Economics 340: International Economics
Andrew T. Hill
Regional Trading Agreements
Nondiscriminatory Tariff Reductions
Trade liberalization
Regional Trading Arrangements
Economic integration is the process of eliminating restrictions on international trade, payments, and factor mobility. Economic integration has taken the form of multilateral agreements
to reduce barriers mostly agreed to through GATT and the WTO and regional agreements to
reduce barriers.
● Types of Regional Trading Agreements
There are four primary types of regional trading agreements.
1.
Free-trade Area: an association of trading nations whose members agree to
remove all tariff and nontariff barriers amongst themselves
while maintaining their own trade restrictions against outsiders.
Example: North American Free Trade Agreement (NAFTA)
2.
Customs Union: an association whose members remove all tariff and nontariff
barriers amongst themselves, but have a common set of trade
restrictions against outsiders.
Example: Benelux (Belgium, the Netherlands, and Luxembourg)
3.
Common Market: a group of trading nations that permits the free movement of
goods and services amongst member nations, the initiation of
common external trade restrictions against nonmembers, and
the free movement of factors of production across national
borders within the economic bloc.
Example: European Union (1992)
4.
Economic Union: involves the transfer of economic sovereignty to a supranational authority. Therefore, the unification of monetary policies
and the acceptance of a common currency is handled by agencies of the union. Monetary union is a subset of economic
union. Example: European Monetary Union (1999) and the
United States.
● Why have regional trading agreements?
1.
enhance economic growth
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2.
A regional trading agreement ensures safe-haven trading agreements with larger
nations.
3.
As members of a trading arrangement increase, the opportunity costs rise for nonparticipant countries.
● Effects of a Regional Trading Arrangement
Example: Luxembourg and Germany form a customs union. The United States is a nonmember.
P
SL
$3.75
$3.50
$3.25
$3.00
DL
Q
Trade creation is economic welfare gained from joining a customs union.
Trade diversion is economic welfare lost from joining a customs union.
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Nations who are more competive are likely to benefit from trade creation.
The large the trade union, the greater the gains are likely to be.
Dynamic gains:
1.
economies of scale
2.
greater competition
3.
stimulus of investment
● European Union
European Community, Treaty of Rome (1957)
Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany
1973 - United Kingdom, Ireland, and Denmark
1981 - Greece
1987 - Spain and Portugal
1995 - Austria, Finland, Sweden
Treaty of Rome (1957):
1.
Abolition of tariffs, quotas, and other trade restictions among member nations.
2.
Imposition of a uniform external tariff on commodities coming from nonmember
nations.
3.
Free movement within the community of capital, labor, and enterprise.
4.
Establishment of a common transport policy, a common agricultural policy, and a
common policy toward competition and business conduct.
5.
Coordination and synchronization of member-nation monetary and fiscal
policies.
1968 - free trade zone
1970 - common external tariff system
trade creation outweighs in areas of machinery, transportation equipment, chemicals,
fuels
trade diversion outweighs in areas of agriculture and raw materials
Studies seem to point to trade creation exceeding trade diversion by a wide margin - 2%
to 15%.
1985 - European Union began work towards becoming a common market by 1992.
--> remove nontariff trade barriers (the remaining ones).
Expected benefits:
1.
Cost reductions as a result of economies of scale in production and business
organization.
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2.
Improved efficiency within companies and an environment where prices fall
toward production costs under the pressure of more competitive markets.
3.
Increased R & D and innovation fostered by the dynamics of an expanded
internal market.
4.
New patterns of competition in which comparative advantages determine the
role of market success.
Economic and Monetary Union:
Maastricht (1991)
Economic and Monetary Union (EMU) (1999)
The creation of the euro.
- euro as reserve currency?
- “interest free” loan
- assymmetric shocks
- assymmetric effects of monetary policy
Convergence Criteria for EMU:
1.
Price stabily: Inflation could be no higher than 1.5% more than the average of the
inflation rates in the three lowest inflation countries.
2.
Low long-term interest rates: Interest rates could be no more than 2% higher than
the average interest rate in the three lowest inflation
countries.
3.
Stable exchange rates: Exchange rates were to be kept in a band and there were to
be no devaluations of the country’s currency for at least 2
years prior to joining EMU.
4.
Sound public finances: Budget deficits could be no more than 3% of GDP,
government debt could be no more than 60% of annual
GDP.
Countries joining EMU on 1/1/1999: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain.
Countries opting out of EMU: Denmark (rejected membership in September 2000),
Sweden, United Kingdom
Countries that didn’t qualify: Greece (accepted in June 2000)
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✍ Predicated Essays
1.
Explain the four criteria used for convergence in anticipation of EMU in the European
Union. Which countries joined the EMU in 1999? Which EU countries didn’t and for
what reasons?
2.
How do the welfare effects of trade creation and trade diversion relate to a nation’s decision to form a customs union? Use a well labeled graph in addition to a carefully worded explanation.
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