Ch. 24 Economic Integration PDF

Ch. 24 Economic integration © Licensed to International School Utrecht Learning objectives Diagrams and 4.4 Economic integration Depth calculations Preferential tra...

Ch. 24 Economic integration © Licensed to International School Utrecht Learning objectives Diagrams and 4.4 Economic integration Depth calculations Preferential trade agreements AO1 Bilateral Regional Multilateral (the World Trade Organization) Trading blocs AO2 Free trade areas/agreements Customs unions Common markets © Licensed to International School Utrecht Learning objectives Diagrams & 4.4 Economic integration Depth calculations Advantages and disadvantages of trading blocs; AO1 Advantages, including: Disadvantages, including: trade creation (HL only) trade diversion (HL only) greater access to markets offer potential loss of sovereignty for economies of scale challenge to multilateral with freedom of labour, there are greater trading negotiations employment opportunities membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations greater political stability and cooperation © Licensed to International School Utrecht Learning objectives 4.4 Economic integration Depth Diagrams and calculations Monetary union AO2 Advantages and disadvantages of monetary union (HL only) AO3 The World Trade Organization (WTO) AO2 Objectives and functions Factors affecting the influence of the WTO, including: difficulties of reaching agreement on services/primary products unequal bargaining power of members © Licensed to International School Utrecht Introduction Economic integration refers to the process of countries becoming more interdependent and economically unified. There are three main types of economic integration: Preferential Trade Trading Blocs Monetary Unions Agreements (PTAs) © Licensed to International School Utrecht Real world example Article: UK starts talks to join Asia-Pacific free trade pact What are the costs and benefits towards the UK of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)? © Licensed to International School Utrecht Preferential Trade Agreements (PTAs) A preferential trade agreement (PTA) is an agreement between two or more countries to lower trade barriers between each other. Member states or governments sign a trade deal consenting to special or favorable terms and conditions of trade. A trading bloc that gives preferential access to certain products from certain countries. This is usually carried out by reducing tariffs but not abolishing them. An example of a PTA is the one between the EU and the African, Caribbean and Pacific Groups of States (ACP). It enables the EU to guarantee regular supplies of raw materials and the ACP countries to gain tariff preferences. © Licensed to International School Utrecht Types of Preferential Trade Agreements A bilateral trade agreement - an agreement between two countries. A multilateral trade agreement - involves an agreement between three or more countries. © Licensed to International School Utrecht Examples of PTAs – CEPA The Closer Economic Partnership Arrangement (CEPA) is a PTA between Hong Kong and China. It aims to strengthen trade and investment cooperation by: Progressively reducing or eliminating barriers to trade Reducing substantial discriminatory measures Promoting trade and investment © Licensed to International School Utrecht Examples of PTAs – ASEAN The Association of Southeast Asian Nations (ASEAN) is a PTA comprising of 10 Asian countries. It aims to achieve cooperative peace and shared prosperity by: Accelerating economic growth, social progress and cultural development in the region Promoting regional peace and stability by adhering to the principles of the United Nations Charter. © Licensed to International School Utrecht Trading Blocs A trading bloc is a group of countries that have agreed to reduce trade barriers for the purpose of encouraging free or freer trade and cooperation. The 3 main types of trading blocs include free trade areas, customs unions, and common markets. © Licensed to International School Utrecht  Free Trade Areas Free trade areas (FTAs) are the most common type of trading bloc, where a group of countries agree to remove trade barriers between themselves. Countries in the free trade area agree to liberalise trade between themselves but can trade with countries outside of the free trade area in whatever way they want to. Members can decide the level of trade barriers towards non-member countries. © Licensed to International School Utrecht  Free Trade Areas In this hypothetical case, countries A, B and C have signed a free trade agreement and are now trading freely among themselves. However, country B may decide to impose a tariff against country D whilst country C enjoys a good relationship with country D and trades freely. © Licensed to International School Utrecht Examples of FTAs – USMCA The United States–Mexico–Canada Agreement (USMCA) is the successor of NAFTA, and aims to: Eliminate barriers to trade Promote conditions of fair competition Increase investment opportunities Protect intellectual property rights Establish procedures for resolving disputes Further trilateral, regional and multilateral cooperation. Over 75% of Canadian total exports now go to the USA © Licensed to International School Utrecht Real world example The Regional Comprehensive Economic Partnership (RCEP) is an FTA consisting of 13 east Asian countries. © Licensed to International School Utrecht  Customs Unions A customs union is similar to FTAs, except members must adopt a common external trade policy towards all non-member countries. In a customs union, there is liberalized trade among members, and then there is a common external tariff (the member countries agree on the method of protectionism). Thus, each member must have the same trade policy with non-members as each other. © Licensed to International School Utrecht Examples of Customs Unions – CEFTA The CEFTA (Central European Free Trade Agreement) comprises of seven countries. It aims to: Expand international trade in goods and services Promote FDI using fair regulations Eliminate the Technical Barriers to Trade Protect intellectual property rights Facilitate negotiations on regional trade policy. © Licensed to International School Utrecht Examples of Customs Unions – SACU The SACU (South African Customs Union) comprises of five countries and aims to maintain the free trade of goods between member countries. It provides for a common external tariff and a common excise tariff, and revenues are shared among members systematically. © Licensed to International School Utrecht Common Markets In common markets, member countries impose common external trade policies and aims to eliminates all trade barriers between them. Factors of production i.e. land, labor, capital, and enterprise can flow freely between member states. A common market has the same characteristics of a customs union plus common policies on product regulation and, more importantly, free movement of labour and capital. © Licensed to International School Utrecht Examples of Common Markets – Schengen Area The Schengen Area is a common market consisting of 26 European countries, of which 22 are EU countries. It aims to allow for free movement of labor between countries within the Schengen area without being checked or having to show their passports. © Licensed to International School Utrecht Practice Exercise © Licensed to International School Utrecht © Licensed to International School Utrecht Practice Paper 1 question. Explain the differences between a free trade area (FTA) and a customs union. [10 marks] © Licensed to International School Utrecht Advantages of Trading Blocs Improved resource allocation, efficiency in production, and greater economic growth Increased competition allow for lower prices and greater consumer choice Producers can expand to larger markets, allowing them to achieve economies of scale With freedom of labor, there are greater employment opportunities Improved political relations and cooperation © Licensed to International School Utrecht Disadvantages of Trading Blocs Inefficient producers will suffer Importing essential goods can reduce national sovereignty Increases discrimination for non-member countries Unequal distribution of gains and losses Reduces government tariff revenue. © Licensed to International School Utrecht  Case study - is the USMCA just a ‘Trump’ branded version of NAFTA? ‘When Canada’s Prime Minister Brian Mulroney, Mexican President Carlos Salinas, and US President George H.W. Bush agreed the North American Free Trade Agreement (NAFTA) which came into force on 1 January 1994, the world’s largest free trade area was formed. In the decades that followed, all three countries enjoyed increased trade, economic growth, and rising living standards, in no small part as a result of the benefits the agreement provided both producers and consumers in North America. When President Donald Trump came into office in January 2017, he planned to remove NAFTA and replace it with a new trade agreement that would benefit American producers, who he argued had been suffering for decades under NAFTA; losing out to lower cost producers in Mexico and Canada. Over the next year and a half the Trump administration engaged in negotiations with trade representatives from Mexico and Canada to work out the details of what many have called the ‘new NAFTA’, but what was officially called the United States-Mexico—Canada Agreement (USMCA). So, what changed from NAFTA to USMCA? To find out, conduct a web search using the term ‘NAFTA USMCA trade deal differences’. One of the top results should direct you to an article with information about the difference between these two free trade agreements. Discussion questions: 1. Is the new rule that requires 75% of a car’s parts to be made in one of the three countries in order to be traded tariff free likely to result in trade creation or trade diversion? Explain. 2. How will the requirement of workers making car parts most likely affect where car parts are manufactured in North America? Do ‘minimum wage’ requirements increase or decrease efficiency of resource allocation between trading partners? 3. Which country’s farmers are most likely to benefit from the changes to USMCA compared to NAFTA? 4. Overall, do free trade agreements like USMCA represent ‘free trade’ or ‘preferential trade’ What is the difference between these two concepts? © Licensed to International School Utrecht Trade Creation (HL only) Trade creation occurs when demand shifts from higher-cost producers to lower-cost producers within a trading bloc as a result of its formation. © Licensed to International School Utrecht Trade Diversion (HL only) Trade diversion occurs when demand shifts from lower-cost producers outside a trading bloc to higher-cost producers within the bloc as a result of its formation. © Licensed to International School Utrecht Monetary Union A monetary union is formed when the member countries of a common market adopt a common currency and a common central bank responsible for monetary policy. This is where a common market also has a common currency and a common central bank. The best example of this is the Eurozone who have adopted the Euro as their currency and have the European Central Bank (ECB). In such a union, countries must have one central bank to operate the union’s monetary policy as the union will tend towards common macroeconomic policies. © Licensed to International School Utrecht Monetary Union Member states do not have flexibility in exercising their own monetary policy. Forming a monetary union requires potential members to limit inflation, government deficits, and government debt. © Licensed to International School Utrecht Examples of Monetary Unions The European Union (EU) is a monetary union comprising of 27 member states, sharing the common currency Euro (€). The EU’s monetary policy is implemented by the European Central Bank (ECB). Members follow the Maastricht treaty to promote sustainable economic convergence, avoid excessive government deficits, and limit government debt. © Licensed to International School Utrecht Paper 1 Exam Question Explain the differences between a common market and a monetary union. [10 marks] © Licensed to International School Utrecht Advantages of Monetary Union (HL only) A single currency eliminates exchange rate risk and uncertainty A single currency eliminates transaction costs. A single currency encourages price transparency. A single currency promotes a higher level of inward investment. Low rates of inflation give rise to low interest rates, more investment and increased output. © Licensed to International School Utrecht Disadvantages of Monetary Union (HL only) A single currency involves loss of monetary policy as an instrument of economic policy. Monetary policy pursued by the single central bank impacts differently on each member Fiscal policy is constrained by the convergence requirements. A single currency involves loss of exchange rates as a mechanism for adjustment. Free movement of people may lead to overpopulation in certain areas. © Licensed to International School Utrecht Paper 1 Exam question Explain the advantages and disadvantages of being a member country of a monetary union. [10 marks] © Licensed to International School Utrecht The World Trade Organisation (WTO) The World Trade Organization (WTO) was established in 1995 by 123 member countries to: Promote trade liberalization Oversee multilateral trade agreements Resolve trade disputes between member states In some special circumstances, the WTO will support maintaining trade barriers: Environmental protection National security Protecting consumers from diseases (bird and swine flu from poultry and pork). © Licensed to International School Utrecht The World Trade Organisation (WTO) – objectives There are six interrelated objectives of the WTO as the core principles of an effective multilateral trading system: 1. Non-discrimination of member nations 2. More open international trade 3. Predictable and transparent trade policies 4. Promoting competition and preventing protectionism 5. Support for less economically developed countries 6. Protecting the environment. © Licensed to International School Utrecht The World Trade Organisation (WTO) – functions The WTO has five functions to ensure that trade between countries flows smoothly, predictably and freely. 1. Platform for trade negotiations including goods, services, and intellectual property 2. Implementation and monitoring of trade agreements 3. Forum for systematic trade disputes resolutions 4. Building trade capacity for developing countries 5. Outreach to promote economic co-operation and growth between countries. © Licensed to International School Utrecht The World Trade Organisation (WTO) – limitations Many argue that the WTO has had limited influence and success in certain areas of trade. High income countries continue to subsidize domestic production of primary goods, while imposing tariffs on primary good imports to protect domestic jobs. WTO is often in favor of large multinational companies and high-income countries. © Licensed to International School Utrecht Test your knowledge on this unit: Kahoot! © Licensed to International School Utrecht Practice Paper 1 exam questions 1.Distinguish between a customs union and a common market, and monetary union. (10 marks) 2.Outline the advantages and disadvantages of a smaller, less developed economy joining a monetary union with larger, more developed economies. (10 marks) 3. Distinguish between trade creation and trade diversion. (10 marks) (HL Only) © Licensed to International School Utrecht Paper 2 questions The United States, Mexico, and Canada entered into the North American Free Trade Agreement in 1994. Study the following charts and answer the questions that follow. Figure 1 Figure 2 Figure 3 © Licensed to International School Utrecht Paper 2 questions a. Define ‘free trade agreement’. (2 marks) b. What is the difference between a free trade agreement like NAFTA and a preferential trade agreement? (4 marks) c. Referencing the data in Figures 1 and 2, use a diagram representing the market for Mexican goods in the USA to illustrate the effect of NAFTA on American consumers, producers, and the US government. (4 marks) d. Referencing the data in Figure 3, summarise the impact NAFTA had on America’s net exports with Mexico in the years following its signing. (4 marks) e. Evaluate the view that increased economic integration will always lead to an increase in efficiency. (10 marks) © Licensed to International School Utrecht