157. preferential trade agreements
TRANSCRIPT
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