Unit VIII- Customs Union and regional groupings

Day and Date:

Unit Highlights

Economic integration Preferential trade arrangements Free Trade Area (FTA) Customs Union Common Market Economic Union Effects of Customs Union Trade creation Trade Diversion

Text book reference chapters

International Economics by Dominick Salvatore Chapter 10 International Economics by Francis Cherunilam Chapter 13

Economic Integration
A commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together.

Economic Integration

Preferential trade arrangements

Free Trade Area (FTA) Customs Union Common Market Economic Union

Economic Integration

Preferential trade arrangements

Preferential trade arrangements provide lower barriers on trade among member nations than non-member nations.

Economic IntegrationFree
Trade Area (FTA)

FTA removes all trade barriers among member nations but individually the nations are allowed to retain barriers while trading with non-members.

EFTA UK,Austria, Portugal, Denmark, Norway, Sweden, & Switzerland NAFTA USA, Canada, and Mexico Southern Common Market (Mercosur) Argentina, Brazil, Paraguay, and Uruguay

Economic IntegrationCustoms
Union

A Customs Union removes all trade barriers among member nations as well as adopts a common commercial policy with the rest of the world.
European Union (now European Common Market) - Germany, France, Italy, Belgium, the Netherlands, and Luxembourg

Economic IntegrationCommon Market

A Common Market goes further from a Customs Union by allowing free movement of labor and capital among member nations.

European Union became European Common Market in 1993

Economic Integration Economic Union

Economic Union harmonizes the monetary and fiscal policies of its members.

Benelux - Belgium, the Netherlands, and Luxembourg United States of America

Effects of formation Customs Union

Trade Creation

Trade Diversion

Effects of formation Customs Union Trade Creation

Trade creation occurs when some domestic production of a member nation is replaced by lower-cost imports.

Effects of formation Customs Union Trade Diversion

Trade Diversion occurs when lower-cost imports from outside the Customs Union are replaced by higher-cost imports from another member nation.

Other effects of a Customs Union

Administrative savings Greater bargaining power Increased competition Economies of Scale Stimulus to investment
Better utilization of economic resources

Effects of a Customs Uniondetermining factors

Level of pre-union trade barriers Pre-union trade and economic relationship of member nations Level of Customs Unions trade barrier with the rest of the world Size of the union and size of the member nations Competitiveness/complementarities of member nations Geographical closeness of member nations

To conclude
In this unit we examined, Economic integration in general and customs union in particular Economic integration leads to most efficient utilization of world resources and maximizes world output and welfare.

You should now know

What is economic integration among nations? In what ways it can happen? Why? What are the effects?