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CHAPTER 12
TRADE BLOCS AND TRADE
BLOCKS
Objectives of the Chapter
Previous chapters have emphasized
import barriers that are imposed mainly to
restrict imports from all
countries.
This
chapter,
however,
examines
import
barriers
meant
to
discriminate
between
countries,
taxing goods and
services (and assets) from some countries more
than others. Some export barriers may
also be imposed to direct the flow of
merchandise and assets to some countries more than
to others.
Chapter 12
discusses different forms of economic integration
(including trade blocs) and their economic
ramifications.
Trade
blocs
have
become
increasingly
important
in
recent
years.
Specifically,
the
European Union and the North American
Free Trade Area have revived interest in the study
of economic
integration and trade
blocs.
After studying Chapter 12 you
should be able to identify
1. the
different forms of economic integration.
2. the economic implications of
trade blocs and full unions.
3. how
trade blocs can lead to trade creation or trade
diversion.
4. the conditions under
which trade blocs and full unions are likely to
succeed or fail.
5. why economic
integration tends to be more successful among
developed countries than developing
countries.
6. the impact
of trade embargoes on both the target country and
the imposing country.
Important Concepts
Common
market:
An
international
union
that
goes
beyond
a
customs
union
by
also
allowing
for
the
free
movement
of
labor
and
capital
(factor
flows)
among member nations.
A
union
in
which
members
remove
all
barriers
to
trade
among
themselves
and
adopt
a
common
set
of
external
barriers,
thereby
eliminating
the
need
for
customs
inspection
at
internal
borders
(e.g.,
MERCOSUR today, and
the EEC from 1957-1992).
Discriminatory
restrictions
or
complete
bans
on
economic
exchange,
designed to punish the target country
or countries.
A
union
that
extends
a
common
market
by
harmonizing
the
monetary
and fiscal policies
of the member nations as well.
Complete
bans
on
economic
exchange.
These
may
fail
for
either
economic or political
reasons.
An area in which members
remove trade barriers among themselves but
keep their separate national barriers
against trade with non-members.
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Customs union:
Economic sanctions:
Economic union:
Embargoes (boycotts):
Free-trade area:
Rules of origin:
A
version
of
domestic-content
regulations
in
which
products
are
certified
to
have
been
produced
within
a
free-trade
area
(and
so
are
permitted
to
trade
without
barriers
in
that
area).
Without
such
rules,
a
non-
member Country X may
circumvent Country Y’s
high external
tariff
by exporting its good to Y’s
free
-trade partner, Country Z.
Forms of economic integration whereby
members remove explicit trade
barriers
among
themselves,
but
keep
national
barriers
to
the
flow
of
labor and
capital and
their
fiscal
and
monetary
autonomy.
Trade
blocs
are
exemplified
mainly
by
free-trade
areas
and
custom
unions.
Nearly
half of all world trade occurs within
trade blocs.
The increase in trade
volume caused by union with a lower cost (more
efficient) supplier within the trade
bloc.
The volume of trade shifted from
a lower-cost (more efficient) supplier
outside
the
trade
union
to
a
higher-cost
(less
efficient)
supplier
within
the union.
Trade blocs:
Trade creation:
Trade diversion:
Warm-up
Questions
True or False? Explain.
1.
T / F
2.
T / F
3.
T / F
4.
T / F
5.
T / F
Trade discrimination
is
bad in the sense
that
separate
deals
with
separate
nations
may
destroy many of the gains from global
markets.
The formation of a customs
union will definitely raise welfare.
The less elastic the import demand
curve, the greater the gains from a customs union.
Customs unions are more likely to be
successful among developed countries than among
less-developed countries.
An
export
embargo
will
backfire
if
the
embargoing
country
has
an
inelastic
export
supply curve while the target country
has an elastic import demand curve.
Multiple Choice
1.
If all member nations of a customs
union are fully employed before and after the
formation of the
union, then (assuming
that trade diversion does not dominate)
A.
the welfare of the
member nations will decrease.
B.
the welfare of the member nations will
increase but world welfare will decrease.
C.
the welfare of the
member nations and the world will increase.
D.
no member nations will
have time to organize good soccer matches.
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2.
Trade sanctions are
A.
usually successful as
long as the imposing countries are developed
countries.
B.
more likely
to be successful when the sanctioning countries
have high trade elasticities.
C.
more likely to be successful when the
sanctioning countries have low trade elasticities.
D.
successful mostly due to
world cooperation, not trade elasticities.
Which of the following is not correct?
A.
The formation of a
common market allows the free movement of factors
of production
between member nations.
B.
The 1992 EC common
market overturned Italian Pasta Protection Laws,
which protected
higher-cost producers.
C.
A common market
coordinates monetary and fiscal policies of
members.
D.
Common markets
have been more successful among rich countries
than among poor
countries.
The United States was able to initiate
most of the trade embargoes in the last four
decades mainly
because
A.
the U.S. is a superpower.
B.
the U.S. has high demand
and supply elasticities in a significant number of
products and can,
therefore, influence
trade.
C.
other countries
cannot do without U.S. trade.
D.
embargoes are usually successful.
If, after the creation of
the EU, the British have an incentive to purchase
less efficiently produced
Irish cheese
rather than importing inexpensive cheese from New
Zealand, this probably shows
A.
trade creation.
B.
trade diversion.
C.
government interference in the
marketplace.
D.
common
sense.
3.
4.
5.
Problems
1.
If Saxony and Leinster currently have
no barriers to free trade between them, are they a
free trade
area, a customs union, a
common market, or an economic union? Explain.
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