Common Market
1991- Argentina, Brazil, Paraguay and Uruguay
Later- Bolivia, Chile, Peru, Columbia, Ecuador and Venezuela
Spaghetti bowl phenomenon
Overlapping preferential trade agreements- complicate the “rules of origin” and increase administrative costs.
Regional trade blocs in the developing world
Count for a relatively small share of global trade
Other Regional trade blocs
- ANCOM- Andean community
- CARICOM- Caribbean community
- ECOWAS- Economic community of West African Nations
- SADC- Southern African Development Community
