Econ306 Chapter7: Economic Integration

3 Dynamic Benefits from Customs Unions

(1) Increased competition - competitive pressures tend to spur more rapid innovation and growth. - external competition limits the ability of a domestic producer to exercise its monopoly power. (2) Economies of scale in production - by being a member of a customs union, producers have access to larger markets that allow them produce on a larger scale and exploit any available economies of scale. (3) Stimulus to investment - production within a customs union may be sold within the customs union without tariffs. -this advantage may induce investors outside the customs union to invest in production facilities within the customs union.

Common market

- *Allowing the free movement of labor and capital among member nations* -Removes all barriers to among members - Harmonize trade policies toward the rest of the world (such as the setting of common tariff rate)

Preferential trade arrangements

- *Provide lower barriers on trade among participating nations than on trade with nonmember nations.* - This is the loosest form of economic integration.

Economic union

- *Unifying the monetary, fiscal, and tax policies of member* - Allowing the free movement of labor and capital among member nations -Removes all barriers to among members - Harmonize trade policies toward the rest of the world (such as the setting of common tariff rate) -Allows the free movement of labor and capital among member nations. - This is the highest form of economic integration.

Customs union

- Allows no tariffs or other barriers on trade among members (as in a free trade area), and in addition it *harmonizes trade policies* (such as the setting of common tariff rates) toward the rest of the world.

What is the objectives of the North American Free Trade Agreement (NAFTA)?

- NAFTA came into force in 1994 - Eliminate barriers to trade between the U.S., Mexico, and Canada. - Improve intellectual property rights protections between the member nations. - Provide a dispute resolution mechanism for trade disputes under this agreement.

The European Union (EU)

- The EU developed from the European Economic Community that was initially established in 1958. - The EU formally came into existence with passage of the Treaty of Maastricht in 1992. - The Treaty of Maastricht also laid the foundation for the introduction of a unified European currency: the euro. - Currently the EU has 28 member nations with an aggregate population of nearly half a billion

Economic integration

- refers to the commercial policy of discriminately reducing or eliminating trade barriers only among the nations joining together/between select group of countries.

5 Forms of Economic Integration

1. Preferential trade arrangements 2. Free trade areas 3. Customs union 4. Common market 5. Economic union

The British Commonwealth Preference Scheme, established in 1932 by the United Kingdom with members and some former members of the British Empire. This example is best describes: A. Preferential trade arrangements B. Free trade areas C. Customs union D. Common market E. Economic union

A

Free trade area

All barriers are removed on trade among members, but each nation retains *its own barriers* to trade with nonmembers.

Duty-free zones / Free economic zones

Areas set up to attract foreign investments by allowing raw materials and intermediate products duty free.

- the European Free Trade Association (EFTA), formed by the United Kingdom, - the North American Free Trade Agreement (NAFTA), in 1993 - The Southern Common Market (Mercosur) in 1991 These examples are best describes: A. Preferential trade arrangements B. Free trade areas C. Customs union D. Common market E. Economic union

B

The European Union (EU), or European Common Market, formed in 1957 is an example of: A. Preferential trade arrangements B. Free trade areas C. Customs union D. Common market E. Economic union

C

The EU (European Union) achieved the status of a common market in 1993. This example is best describes: A. Preferential trade arrangements B. Free trade areas C. Customs union D. Common market E. Economic union

D

Tariff factories

Direct investments made in a nation or other economic unit (such as a customs union) to avoid import tariffs.

- Benelux, which is the economic union of Belgium, The Netherlands, and Luxembourg, formed after World War II (and now part of the EU). - Complete economic and monetary union is the United States. These examples are best describes: A. Preferential trade arrangements B. Free trade areas C. Customs union D. Common market E. Economic union

E

Trade diversion

Occurs when lower cost imports from outside the union are replaced by higher cost imports from another union member. By itself, this reduces welfare. It shifts production from more efficient producers outside the customs union to less efficient producers inside the union. For example, With no tariff --> Japan goods (lower cost provider) are cheaper than Mexico good (higher cost provider) - If the regional agreement further adds higher trade barrier to Japan, the trade division effect is even larger. -This is no allowed by WTO

Trade creation

Occurs when some domestic production in a member of the customs union is replaced by lower cost imports from another member nation. This increases welfare. For example, Before regional agreement-->Mexico has a higher price on products more than Japan, even though both countries charged at the same tariff rate. However, after regional agreement--> there is no more tariff on Mexico goods, so the price on Mexico products are cheaper than Japan.

Development of The European Union (EU)

Steps towards economic unification - Internal tariffs and duties have been removed. - Impediments to the free movement of labor and capital have been removed. - Corporate law practices have been harmonized. - Environmental regulations have been harmonized. - Labor standards have been harmonized.

Southern Common Market (Mercosur)

The South American Common Market formed by Argentina, Brazil, Paraguay, and Uruguay in 1991.

European Union (EU)

The customs union formed by West Germany, France, Italy, Belgium, The Netherlands, and Luxembourg that came into existence in 1958, and expanded to 15 nations with the joining of the United Kingdom, Denmark, and Ireland in 1973, Greece in 1981, Spain and Portugal in 1986, and Austria, Finland, and Sweden in 1995.

Trade deflection

The entry of imports from the rest of the world into the low tariff member of a free trade area to avoid the higher tariffs of other members.

European Economic Area (EEA)

The free trade area formed by the 12 members of the EU and 5 of the 7 members of the EFTA on January 1, 1994.

European Free Trade Association (EFTA)

The free trade area that was formed in 1960 by the United Kingdom, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland.

EU imposes tariffs (also called variable import levies)

The import duties levied by the EU on imports of agricultural commodities and equal to the difference between the high farm prices established by the EU and the lower world prices.