PPT_chap011

Outlines of chapter 11
Types of economic blocs Is trade discrimination good or bad? The basic theory of trade blocs: trade creation and trade diversion Other possible gains from a trade bloc
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Economic union
a bloc of countries that have a common market and also unify other economic policies
discussion
Is trade discrimination good or bad?
“stepping stone” （Joseph E.Stiglitz） or a “stumbling stone” （Jagdish.Bhagwati） Good sides: forming a customs union or freetrade area must be good because it is a move toward free trade Bad sides
a trade bloc in which the member countries remove trade barriers among themselves but each keeps its own separate barriers to trade with outside countries.
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WTO rules about trade blocs
The basic WTO principle is that trade barriers should be lowered equally and without discrimination for all foreign-trading partner (MFN) But WTO rules permit some deviations from MFN under specific conditions
One deviation is special treatment for developing countries Another deviation permits trade blocs invoving industrialized countries if the trade-bloc removes tariffs and other trade restrictions on most of the trade among its members, and if its trade barriers against nonmembers do not increase on average.
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© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Common union
A trade bloc in which the member countries remove trade barriers among themselves and adopt a common set of barriers to trade with outside countries
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© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
The basic theory of trade blocs: trade creation and trade diversion
Trade creation : The net volume of new trade resulting from forming or joining a trade bloc, and one source of gains in well-being from the trade bloc Trade diversion : The volume of trade shifted from low-cost outside exporters to higher-cost bloc-partner exporters, resulting from forming or joining a trade bloc, and the source of losses of wellbeing from the trade bloc.
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Other possible gains from a trade bloc
An increase in competion can reduce prices An increase in competion can lower costs of production Firms can lower costs by expanding their scale of production Increases opportunities for business invesments
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Chapter 11
Trade Blocs and Trade Blocks
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Free-trade area custom union Common market Economic union
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Free-trade area
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Trade creation
Area b represents two gains: gains on extra consumption of the product and gains on replacement of higher-cost by low-cost partner production
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Figure 11.4 – Effects of an Embargo on Exports to Iraq
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Figure 11.3 – Estimates of the Effects of the North American Free Trade Area on National Incomes and Wage Rates
Trade diversion
Area c represents the national loss from the low-cost outside exporters to higher-cost bloc-parner exporters
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Common market
a bloc of countries that have a customs union and also allow freedom of factor flows among themselves
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Figure 11.1 – Types of Economic Blocs
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Figure 11.2 – Trade Diversion versus Trade Creation in Joining a Trade Bloc: UK Market for Imported Compact Cars