International Trade: Integration, Agreements, and Concepts
Stages of Economic Integration
- Free Trade Area (FTA): Members eliminate tariffs and quotas among themselves but maintain independent trade policies with non-member countries.
- Customs Union (CU): Members eliminate internal barriers and adopt a common external tariff (CET) against non-member countries.
- Common Market: Builds on a Customs Union by allowing free movement of labor and capital among member countries.
- Economic Union: Extends a Common Market by harmonizing economic policies (e.g., monetary, fiscal) among members.
- Political Union: The highest level of integration, involving a common government and unified political policies.
Key International Trade Concepts
Dumping
Dumping is the practice of selling goods at a lower price in an external market than in the domestic market.
Conditions for Dumping:
- Market Segmentation: The ability to keep markets separate.
- Imperfect Competition: Imperfect competition in at least one of the two markets.
Rules of Origin
The main idea behind Rules of Origin is to prevent companies from outside a Free Trade Area (FTA) from benefiting unfairly from the agreement by simply transshipping goods through a member country.
Trade Deflection
Trade deflection is the redirection of international trade due to the creation of a Free Trade Area (FTA). It occurs when imports intended for a buyer in a higher-tariff partner country enter through a low-tariff member of the FTA.
Trade Diversion and Trade Creation
- Trade Diversion: A shift in the pattern of trade from low-cost world producers to higher-cost Free Trade Area (FTA) members. This can be a negative outcome of an FTA.
- Trade Creation: The expansion of trade that results from the formation of a Free Trade Area (FTA). This occurs when efficient producers within the FTA gain market access due to reduced barriers.
Free Trade Area vs. Customs Union
Both Free Trade Areas (FTAs) and Customs Unions (CUs) remove trade barriers between member countries. However, they differ in their approach to non-member countries:
- In an FTA, countries are free to maintain their own individual barriers and trade policies with non-member countries.
- In a CU, members agree to set up a common external tariff (CET) to non-member countries.
Examples:
- Free Trade Area (FTA): NAFTA (North American Free Trade Agreement)
- Customs Union (CU): The European Union (EU), Mercosur