TRADING BLOCKS

STAGES OF ECONOMIC INTEGRATION

Preferential Trading AreaFree Trade AreaCustoms UnionCommon MarketEconomic and Monetary UnionFull Integration

FREE TRADE AREA

When a group of countries remove tariffs and quotas between themselves while retaining the right to set tariffs and quotas towards non mebers.

I.E. NAFTA, CAFTA

A

B

C

CUSTOMS UNION

A

B

C

COMMON MARKET

Is a customs union with complete freedom of movement for all goods and services. Includes freedom of F.O.P. and needs increased economic, social and legislative cooperation in taxes, labor and environmental laws and invisible barriers to trade.

A

B

C

E.U.

THE EUROPEAN UNION

http://www.youtube.com/watch?v=SfRcN45pnHU

Implications of a common market

The former European Free Trade Area.

4-BASIC FREEDOMS (E.U.)

1. People can move to work, study and live.

2. Goods and services can be bought and sold across national borders.

3. Firms can operate freely across borders.

4. Capital can be transferred without restrictions.

COMMON MARKETS AND FURTHER INTEGRATION

Broader scale in Labour laws, competition legislation, financial rules. (New Constitution)

Non tariff barriers are removed within countries (technical, safety, environmental standards, etc.).

Taxes on Labour, income, goods and profits must be coordinated in order to hinder tax evasion and limit regional unemployment due to tax structures.

BENEFITS AND COSTS OF COMMON MARKETS

BENEFITS Less market distortions: Tariffs

are removed. Increase competition and

improve resource allocation. Spread technology and ideas Possibility of E.O.S. due to

larger markets Increased labor mobility. Possible “peace and stability”.

(cultures becoming closer and interdependent.)

DISADVANTAGES Loss of domestic political and

economic sovereignity. Possible monopolies and

oligopolies. Diminishing social policies.

(tobbaco, alcohol) Strict environmental and labor

rules may be lowered due to harmonization of rules.

STAGES OF INTEGRATIONStage PTA FTA C.U. C.Mkt E. Int. Full I.Type of agreement

Reduced tariff levels for selected countries

0 tariffs on selected goods. Each country keeps its own tariffs towards non members

0 tariffs on goods between members and a common tariff towards other countries.

Free movement of goods and services, capital an dlabour between members.

Fixed exchange rates between members or single currency.

Harmonization of tax laws, social systems and “supra-national state”

Example: Eu and African Caribbean and pacific

N.A.F.T.A. European Economic Community

European Union

European Monetary Union (EMU)

U.S.A.

Difference from previous stage

Tariffs are selectively lowered.

Tariffs are removed rather than lowered.

Setting a common external tariff.

The four freedoms of movement. Convergence in taxes, laws and social welfare systems.

Convergence in monetary and fiscal policies. (12 Emu Members of the 25 E.U.)

Centralized economic, political and legislative power of government.

Other REGIONAL ECONOMIC ASSOCIATIONS

APEC: Asia Pacific Economic Cooperation. / 21 Member countries: Japan, USA, Canada, Australia, Chile, Peru, Indonesia, Vietmnam. Aims to a fully FTA by 2010.

ASEAN: Association of South East Asian Nations. (10 countries including: Cambodia, Indonesia, Thailand, Vietnam) FTA.

MERCOSUR: Customs Union in south america (6 countries). A common external tariff was implemented form most goods in 1995.

CEFTA: Cental European Free Trade Area: After the fall of USSR. (Poland, Hungary, Slovakia, Czech Republic, Slovenia, Bulgaria and Romania). Most of the countries are in the E.U. now or have applied for membership.

DR-CAFTA: Central American Free Trade Area. / USA and Central America and Dominican Republic.

SHORT QUIZ

a. Why might there be both winners and losers due to globalization?

b. What are the possible negative effects for a country joining a free trade area?

c. What other regulations are necessary for countries entering into a free trade area?

d. What is the main difference between a FTA and a customs union?

e. Explain why a common market involves more political and economic cooperation than a customs union.

a. Losers: Labour if the increase competition abroad displaces local industries. MNC exploit cheap labour, and social and environmental laws.

b. Possible loss of jobs, less G revenue, zero internal tariffs will redirect trade to less efficient producers. (trade diversion)

c. Re export tariffs and local content rules will need to be implemented in the FTA. (To avoid deflection).

d. A FTA enables each member to set its own outward tariffs towards non members, while in Customs Union means that there is a common outer tariff wall.

e. A common market will allow a range of freedoms in the mobility of goods, Labour and capital, which will need a degree of convergence in standards, taxes and Labour legislation between members.

World Trade OrganizationWorld Trade Organization

From Gaat to the WTOhttp://www.wto.org/english/res_e/webcas_e/webcas_e.htm#wtosystem

FORUM

GUIDELINES AND PRINCIPLES

Aims: To create a Global Free trade environment by eliminating trade barrieras and facilitating an arena in which to settle disputes. (Includes dumping and subsidies). (Includes issues such as industry standards, labour rules and intellectual property).

GUIDELINES AND PRINCIPLES

Non DiscriminationFreeing trade through negotiation and

mediation.Stabile trade environmentFair CompetitionDevelopment