Chapter 10 Regional Economic Integration Chapter 10 Regional

Chapter 10 Regional Economic Integration 经济学院 柳哲

Chapter 10 Regional Economic Integration 10. 1 The forms of economic integration 10. 1. 1 Preferential trade arrangements ----- provide lower barriers on trade among participating nations than on trade with nonmember nations. This is the loosest form of economic integration ASENA (1967)----- Association of South East Asian Nations Members: Indonesia, Malaysia , the Philippines, Singapore, and Thailand, Brunei, Vietnam 10. 1. 2 Free trade area ---- is the form of economic integration wherein all barriers are removed on trade among members, but each nation retains its own barriers to trade with nonmembers. NAFTA (1993) ----North American Free Trade Agreement Members: the United States, Canada, and Mexico

10. 1. 3 Customs union ---- allows no tariffs or other barriers on trade among members , and in addition it harmonizes trade policies (such as the setting of common tariff rates) toward the rest of the world. Benelux (1948)---- Belgium, the Netherlands, and Luxembourg 10. 1. 4 Common market ---- the free movement of goods and services among member nations; The initiation of common external trade restrictions against members; The free movement of factors of production across national borders within the economic bloc CACM (1960) --- Central American Common Market Members: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua Economic union ----- goes still further by harmonizing or even unifying the monetary and fiscal policies of member states. This is the most advanced type of economic integration. EU (1958/1994)---- The European Union

10. 2 Trade-creating effect of customs unions 10. 2. 1 Trade creation ---- occurs when some domestic production of one customs-union member is replaced by another member’s lower-cost imports. Trade creation increases the welfare of member nations because it leads to greater specialization in production based on comparative advantage. 10. 2. 2 Illustration of a trade creating customs union A. USD 30 Tariff rate 100% B. USD 25 USD 20

Nation 2 In Nation 1 Px = $1 In Nation 3 Px = $1. 5 100% tariff rate of import commodity X Nation 2 import from Nation 1 = 50 x – 20 x = 30 x If Nation 2 now forms a customs union with Nation 1 Nation 2 import from Nation 1 = 70 x – 10 x = 60 x The area AGJC represents a transfer from domestic producers to domestic consumers, Net static gains to Nation 2 as a whole equal to $15 ---- the areas of shaded triangles CJM + BHN

10. 3 Trade-Diverting Customs Unions 10. 3. 1 Trade diversion ---- Occurs when lower-cost imports from outside the union are replaced by higher-cost imports from another union member. Trade-diverting customs union results in both trade creation and trade diversion, therefore can increase or reduce the welfare of union members. 10. 3. 2 Illustration of a Trade-Diverting Customs Union A $35 40% B $26 x C $20

Nation 2 S 1 and S 3 are the free trade perfectly elastic supply curves of X of Nation 1 and Nation 3 With 100% tariff Nation 2 import from Nation 1 = 50 x – 20 x = 30 X Forming a customs union with Nation 3 only; Nation 2 import from Nation 3 = 45 x The welfare gain in Nation 2 from pure trade creation is $3. 75 ----- the sum of the areas of the shaded triangles. The welfare loss from trade diversion is

10. 4 Dynamic benefits from customs unions 10. 4. 1 Increased competition. 10. 4. 2 Economies of scale 10. 4. 3 Stimulus to investment. 10. 4. 4 Better utilization of the economic resources of the entire community.