International Trade Policy Economic Integration and Regionalism

Major Trade/Economic Agreements NAFTA: The North American Free Trade Area (1994) EU: The European Union (1957) Mercosur: Argentina, Brazil, Paraguay, Uruguay (1991) ASEAN: Association of Southeast Asian Nations (1967) Andean Community: Bolivia, Colombia, Ecuador, Peru, Venezuela (1973)

What is a trade agreement? A special agreed upon preferential arrangement among a group of nations governing their trade/economic relationship: Trade: Tariffs and other trade barriers Trade Policies: Trade with other countries Factor movements: Labor and capital mobility Economic policies: Monetary and fiscal policies

Types/Levels of Agreements Preferential trade arrangements: Reduction of intra-group tariffs Free trade area: Removal of intra-group tariffs Customs Union: Common external tariffs Common Market: Free factor mobility and and service trade, fixed exchange rate Economic Union: Common/coordinated economic policies and common currency Regional agreement

Measuring Trade Flows A relative measure: World Trade Share Regional share of trade relative to the total share Share of the trade block relative to the world trade Trade Concentration ratio Of the trade block

The welfare implications of trade/economic pacts: Trade creation and trade diversion Trade creation: The lowering or removal of tariffs within a group of nations could result in an increase in the mount of trade among members. Trade diversion: The lowering or removal of tariffs and other barriers within a group of nations could divert trade from (more efficient) non-members to (less efficient) members.

Welfare Effects Snm Snm+t Sm Sm+t D S o q1 qoq3 q2 Po p1 Q a e c d b g hi a j

Other Implications Economies of Scale The possibility of more competition within the group Monopoly power More market power: Optimal tariff Incentives for freer trade globally