Regional Trade Agreements

Regional Trade Agreements

Preferential trade agreement

A preferential trade area (also preferential trade agreement, PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. Example: India and Mauritius have a bilateral preferential trade agreement where low tariffs being imposed on certain products.

Free Trade Agreement

Involve cooperation between  at least two countries to remove trade barriers such as import tariffs and quotas. This could increase trade of goods and services with each other. Examples of FTAs: Common Market For Eastern and Southern Africa (COMESA) and North America Free Trade Agreement (NAFTA)

Advantage

• ·         Eliminate trade barriers which will allow consumers and producers to purchase from the cheapest and most competitive source of supply.
• ·         Thus, costs of some goods will be lower, which will increase the trade volume among member states.
• ·         The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.
• ·         FTAs can increase productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation.
• ·         FTAs can enhance the competitiveness of a member's exports in the partner market, and add to the attractiveness of the country's as an investment destination.
• ·         The volume of direct investments among member states will increase with the free movement of goods and capital. In this way, there will be more employment opportunities, and cash flow into those countries will increase.
• ·      Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multi-national companies provide job training to local employees.

Disadvantages

• ·         Reducing tariffs on imports allows companies to expand to other countries. Without tariffs, imports from countries with a low cost of living cost less. It makes it difficult for U.S. companies in those same industries to compete, so they may reduce their workforce. Many U.S. manufacturing industries did, in fact, lay off workers as a result of NAFTA. ​​One of the biggest criticisms of NAFTA is that it sent jobs to Mexico.
• ·         Reduced tax revenue. Many smaller countries struggle to replace revenue lost from import tariffs and fees.
• ·         Mexican workers exploited

Customs union

A customs union is a type of trade bloc which is composed of 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. In other words a Customs Union is equivalent to an FTA plus a common external trade policy.

Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries.

Examples: Andean Community (CAN), East African Community (EAC) and European Union Customs Union (EUCU)

Advantages

• ·         Same advantages as FTA
• ·         Due to the common external tariffs, non-member countries become less competitive and thus local people buy local products which will lead to a favorable balance of payment.

Disadvantages

• ·         Share same disadvantages with FTA
• ·         The most important disadvantage of the Customs Union will be member states’ rejection of their sovereignty and their right to follow independent policies. Members will not be able to enter into agreements with third countries as they wish, and they will have to obtain the approval of other members.
• ·         Excessive bureaucracy may inhibit the ability of members to innovate.
• ·         Trade rules may favour some members over others, and some industries and sectors over others.

Common market

A common market is usually referred to as the first stage towards the creation of a single market. It usually is built upon a free trade area with no tariffs for goods and relatively free movement of capital and of services. It is equivalent to a customs union plus free mobility of factors. One example of Common Market is the Common Market for Eastern and Southern Africa (COMESA).

Advantages

• ·         Share same advantages as FTA and Customs Unions
• ·         One of the objectives of membership is a common currency. This would prevent exchange rate fluctuations, which would improve and facilitate commercial relations within the union and contribute to the creation of a stable commercial environment.
• ·         Increased labour mobility enabling wage costs to converge, and unemployment to be spread more evenly between members.
• ·         Increased capital mobility which increases its relative supply in each country, and enables businesses to grow and innovate
• ·         Enables jointly produced goods which members might not be able to fund on their own, such as Europe's Airbus consortium.

Disadvantages

• ·         Same drawbacks as FTA and Customs Unions.
• ·         Rising negative externalities associated with the free movement of people, including pressure on infrastructure and the insufficient supply of merit goods  such as healthcare and education.

Economic Unions

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour), a common external trade policy and adopt common macroeconomic policies. Example: European Union (EU).

Advantages

• Same as FTA, CU and CM

Disadvantages

• Same as FTA, CU and CM
• It becomes very difficult for the EU to communicate with all of it’s citizens because they all speak different language. This also impact the feeling of unity among it’s members. It makes it harder to bring people together.
• The policies, decisions, and rules set in place by the European Union are not there to protect the best interest of each individual country. Instead, their goal is to advance the EU as a whole. This has caused many damages in smaller countries, that are often left unheard.

Globalisation

“Far from being the greatest cause of poverty, globalisation is the only feasible cure” (The Economist, 2001).

Based on the above statement, analyse the opportunities and dangers of globalisation for industrialized and developing nations.

Globalisation is the increasing interaction of people through the growth of the international flow of money, ideas and culture. Globalisation is primarily an economic process of integration which has social and cultural aspects as well. It involves goods and services, and the economic resources of capital, technology and data. Major factors of globalisation are: Transport facilities, telecommunication infrastructure (internet and mobile phones), technology, changing world order and Regional Trade Agreements.

There are several kinds of globalisation which includes; Economic globalisation, culture globalisation and political globalisation.

One of the main benefits of globalisation is faster growth of economies. As globalisation involve many other countries, many foreign direct investment (FDI) invest in attractive market countries. FDI have developed at a much  quicker pace than those economies closed to such investment. As there are FDI in countries, this creates jobs and the population have a better living standard.

Free trade is supposed to reduce barriers such as tariffs, value added taxes, subsidies, and other barriers between nations.

It also provides poor countries, through infusions of foreign capital and technology, with the chance to develop economically. With the help of new technology, developing will be able to increase productivity which could lead to an increase in their gross domestic product (GDP).

With globalisation, there is an increase in competition with companies around the world. Due to high competition, prices of products tend to decrease which could benefit the population. However, in many cases this is not working because countries manipulate their currency to get a price advantage. Foreign competition will encourage domestic producers to increase efficiency

The proponents say globalization represents free trade which promotes global economic growth; creates jobs, makes companies more competitive, and lowers prices for consumers.

There is cultural intermingling and each country is learning more about other cultures.

Labor can move from country to country to market their skills. This could help developing countries, if they lack skilled labour and this could lead to an improvement of quality of work and the skilled labours could train the unskilled one.

Multinational companies investing in installing plants in other countries provide employment for the people in those countries often getting them out of poverty.

Globalisation has given countries the ability to agree to free trade agreements like NAFTA and COMESA. reduction of barriers to entry such as tariffs on imports will lead to a fall in price.

However, The general complaint about globalisation is that it has made the rich richer while making the non-rich poorer. In other words, gobalisation increase the poverty gap, where the managers, owners and investors become richer and the low lever worker remain unchanged are become poorer.

Globalisation is supposed to be about free trade where all barriers are eliminated but there are still many barriers.

The biggest problem for developed countries is that jobs are lost and transferred to lower cost countries. When NAFTA was implemented, many United States manufacturing industries was sent to Mexico and Mexican did the job at a cheaper price.

Multinational corporations are accused of social injustice, unfair working conditions (including low labour wages and poor working conditions), as well as lack of concern for environment, mismanagement of natural resources, and ecological damage. Mexican workers were exploited due to the implementation of NAFTA.

Countries are increasingly losing their sovereignty and powers to implement local decisions because of the powers provided to the WTO.

Technology could also widened the poverty gap between countries. For instance, countries which are not able to afford new technologies, will not be able to improve their productivity as the one who can afford new technologies.

Theories of international production

In this chapter I am going to explain the theory of multinational and theory of why firms produce overseas.

Basically a multinational is an enterprise that engages in FDI and owns or controls value adding activities in more than one country (Dunning 1992)

Reasons for the creation of multinational enterprises:

1.      Classical/Neo Classical models of Trade

2.      Hymer’s Theory of International Production

3.      Vernon’s Product Life Cycle

4.      The Eclectic Paradigm

5.      Technological Accumulation Theory

6.      The Investment Development Path

7.      Alliance Capitalism