As globalization continues, countries are joining together to form trade blocs to lower or eliminate trade barriers and to try to accede to the WTO (see post). A trade bloc is an agreement between nations to create a “free trade area” of varying integration that is formed through international agreements (i.e. treaties) and/or with intergovernmental organization help to reduce of eliminate different forms of protections. Please see my Model United Nations blog for further information on international relations: http://schmidtmun.blogspot.com/.
There are six levels of trade areas, from the least extensive (the Preferential Trade Area) to the most extensive (complete economic integration).
1. Preferential Trade Area (PTA): a trading bloc giving preferential treatment for some g/s between some countries/groups of countries (i.e. EU and ACP countries, India and Afghanistan).
2. Free Trade Area (FTA): a trading bloc comprised of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) g/s between them (i.e. North American Free Trade Area (NAFTA) between Canada, the US and Mexico). However, the countries can have different external tariffs to non-members.
3. Custom Union (CU): an FTA with a common external tariff (i.e. MERCOSUR in much of South America, CARICOM in the Caribbean).
4. Common Market (CM): a CU with free movement of FoPs (specifically capital and labor) and unified policies on product regulation (i.e. the European Union).
5. Economic and Monetary Union (EMU): a CM with a single market and common currency (i.e. 16 countries of the Eurozone, West African EMU and the West African CFA franc).
6. Complete economic integration i.e. think of the US from colonial times to today
trade creation: the advantage of a country joining (at least) a customs union as specialization according to comparative advantage from high-cost producers to low-cost producers occurs.
Graph Analysis:
In this example, we address what happens to Slovenia when it joins the European Union. Before joining, Slovenia faced an EU tariff on beef (P-EU+Tariff). When Slovenia joined the EU, the tariff was eliminated, leading to a gain in the world efficiency lost before with the tariff (the orange triangle) and a gain in the consumer surplus also previously lost (green triangle). If there were any g/s the Slovenes placed on the EU, those would also we eliminated. A full-fledged analysis would include the full pre- and post-tariff situation with new labels (see tariff post).
trade diversion: the disadvantage of a country joining (at least) a customs union since the country may have to put tariffs on g/s from countries they previously traded with to adhere to the new agreement (low-cost to high-cost).
Graph Analysis:
In this example, we address what would happen if Albania entered at least a customs union with the European Union. We assume Albania had an agreement with India by which they could purchase shirts at a price of P-India. If Albania signs an agreement with the EU, they'll have to assume the EU's tariff on the Indian shirts (P - EU+T) which is a price higher than the EU price for shirts. In this instance, Albania ceases to trade with India and, instead, purchases EU shirts beyond domestic production. Therefore, the red trapezoid represents the loss of world efficiency (the left triangle and rectangle) and the loss of consumer surplus (the right triangle) enjoyed before the agreement. A full-fledged analysis would include the full pre- and post-tariff situation with new labels (see tariff post).
In this example, we address what happens to Slovenia when it joins the European Union. Before joining, Slovenia faced an EU tariff on beef (P-EU+Tariff). When Slovenia joined the EU, the tariff was eliminated, leading to a gain in the world efficiency lost before with the tariff (the orange triangle) and a gain in the consumer surplus also previously lost (green triangle). If there were any g/s the Slovenes placed on the EU, those would also we eliminated. A full-fledged analysis would include the full pre- and post-tariff situation with new labels (see tariff post).
trade diversion: the disadvantage of a country joining (at least) a customs union since the country may have to put tariffs on g/s from countries they previously traded with to adhere to the new agreement (low-cost to high-cost).
Graph Analysis:
In this example, we address what would happen if Albania entered at least a customs union with the European Union. We assume Albania had an agreement with India by which they could purchase shirts at a price of P-India. If Albania signs an agreement with the EU, they'll have to assume the EU's tariff on the Indian shirts (P - EU+T) which is a price higher than the EU price for shirts. In this instance, Albania ceases to trade with India and, instead, purchases EU shirts beyond domestic production. Therefore, the red trapezoid represents the loss of world efficiency (the left triangle and rectangle) and the loss of consumer surplus (the right triangle) enjoyed before the agreement. A full-fledged analysis would include the full pre- and post-tariff situation with new labels (see tariff post).
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