Module 4

Free Trade Area (FTA):

Free trade area is a designated group of countries that have agreed to eliminate
tariffs, quotas and preferences on most goods and services traded between them.

It can be considered the second stage of economic integration. Countries choose

this kind of economic integration form if their economical structures are
complementary. If they are competitive, they will choose customs union.

A group of countries, such as, the North American Free Trade Area (Canada,
Mexico and the United States), pledged to remove barriers to mutual trade,
though not to movements of labour or capital.

The aim of a free trade area is to so reduce barriers to easy exchange that trade
can grow as a result of specialization, division of labour and most importantly via
(the theory and practice of) comparative advantage.

List of Free Trade Areas:

African Free Trade Zone (AFTZ)
Asia-Pacific Trade Agreement (APTA)
Central European Free Trade Agreement (CEFTA)
Dominican Republic Central America Free Trade Agreement (DR-CAFTA)
European Economic Area (EEA)
Greater Arab Free Trade Area (GAFTA)
Latin American Integration Association (ALADI)
North American Free Trade Agreement (NAFT A)
South Asia Free Trade Agreement (SAFTA)
South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA)

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The Customs Union (CU) and its Benefits!
A customs union is a free trade area with a common external tariff. The
participant countries set up common external trade policy, but in some cases they
use different import quotas. Common competition policy is also helpful to avoid
competition deficiency.

Purposes for establishing a customs union normally include increasing economic

efficiency and establishing closer political and cultural ties between the member
countries. It is the third stage of economic integration. Customs union is
established through trade pact.

A free-trade zone with common tariffs is a customs union. It has long been
recognized that tariff barriers generally reduce the quantity of trade between
countries. Under most circumstances this reduction in trade protects certain
domestic producers, but it also translates into higher costs for consumers in both
the importing and the exporting country.

Many governments attempt to resolve this problem by protecting politically

favoured producers while also reducing consumer costs. Customs unions, along
with other forms of partial economic integration, offer one means of achieving
that balance.

Benefits of a Customs Union:

a) To Producers:
i. Producers get a larger and wider market and can thus produce more goods.

ii. The CU lowers cost of production: A large single market encourages mass
production of goods and services thereby lowering the cost of production by
taking advantage of economies of scale.

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iii. It offers equal protection to all manufacturers against third country imports
and minimizes the possibility of transshipment or trade deflection.

iv. It levels the economic environment and promotes fair competition by reducing
disparities in production costs for manufacturers in the various countries with
regard to taxes on imported raw materials and intermediate goods from third
countries.

b) To Traders within the CU:

i. Traders get wider source of goods therefore, bargaining power in dealing with
suppliers resulting in cost savings for their customers.

c) To the Importers:
i. Because the CU removes border controls and trade barriers, importing goods
becomes faster since traders do not have to go through so many customs
procedures in different countries. This reduces transaction costs and results in
timely deliveries.

d) To Consumers:
i. Consumers get a wider choice of goods and they also benefit from the
advantages of increased productivity which leads to lower prices.

e) To the CU Members:
i. In a CU with a Free Trade Area, intra-regional trade is enhanced as there are no
tariffs or quotas on goods originating from within the region,

ii. It seeks to maintain a price advantage for regionally produced goods over
goods produced outside the Customs Union.

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List of Customs Unions:
Arab Customs Union (ACU)
Central American Common Market (CACM)
Andean Community (CAN)
Caribbean Community (CARICOM)
Economic and Monetary Community of Central Africa (CEMAC)
East African Community (EAC)
Eurasian Economic Community (EAEC)
European Economic Area (EEA)
Gulf Cooperation Council (GCC)
Southern Common Market (MERCOSUR)
Southern African Customs Union (SACU)
West African Economic and Monetary Union (WAEMU)

Economic Unioun:
The purpose of the Common Market is not limited to the creation of a custom
union. It aims at a much broader economic union. The avowed objective of the
Treaty of Rome includes free mobility of labour and capital within the Economic
Community and harmonisation of national economic policies of the member
States, to promote throughout the Community a harmonious development of
economic activities and closer relations among its member nations.

To accomplish all these, the member states are committed under the Treaty of
Rome to:
1. The removal of customs duties and import-export quotas between each other;
2. The establishment of a common tariff and commercial policy for the outside
nations;

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3. The abolition within the Community of obstacles to the free movement of
labour and capital;
4. The inauguration of common agricultural and transport policies;
5. The establishment of a system ensuring competition in the Common Market;
6. The adoption of procedures for co-ordination of the economic policies of
member nations and for remedying their balance of payments disequilibrium.
Basic goals in the co-ordination process include external balance, full employment
and price stability;
7. The co-ordination of legislation of member states for the smooth functioning of
the Common Market;
8. The establishment of a European Social Fund for easing the readjustment
problem of workers experiencing unemployment as a consequence of trade
liberalisation;
9. The creation of a European Investment Fund which will give financial aid to the
industrialists to improve workers conditions in the underdeveloped regions of
the component states. Another purpose of such a fund is to help in financing
projects of European importance;
10. The association of dependent overseas territories within the Economic
Community. Hence, an Overseas Development Fund was also established in 1958,
empowered to provide loans for projects in the affiliated overseas territories

Trade Creation : Trade creation is an economic term related to international

economics in which trade flows are redirected due to the formation of a
free trade area or a customs union.
Trade Diversion : In general, trade diversion means that a free trade area diverts
trade, away from a more efficient supplier outside the FTA, towards a less
efficient supplier within the FTA. In some cases, trade diversion will reduce a
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country's national welfare but in some cases national welfare could improve
despite the trade diversion

European Union (EU):

The European Union (EU) is supranational and intergovernmental union of 27
states in Europe. It was established in 1992 by the Treaty on European Union (The
Maastricht Treaty)

Since then new accessions have raised its number of member states and
competencies have expanded. The EU is the current stage of a continuing open-
ended process of European integration.

The EU is one of the largest economic and political entities in the world, with 494
million peoples and a combined nominal Gross Domestic Product (GDP) of 11.6
($14.5) trillion in 2006. The Union is the single market with a common trade
policy, a Common Agriculture/Fisheries Policy and a Regional Policy to assist
underdeveloped regions.

It introduced a single currency, the euro, adopted by 13 member states. The EU

imitated a limited Common Foreign and Security Policy and a limited Police and
Judicial Co-operation in Criminal Matters.

Important EU institutions and bodies include the European Commission, the

Council of the European Union, the European Council, the European Central Bank,
the European Court of Justice and the European Parliament.

History:
The EU has evolved from a western European trade body into the supranational
and intergovernmental body. After the Second World War, an impetus grew in

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western European for institutional forms of cooperation (through social, political
and economic integration) between states, driven by the determination to rebuild
European and eliminate the possibility of another war between Germany and
France.

On 29 October 2004, EU member state heads of government and state signed the
Treaty establishing the Constitution for European. This was later ratified by 17
member states.

Members of EEC:
The six states that founded the EEC and the other two Communities were known
as the inner six (the outer seven were those countries who formed the
European Free Trade Association). The six were France, West Germany, Italy and
the three Benelux countries: Belgium, the Netherlands and Luxembourg.

The first enlargement was in 1973, with the accession of Denmark, Ireland and
the United Kingdom. Greece, Spain and Portugal joined throughout in the 1980s.
Following the creation of the EU in 1993, it has enlarged to include a further
fifteen countries by 2007.

Aims and Achievements of EEC:

The main aim of the EEC, as stated in its preamble, was to preserve peace and
liberty and to lay the foundations of an ever closer union among the peoples of
Europe. Calling for balanced economic growth, this was to be accomplished
through, (1) the establishment of a customs union with a common external tariff
(2) common policies for agriculture, transport and trade (3) enlargement of the
EEC to the rest of Europe.

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Euro Currency:
Euro currency was created by the Economics and Monetary Union (EMU). It was
established on 1 January 1999 and based on the Maastricht treaty from 1992. 12
countries are members of the Euro area also known as the Euro land.

Structure of EU :

The European Commission (EC)

Executive Body
Initiates all legislation and enforces decisions
Ensures proper implementation of laws
Administers EU budget
Represents EU in trade negotiations
Scrutinize the implementation of the treaties and legislation
Act solely in the interest of the EU as a whole, as opposed to the Council
which consists of leaders of member states who reflect national interests.
The only body paid to think European
Implements, monitors, and controls enforcement of EU law and policy
Can bring a Member State before the Court of Justice for failure to enforce
EU law
Based in Brussels
27 Commissioners. 1 is President (Barroso until 2014)
o Commissioners appointed for 5 years
o 25,000 Euro civil servants

Council of Ministers

Meets in Brussels
Consists of one Minister from each Member State
Responsible for making the major policy decisions of EU
Power to adopt legislation proposed by Commission
Each Member State acts as President of Council for 6 month rotation
Meetings attended by different Ministers according to agenda
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The European Parliament
736 seats. Proportionate Rep.
Directly Elected. 5 year terms.
Second largest democratic electorate in the world (India)
Equal legislative and budgetary powers with Council
Appoint Court of Auditors and the president and executive board of the
European Central Bank
Sit in political groups. For a group to be recognized, it needs 25 MEPs from
7 different countries
The European Council
Comprises the heads of government of Member States and President of
Commission assisted by Foreign Ministers of the Member States and a
member of Commission
Defines the EU's policy agendathe motor of EU integration
No direct legislative power but "supreme political authority"
Meets 4 times/year
Sorts out disputes between member states and the institutions
The Court of Justice
Ensures that the European Treaties are interpreted and implemented in
accordance with EU law
13 judges appointed by agreement with Member States
Assisted by 6 advocates general
Judgements overrule those of national courts
Power to fine a Member State
National courts have power to enforce decisions of Court of Justice
The Court of Auditors
Monitors the Unions financial activities
1 member from each EU member state
Appointed by Council for 6 year terms and 800 auditors
No judicial functions
Function: externally check EU budget
In Luxembourg

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 North American Free Trade Agreement (NAFTA)!
On August 12, 1992, a trilateral agreement between United States of American
(USA), Canada and Mexico took place which declared North American region as
Free Trade Area. This Agreement is known as NAFTA. USA played the dominant
role in this established.

Before NAFTA, free trade was already taking place between USA and Canada but
this free grade facility was now extended to Mexico. The main objective of NAFTA
is to utilize economic resource of North American region for developing the area
in a better way.

NAFTA has generated economic growth and rising standards of living for the
people of all three member countries since 1994. By strengthening the rules and
procedures governing trade and investment throughout the continent, NAFTA has
proved to be a solid foundation for building Canadas future prosperity.

The objective of the agreement is to:

Allow free movement of goods and services among the countries.

Promote competition in the free trade areas.
Protect the property rights of people and businesses in each country.
Be able to resolve problems that arise among the countries.
Encourage cooperation among countries.
The major functions of NAFTA are:
Eliminate trade barriers in various service sectors belonging to its member
nations.
Reduce high Mexican tariffs and help to promote agricultural exports.
Assist firms spanning the three nations to bid on government contracts.
Assure fair market value to investors by reducing risk and offering the same legal
rights that are enjoyed by local investors.
Help investors to claim against a government by offering legal help.

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Advantages :

Free trade increases sales and profits for Mexico, Canada and the U.S.A.,
thus strengthening their economies.
Lack of tariffs has allowed Mexico to sell its goods in the USA and Canada at
lower prices. This makes Mexican products more competitive in these
markets and increases Mexicos profits as it tries to develop its economy.
Free trade is an opportunity for the U.S. to provide financial help to Mexico
by making jobs available in factories located there.
Disadvantages
Free trade has caused more U.S. jobs losses than gains, especially for
higher-wage jobs.

SAARC
The South Asian Association for Regional Co-operation (SAARC) is an organisation
of South Asian nations, which was established on 8 December 1985 when the
government of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka
formally adopted its charter providing for the promotion of economic and social
progress, cultural development within the South Asia region and also for
friendship and cooperation with other developing countries.

It is dedicated to economic, technological, social and cultural development

emphasising collective self- reliance. In terms of population, its sphere of
influence is the largest of any regional organisation: almost 1.5 billion combined
population of its member states. In April 2007, Afghanistan became its eighth
member.

Objectives of SAARC:
i. Promote the welfare of the peoples of South Asia and improve their quality
of life;

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ii. Accelerate economic growth, social progress and cultural development in
the region by providing all individuals the opportunity to live in dignity and
realise their full potential;
iii. Promote and strengthen collective self-reliance among the countries of
South Asia;
iv. Contribute to mutual trust, understanding and appreciation of one
anothers problems;
v. Promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields;
vi. Strengthen co-operation with other developing countries;
vii. Strengthen co-operation among themselves in international forms on
matters of common interest; and
viii. Cooperate with international and regional organisation with similar aims
and purposes.

Structure :

Council : At the top, there is the Council represented by the heads of the
government of the member countries. The council is the apex policy making body.
It meets once in 2 years time

Council of ministers : It is to assist the council. It is represented by the foreign

ministers of the member countries. Its functions include:

Formulation of policies
Review of functioning
Deciding new areas of cooperation
Chalk out additional mechanism
Decide about general issues of common interests of the SAARC members.

Programming Committee : It consist of the senior official of the member

governments. Its functions include:
Scrutinizing the budget of the secretariat

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 Finalizing the annual schedule
External activities assigned by the standing Committee
Analyses the respects of the technical committee

Technical committee :It consist of the represented of the member nations. Its
function are:

To formulate project and programmes

To monitor and execute the projects
To submit reports.
Cover Areas like Agriculture, Communication, Environment, Rural
Development, Health and Population, Science and Technology, Tourism and
Transport
SECRETARIAT : The SAARC secretariat is located in Nepal. The secretariat is
headed by the secretary-General appointed by the Council of Ministers. Its
function include:
Coordination, execution and monitoring of SAARC activities
Servicing the SAARC meetings
Works as communication link between the SAARC and other international
forums.

ACHIEVEMENTS
SAPTA(SAARC preferential trading arrangement)was signed on 7 December,
1995

SAFTA(South Asian Free Trade Area) was signed in Islamabad in January

2004

SAARC chamber of commerce and industry (SCCI)

SAARC constitutes South Asian Development Fund(SADF)

Signed an agreement of mutual assistance. Avoidance of double taxation

were signed.

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 Till 2013 going to establish a common university for education in Delhi

Regional food security essence

Promoted global objective of shelter for all for poverty allevation

Convention on terrorism was signed in November,1987

SAARC convention on narcotic drugs signed on November, 1990

SAARC terrorist offences monitoring desk(STOMD)

SAARC drug offences monitoring desk(SDOMD)

Failures OF SAARC :

India tries to dominate the function and activities of SAARC

Large variety of different political system

Large variety regional and cultural differences

They lack financial resources and advance technologies

Involvement of external actors

Internal problems constituting social economic and developmental and

growth issues.

Bilateral disputes and differences

Food Security Reserve failed to meet the need of Bangladesh

Suffers from an acute resource crunch

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