PREFERENTIAL TRADE ARRANGEMENTS Chapter 9

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PREFERENTIAL TRADE ARRANGEMENTSChapter 9

• ECON 333 SUMMER 2004

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Preferential Trading Agreements

• Preferential trading agreement (PTA) An
  agreement between several countries to reduce
  trade barriers against each other.
• Forms of PTAs
• Free Trade Areas
• Customs Unions
• Common Markets
• Economic Unions

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Levels of Integration

• Free Trade Area Zero tariff for members, but
  independent external tariffs.
• Customs Union Zero tariffs for members and
  common external tariff.
• Common Market Customs Union Free movement of
  factors of production.
• Economic Union Common Market Same economic
  policies for member countries.

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Levels of Economic Integration
Preferential trading
arrangement
Free-trade area
Customs union
Common market
Economic union
Common economic policies and common currency
Intra-group capital and labor mobility
Reduction of intra-group tariffs
Removal of intra-group tariffs
Common external tariff
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Tariffs Under Different Stages of Integration
t 10
t 10
A
B
C
t 5
t 20
(a) Preferential Trade Arrangement
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Tariffs Under Different Stages of Integration
t 10
t 0
A
B
C
t 0
t 20
(b) Free-trade Area
7
Tariffs Under Different Stages of Integration
CET 15
t 0
A
C
B
t 0
CET 15
(c) Customs Union
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Trade Creation Trade Diversion

• Economic integration results in
• Trade creation Increased imports from the member
  countries.
• Trade diversion Imports switch from the
  non-member to member countries.
• Economic integration improves welfare if the
  effects of trade creation outweighs that of trade
  diversion.
• Political reasons often play a role in the
  formation of preferential trading arrangements.
• EU.

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Major Integration Attempts

• European Union (EU)
• North American Free Trade Agreement (NAFTA)
• Association of South East Asian Nations (ASEAN)
• Southern Common Market (MERCOSUR)
• New Attempts
• Free Trade Area of Americas
• Asia Pacific Economic Cooperation

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ASEAN
11
MERCOSUR
12
EU
13
FTAA
14
APEC
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Intra-Group Trade as Percent of Total Trade, 1996
70
Percent
60
Intra-Group Exports as Percent of Total Exports
Intra-Group Imports as Percent of Total Imports
50
40
30
20
10
0
EU
NAFTA
ASEAN
MERCOSUR
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NAFTA

• Members Mexico, US and Canada.
• Took effect in 1994.
• Different levels of economic development among
  members.
• Immediate removal of tariffs on about half of
  members trade.
• Free trade in all goods and services by 2008.

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U.S. Apparel Imports, 1993 and 1996
Percent
39
40
1993
35
1996
30
30
25
20
15
9.6
10
4.4
5
0
Mexico
Asia
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European Union

• 1957 Treaty of Rome.
• Six-member European Community BeNeLux, France,
  Germany, and Italy.
• The main goal was political Unification of
  Europe
• To prevent another war
• To be an effective rival to the US
• It also aimed to form a common economic market.

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European Union

• 1971 10-year plan to achieve full economic
  union.
• The Single Europe Act (1987)
• developing a single system of standards, and
• removing non-tariff barriers among EU member
  countries.
• The Maastricht Treaty (1991)
• An agreement to form a monetary and economic
  union with a common currency
• Establishment of the European Central Bank (ECB)

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Institutions of the EU

• The European Commission
• Drafts and enforces EU laws
• The Council of the EU
• Issues directives to the member states
• The European Court of Justice
• Decides on the legality of regulations,
  directives, and decisions
• The European Parliament
• Legislative branch