FTA, Customs Union, Common Market, Trade Diversification, Trade Creation
Pisat 1A) Explain and define (1) an FTA (2) a customs union and (3) a common market,and explain the main differences between them. Give an example of each.1A trade bloc is an agreement amongst nations to trade freely or at lesser costswith fellow member nations. Trade blocs simultaneously restrict their trade withnon member nations.2Types:1. FTA2: Stands for Free Trade Area / Agreement. In FTA; the member countrieswho have agreed to Free Trade lift off trade barriers between each other andmaintain separate barriers with other countries who are outsiders to their FTAfor restricting trade. E.g. A, B, C are 3 countries who entered into FTA. Herethey have very little / no barriers to trade with each other. They also maintaina separate policy specific to their own country when it comes to dealing withcountry D who is not a participant to their FTA. (LAFTA – Latin America FreeTrade Area3 & 4is a real world example of the same)2. A Customs Union2: In a Customs Union; the member countries in agreement toFree Trade lift off or lower trade barriers between each other and agree tocommon kind of barriers with other countries who are outsiders to their FTA forrestricting trade. E.g. A, B, C are 3 countries who entered into a CustomsUnion. They all have little / no barriers in trade with each other; however,they all share a common set of rules when it comes to restricting trade withcountry D who is not a participant to their customs union. (EEC – EuropeanEconomic Community3 & 5is a real world example of the same)
Pisat 23. A Common Market2: In a Common Market; the member countries in addition tofree trade agreement maintain a liberal stance towards movement of keyfactors like Capital & Labour amongst each other. E.g. Countries A & B are in aCommon Market agreement; they permit flow of capital (A lets B bring in agiant telecom business from B to their economy without restrictions) & flow oflabour (B lets A supply its meat factories with unskilled labour) withoutrestrictions. (EEC – European Common Market2 & 6is a real world example of thesame)Differences by features offered:Features / Type FTA Customs Union Common MarketIn-Member Free Trade Factor Mobility Across Borders Common Economic Policiesamongst members Common External Barriers withnon members B) Define and explain the difference between Trade Creation and Trade Diversion dueto the formation of a trade bloc (such as the EU, NAFTA, ASEAN).When does a trade bloc lead to Trade Creation?When does a trade bloc lead to Trade Diversion?Give an example of a trade creating effect resulting from the formation of trade blocand an example of a trade diversionary effect.1Trade Creation: Trade Creation2refers to the creation of an additional (usuallya more efficient) trade volume in an economy due to the country joining a trade bloc.
Pisat 3Trade Creation is a positive value representing the net economic welfare in thecountry after joining the trade bloc. Trade Creation creates economic welfare bybringing in imports and increasing the consumer surplus for the importing country. Italso brings net economic welfare for the exporting country by increasing theirproducer surplus.Trade Diversion: Trade Diversion2refers to the effect of shift of volumes oftrade from one nation to the other due to a country joining a trade bloc. It may ormay not be a positive number and can represent economic gain or loss in a particulareconomy. Trade Diversion may make a country better off if the price differencebetween trades previously done with a non member is not much compared to theprices offered by a member nation of that particular product.According to my understanding and the above explanation; trade bloc resultsinto trade creation when tariffs go down in a bloc and the prices of the bloc member(cheaper market) are lower than the non bloc member (expensive market).Trade Diversion is created when tariffs go down in a bloc and the prices of thebloc member and or non member are competing / unequal. As such it can be apositive or a negative number.Bibliography / End Notes:1. Terminologies used in Economics.
Pisat 42. My inferences & learning’s from the textbook on International Economics (15thEdition) by Thomas A. Pugel.3. Slideshare Website.4. Source:http://www.insouth.org/index.php?option=com_sobi2&sobi2Task=sobi2Details&sobi2Id=16&Itemid=685. Source:http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_eec_en.htm6. Source: http://europa.eu/about-eu/eu-history/index_en.htm