1. McGraw-Hill/Irwin Copyright  2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12: Trade Blocs and Trade Blocks

2. 12-2 Figure 12.1 – Types of Economic Blocs 经济集团 p231

3. 12-3 Trade discrimination 贸易歧视 p232 Advantages Advantages Customs unions and free trade areas are remove the tariff and NTBs for some countries and therefore are a move toward free trade Customs unions and free trade areas are remove the tariff and NTBs for some countries and therefore are a move toward free trade Disadvantages Disadvantages Incentive to purchase from high-cost producers within the FTA or customs union Incentive to purchase from high-cost producers within the FTA or customs union Bilateralism of the 1930s Bilateralism of the 1930s Tension re: new members Tension re: new members WTO: MFN principle 最惠国待遇原则 (deviations 背离 ) WTO: MFN principle 最惠国待遇原则 (deviations 背离 )

4. 12-4 Theory of trade blocs 贸易同 盟理论 Trade diversion 贸易转向 (from low cost to high cost producers) Trade diversion 贸易转向 (from low cost to high cost producers) Trade creation 贸易开辟 (of more low cost trade) Trade creation 贸易开辟 (of more low cost trade) The case of Britain: The case of Britain: Before any tariffs-import from Japan (point C) Before any tariffs-import from Japan (point C) After the tariff- import from Japan (point A); gov ’ t revenue a+c After the tariff- import from Japan (point A); gov ’ t revenue a+c After EEC – import from Germany After EEC – import from Germany gain in consumer surplus a+b gain in consumer surplus a+b Loss of gov ’ t revenue a+c Loss of gov ’ t revenue a+c Net effect c-b Net effect c-b

5. 12-5 Figure 12.2 – Trade Diversion versus Trade Creation in Joining a Trade Bloc: UK Market for Imported Compact Cars

6. 12-6 Theory of trade blocs Trade creation – area b Trade creation – area b More cars are purchased More cars are purchased Price is lower Price is lower Trade diversion Trade diversion More and cheaper cars would have been imported from Japan had the tariff been removed More and cheaper cars would have been imported from Japan had the tariff been removed The net effect can be positive or negative The net effect can be positive or negative The lower the partner costs relative to the outside world, the greater the gains The lower the partner costs relative to the outside world, the greater the gains The more elastic the import demand the greater the gains The more elastic the import demand the greater the gains

7. 12-7 Other gains The trade bloc creates a larger market, hence scale economies The trade bloc creates a larger market, hence scale economies An increase in competition can reduce prices An increase in competition can reduce prices An increase in competition can lower costs of production An increase in competition can lower costs of production Increased opportunities for business investment Increased opportunities for business investment

8. 12-8 The EU experience Small gains from trade creation in manufacturing goods Small gains from trade creation in manufacturing goods Losses from the common agricultural policy Losses from the common agricultural policy Unmeasured gains from competition, scale economies and productivity increases Unmeasured gains from competition, scale economies and productivity increases What do you think? What do you think?

9. 12-9 The Single European Act The Single European Act Removed separate national product standards Removed separate national product standards Removed restrictions on capital flows Removed restrictions on capital flows Free movement of labour Free movement of labour New members New members Smaller agricultural subsidies Smaller agricultural subsidies Movement of labour is not free Movement of labour is not free Secure borders Secure borders

10. 12-10 Canada – US FTA Canada stands to gain more from trade with the US because its export supply and import demand curves are less elastic Canada stands to gain more from trade with the US because its export supply and import demand curves are less elastic More price fluctuation; gains for export industries and losses for import competing industries More price fluctuation; gains for export industries and losses for import competing industries Gains in manufacturing and labour productivity Gains in manufacturing and labour productivity

11. 12-11 NAFTA 北大西洋自由贸易区 – learning activity Summarize the important changes brought by the agreement Summarize the important changes brought by the agreement The pros and cons from Mexico ’ s point of view The pros and cons from Mexico ’ s point of view The pros and cons from the US point of view The pros and cons from the US point of view From the Canadian point of view From the Canadian point of view

12. 12-12 Figure 12.3 – Estimates of the Effects of the North American Free Trade Area on National Incomes and Wage Rates

13. 12-13 NAFTA Who loses? Who loses? Import competing producers Import competing producers In the US-clothing, field crops, cars In the US-clothing, field crops, cars In Mexico – fin services, chemicals, high-tech In Mexico – fin services, chemicals, high-tech Outside producers – clothing, textiles Outside producers – clothing, textiles Rules of origin are too complex and can be considered a NTB Rules of origin are too complex and can be considered a NTB

14. 12-14 Trade blocs of developing countries

15. 12-15 Trade embargoes 贸易禁运 Consider a total trade embargo Consider a total trade embargo The embargoing country loses area a due to restriction of free trade The embargoing country loses area a due to restriction of free trade In the target country consumers lose area b+c, producers gain area b In the target country consumers lose area b+c, producers gain area b As long as c>a, the embargo works As long as c>a, the embargo works An embargo may fail for political or economic reasons An embargo may fail for political or economic reasons

16. 12-16 Figure 12.4 – Effects of an Embargo on Exports to Iraq

17. 12-17 Figure 12.5 – Two Kinds of Economically Unsuccessful Embargoes

18. 12-18 An embargo can backfire An embargo can backfire Inelastic export supply in the imposing country and elastic import demand in the target country Inelastic export supply in the imposing country and elastic import demand in the target country A>c A>c An embargo can have little economic impact on either side An embargo can have little economic impact on either side Elastic export supply and import demand Elastic export supply and import demand Both a and c are very small Both a and c are very small

19. 12-19 Conclusions: Conclusions: Big countries pick on small ones Big countries pick on small ones Sanctions must be extreme and sudden Sanctions must be extreme and sudden Sanctions work better in a democracy Sanctions work better in a democracy

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