CHAPTER 12 : TRADING BLOCS
- Definitions
- Belonging to a trading bloc
- Examples of trading bloc
1) Trading bloc
1.2 Free trade areas
1.3 Customs Unions
1.4 Single / common market
The world economy includes a series of trading blocs
= preferential trading agreements, which involve trade restrictions with the rest of the world
no restriction between member (i.e = EU)
Trading bloc is an area including several countries and an economic objective which is to promote trade through a pact (= reduced trade tariffs and barriers)
trading bloc can have several forms :
Free trade area
Customs union
Single / common market
Monetary union
OECD = free trade
“ a grouping of countries within which tariffs and non-tariffs trade barriers between the members are generally abolished but with no common trade policy toward non-members”
⇒ it’s an area where member states remove tariffs and quotas between themselves, and maintain restrictions with non-member countries. (restriction may be different between countries)
The producer can acquire a larger market of potential customers
The North American Free Trade Agreement (NAFTA)
member : USA, Canada and mexico
European Free trade association (EFTA)
Norway, Iceland, Switzerland and Liechtenstein
Comprehensive economic and trade agreement (CETA)
entered into force on sept 21 2017) between EU and Canada
customs ≠ custom
Customs = taxes you pay on goods that you bring into a country
Custom = coutume
OECD def of customs union = arrangement among countries in which the parties do two things :
- agree to allow free trade on products within the customs union
- agree to a common external tariff (CET) with respect to imports from the rest of the world
customs union = union douannière
Customs union = free trade area where there's an imposition of common external tariffs with non member countries
OECD def : a common market is a customs union with provisions to liberalise movement of people and capital
no tariffs, no quotas between member countries
common external tariffs and quotas with non-member countries
The characteristic :
common system of taxation : identical tax rates in all member states (ICO perfect common market)
common laws and regulations : for production, employment (no children), and trade
free movement of : labour, capital, materials, g&s
That's implies :
Absence of border control between members
Freedom of workers ) work in country part of the common market
Freedom of firms = expand into any member state
to recap :
customs unions : g&s only
No trade barriers, common trade policy with non member
common market : g&s, same regulation and laws
no trade barriers, common trade policy with non-member and free mov of capital goods and people
free trade : g&s, people, capital
Abolition of trade barriers between members
fixed exchange rate between currencies
single currency (e.g € in EU)
common macroeconomic policies
2.2 Long term benefits
Intro
2.3 Long term disadvantages
2.1 Direct consequences
regional trading blocs : developed as alternative to global free trade AND advocated by WTO
regionalism may be seen as a threat to global free trade because it implies discrimination and preferences
Regionalism : offers some kind of protection, members of regional trading blocs
The first advantage of dev trading bloc is that :
serves economic interests of member stats
reinforces political stability
country joins a trading bloc = change in trade patterns
There's two major change :
trade creation
trade diversion
trade creation = trade agreements especially tariff agreements that would be a shift (=changement) in consumption
domestic high costs producer to a foreign low-cost producer = reduction in tariff barriers
consumers : stop paying high prices of domestic goods
Pay lower prices for foreign goods (cf ex 1)
ex :
.
Example : danish butter
There is no trade agreement between UK and Denmark
⇒ tariffs imposed on Danish butter
⇒ produce butter at a cheaper price, but, on the british market :
⇒ danish butter is more expensive than British butter (because of tariffs)
If they choose to abolish tariffs
⇒ danish butter become cheaper than british butter
⇒ british consumers are gonna buy danish butter instead of the British butter
The main drawback (=désavantage)
Switch to lower cost producers = leads to domestic job losses
Domestic producers = sell less
Consumers buy cheaper imported goods
trade diversion = détournement des échanges
When tariffs agreements leads to a consumption shift
The switch of : lower cost producers outside the trading bloc --> higher-cost producer (but tariff-free) within the trading bloc
.
UK places a tariff on the import of cauliflowers (chou fleur) to all countries equally
An equal tariff is imposed to france and equal tariff to australia
Australian cauliflowers : £2 + VAT (Value Added Tax) 20% ⇒ £2,40
French cauliflowers : £2,2 + VAT 20% ⇒ £2,64
Consumers are likely to buy australian cauliflower because it is cheaper
Suppose the UK abolished tariffs with france, but not ith australia
The price of importing cauliflowers from france falls to £2,20
The consumers are likely to :
Shift from australian cauliflower to French cauliflower
Even if australian cauliflower is produced at a cheaper price
cf exemple 2
The first benefits of joining a trading bloc :
Increase in market size
Development economic & technical cooperation = reaching economies of scale
Developing trade : reinforces political stability in the region. The whole trading bloc = more bargaining power than a single country (more power, gain better deals)
Bargaining power of the union with the rest of the world = allows member states to gain better terms of trade.
Ressources may shift from one country to a more efficient member
Purpose : minimise costs
ex : moving to geographical center of trading bloc
leads to oligopolistic collusion
higher pricer for consumers
can lead to mergers, takeovers, monopolies
1) NAFTA and USMCA
2) CETA
3) ASEAN ( Association of Southeast Asian Nations)
4) MERCOSUR
5) EU
The trading bloc tend to benefit countries of our domestic market is too small
Integrating trading bloc = allows members to benefit from economies of scale
Most developing countries : tried to form trading blocs and sign preferential trading bloc
North American Free trade agreement, one of the two most powerful trading blocs in the world (with EU)
Established in 1994 by : USA, Canada, Mexico
They decided to abolish tariffs between themselves, and increase trade and cooperation
Tariffs = eliminated on January 1sr, 2008
Development of true free-trade = prevented by existing non tariff barriers (obstacle non douanier, non tarifé à la place de taxe douanière on met des règlementations)
example : wto, licensing, pre-shipment inspections, rules of origin ('made in ...')
Trump wanted to renegotiated NAFTA ("the worst trade deal ever signed by the US")
He blamed nafta for : "destroying US manufacturing jobs because it allowed companies to move factories to Mexico where labour is cheaper"
Renegotiation began in 2017 reaching a new free trade agreement replacing NAFTA : UMSCA
Reached an agreement, final version signed in december 2019 became effective in july 2020
Trump : “ USMCA is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our farmers and manufacturers, reduces trade barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world”
The Comprehensive Economic and Trade Agreement (CETA)
Free-trade agreement between Canada and the EU.
Signed in October 2016, Provisionally applied since September 2017 = most of the agreement applies.
CETA : Approval by national parliaments in EU
Approved by french National assembly it in July 2019 = abolished 98% of the tariffs between Canada and the EU
The CETA : supported by the european commission :
“By boosting trade between us, CETA will create jobs and growth - and new opportunities for your business”
⇒ Canada is a large market for Europe’s exports and a country rich in natural resources that Europe needs”
⇒ more growth & more business and we have access to more resources
Critics :
french farmers have a lot of regulations
Fear of unfair competition : canadians can use products and farming methods that are banned in France. So it's a considerable distortion of the competition.
⇒ OGM, pesticides
created in Bangkok and signed in 1967
South east asia
Purpose :
promote cultural economic and political develpment in the region
Increase regional welfare (economically & culturally) through cooperation
members :
the original : indonesia, singapore, malaysia, Phillippines and Thailand
the other who came after : Brunei, Cambodia, Laos, Myanmar, Viet Nam
form a common market similar to the European union
established the free movement of :
Goods and services
Capital
Labour (people/main d’oeuvre)
established common standard in :
agriculture
financial services
intellectual property rights
consumer protection
It's the trading bloc of the South America (Mercado Comun del Sur = southern common market)
members : argentina, Brazil, Praguay, Uruguay
Established in 1991
goal : promote regional integration through political, social and economic cooperation
mercosur's purpose : promote free trade & free movement of g&s, people and currency
venezuela joined in 2012 (but has been suspended since December 20216 because of the failure to comply (=se conformer) and bloc's trade obligation)
Bolivia : candidate member, he complies with the accession procedure and should join in the future (give the green light in 2023)
All economies combined together makes them the 5th economies largest in the world
ECSC --> EEC --> EU
After WW2 European Coal (=charbon) and Steel (=Acier) Community
Purpose : free movement, free access to sources of production
ECSC to EEC :
Original members : france, italy, luxembourg, belgium, netherlands, west germany, pooled (=mettre en commun= coal and steel production
established in 1952 and it removed trade restriction between member states
purpose :
economies of scale,
competition to the US and other foreign producers,
European integration.
⇒ Promote peace between the members and prevent war notably with the pooling of coal and steel production
1957 EEC : European Economic Community (treaty of rome) ==> create a common market pooling resources
european coal and steel community
free trade of :
Movement
Labour
Enterprise
capital
1968 they decided to abolished all internal tariffs and create CET (Common External Tariffs)
The EEC was a customs union because they capt in the legal fiscal and administrative restriction
EEC to EU : customs union --> common market
1993 EEC become EU with the Maastricht Treaty
Signed in feb 1992 and become effective in nov 1993
- Common policies
- ce qui découle du traité et ce qui a fait que l'eec est devenue l'ue
3 example : common agricultural policy, harmonisation of taxation (VAT = Value Added taxes), social policies
common agricultural policy (1962) : ensure food supplies for europe, fair income for european farmers, now : agricultural subsidies to support farmers
Theses subsidies are very important because farmers are facing issues :
Falling farm incomes
Increase of global food production
Unstable farm prices ( ⇒ cause their supplies are subject to a random supplies chocks, like poor weather and disease)
Large supermarket chains who have take the power and push farm prices down
Harmonisation of taxation :
VAT (value added tax)
Standard form of indirect tax throughout EU
Substantial differences in VAT rates
Examples : VAT standard rates in Europe
france = 20%
Danemark = 25 %
Luxembourg = 17%
Social policy :
Social charter in 1989, about worker and social rights should appy in all members states
ex : decent income for both emplyed and free dom of mov to belong to a trade union
Benefits
costs
recommendations included social chapter of the maastricht treaty
John Major was the PM who replace Margaret thatcher and refuse the british conservative gov --> increase production costs and european goods were less competitive
1997 : signature by labour gov (tony blair)
1992/93 : creation of the single market : cost and benefits are difficult to qualify but identifiable
- Trade creation
- Reduction of direct costs of barriers
- Economies of scale
- Greater competition
In which g&s countries should specialise ?
production at comparatively cost
abolition / harmonisation : administrative costs, border delay, technical regulation : substantial costs saving
European scale expansion
Growth = economies of scale
Increased competition in :
- lower costs
- lower price
- larger product range (transports, financial services, telecommunication)
economies of scale = redundancies :
- bankruptcies
- takeovers
- new technologies (threat to employment)
Firms location = closer to their market centers
Removal of barriers = market = Europe
The single market attracts jobs from edges (=bord) of union to its geographical centers
Free movement of capital : lead to a large European mergers (=fusion) = collusive or monopolistic practices
The cause of the Brexit :
- loss national sovereignty
- intervention at a microeconomic level = difficult for gov
==> ils peuvent implémenter plein de loi que sous l'UE serait interdit (si un immigrant arrive en UK ils les renvoient au Rwanda)