1. ECON 331 INTERNATIONAL TRADE and ECONOMICS
Chapter 6
International Integration and Agreements

2. Introduction What are regional trade agreements?
What are the different types of regional trade economic integration?
What has been the role of GATT, WTO and other trade negotiations?

3. Protectionism – Political Economy
Consumers benefit from free trade but firms and workers in importing industry can be harmed
Special interest groups lobby for changes that benefit them
Lobbying to restrict trade has long history in US and other countries

4. Levels of Integrations
Trade Agreements between two or more countries that eliminates barriers on trade as well as the movement of any other factors causes economıes to integrate further.
There are 5 levels of this type integration stages.

5. 1. Preferential trade agreement
Levels of Integration
1. Preferential trade agreement
Tariffs abolished on for a limited number of commodities not requires abolishing of all barriers but lower than usual.
Usually either for certain agricultral goods or for certain manufactured products
Example: Lome Convention between EU and ACP countries
1962 Auto Act Agreement between USA and Canada

6. 2. Free-Trade Area - FTA
- Countries agree to eliminate tariffs and other non-tariff barriers between them (example NAFTA- LAFTA)
Again must cover “substantially all” trade
May just cover non-agricultural products
May cover all merchandise trade
May cover all trade in goods/services, foreign direct/portfolio investment

7. 3. Customs union
Agreement between countries to maintain a free trade area and a common external tariff
Common external tariff – each country replace national tariff schedule with common tariff schedule applicable to all member countries
US exporting to EU faces one tariff schedule

8. 3. Customs Union (cont.)
Takes time for nation schedules to harmonize with common external tariff
Not all free trade areas include trade in agricultural products, services and financial flows
Level of economic integration is usually “deeper” than that implied by FTA

9. 4. Common Market
Capital and labor are free to move within member countries
More efficient allocation of capital
More efficient allocation of human capital
Large wage differentials may induce large amount of migration – noticeable effect on national wage rates
Problems with common regulations

10. 5. Economic Union FTA Common external tariff
Maintain
FTA
Common external tariff
Free mobility of capital and labor
Some degree of unification in government policies and monetary policies
Requires common currency
Common Central Bank

11. 5. Economic Union
Each national government must align national policies with other member countries
Tax rates
Antitrust law
Labor regulations
Environmental regulations, etc.

12. Trade Effects of Integration
Trade Creation (TC)
Increase in trade between two countries from mutual elimination of tariffs
If Mexico and US eliminate tariffs to each other, US will import more from Mexico and vice versa
Losses to other countries as trade shifts from them to member countries

13. Trade Effects of Integration
Trade Diversion (TD)
Export losses to other countries
US will import from Mexico instead of from other countries
The larger the tariff before the agreement, the larger the loss to other countries
Change in world trade depends on larger effect: trade creation or diversion

14. Economic Effects - Example
Before NAFTA
US Exporter
Other Exporter
Import Price to Mexico
$24,000
20% Tariff
$21,600
After NAFTA
$20,000
0% Tariff

15. Economic Effects - Example
Mexico purchased cars from other countries at lower price before NAFTA
After NAFTA, shifted purchases to US
US is less efficient producer – cost of production higher
Trade is diverted from more efficient producers to less efficient producers
Yields losses in world output

16. Price of Cars – Trade Agreement

18. GATT (Genral Agreement on Tariffs and Trade)
Established in 1947 after the Second World War to liberalise the world trade
Purpose was to operate an an interim committee until ITO was established
Not an official organization, joining countries were called contracting parties
There had been 8 different rounds of talks to liberalise trade gradually

19. Rounds under GATT process
Dillon Round ( )
Keneddy Round ( )
Tokyo round ( )
Uruguay Round ( )
Doha Round (2001-

20. GATT
Changed world trade – started with 23 countries and WTO has more than 130 members now
Trade shares of members cover more than 90% of world trade
To become a contracting party
Had to have MFN status with all other parties
Must remove any quotas and barriers to trade

21. Goals of GATT
Reduce high levels of tariffs from 1930’s with Multilateral Trade Negotiations (MTN)
Trade minister of GATT would propose agenda of what was to be negotiated
Trade minister of each country would ask their government to participate in MTN
Negotiations could not proceed with out US participation

22. Tariff Problems
Although tariffs have decreased significantly, they continue to be a problem
Tariffs on some products are still high even in developed countries
Fruit juice and some other agricultral products
Developing countries and transition economies are latecomers to GATT and therefore still reducing tariffs

23. Uruguay Round
Contracting parties reduced tariffs by approximately more than 60 percent
Participation of developing countries changed nature of negotiations
Remaining quotas and VER’s would be phased out and converted to ad valorem equivalent tariffs

24. Uruguay Round
Trade related investment measures (TRIMs) were negotiated.
Developing countries agreed to phase out
trade balancing rules
domestic content rules
General Agreement on trade Services (GATS) was created

25. Uruguay Round
No agreement was reached concerning rules governing government procurement
Attempted to reduce trade distortions caused by agriculture subsidies
Agreement made to end use of quotas on agricultural commodities
Make level of protection transparent

26. Uruguay Round Created World Trade Organization (WTO)
Made GATT a reality
Any country can file complaint against another country and WTO panel will investigate
WTO rules are legally binding