Trade Creation Diversion

8/9/2019 Trade Creation Diversion

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BITS Pilani, K K Birla Goa Campus

Preferential

Trade

Agreements -

PTAs

Economic Integration Models

PTA - is a trading bloc that gives preferential

access to certain products from the participating

countries.

This is done by reducing tariffs but not byabolishing them completely.

A PTA can be established through a trade pact.

It is the first stage of economic integration.

These tariff preferences have created numerous

departures from the normal trade relations.

Regional trading bloc formation can both create

and divert trade.




PTA Cases

India – Afghanistan (2003)

India – Mauritius

India – Nepal (2009)

India – Chile (2007)

India – MERCOSUR (2009)

ASEAN – PR China (2005)

Laos – Thailand (1991)

More than 23 forms of

PTAs are identified.

Among the 119 countries.

Account for 82% of world

trade (Fieleke 1992).

The use of PTAs to

achieve both domesticand international trade

policy objectives clearly is

increasing.




Free Trade Area

or

FTAs

FTA is an economic integration process encompassing a

trade bloc whose member countries have signed a free-

trade agreement.

Generally among neighbouring countries. However, it can

also be extra regional too.

Free trade agreements eliminate tariffs, import quotas,

and preferences on most (if not all) goods and services

traded between the member countries.

If people are also free to move between the countries, in

addition to FTA, it would also be considered an openborder.

It can be considered the second stage of economic

integration. Countries choose this kind of economic

integration if their economic structures are

complementary.




ASEA

ASEAN FTAsChina’ FTAs

EU FTAs India FTAs




NAFTA;

EFTA;

GAFTA;

CAFTA;

MERCOSUR

EFTA –

European Free Trade Area.

Formed in 1960

by UK; Austria; Denmark;

Norway; Portugal; Sweden &

Switzerland.

GAFTA –

Greater Arab Free Trade

Area.

Formed in 1997

14 countries




CustomsUnion

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.

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 3rd stage of economic integration.

Customs unions are established through trade pacts.




February 26, 2014, 2:54 pm

Russia, India to set up

FTA with Customs Union

Russian Deputy Prime Minister Dmitry Rogozin met

Indian Prime Minister Manmohan Singh in New

Delhi on Wednesday 26 February 2014 [MEA]

South Africa ,Lesotho,

Swaziland, Botswana &Namibia has formed the

Southern African Customs

Union (SACU) with a

common custom tariff policy.




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 & labour) anda common external trade policy.

When an economic union involves unifying currency it

becomes a Economic and monetary union.

Purposes for establishing an economic union normallyinclude increasing economic efficiency and establishing

closer political and cultural ties between the member

countries.

Economic union is established through trade pact.

Economic

Union




Cases-

Benelux Countries –

Belgium; Netherlands;

Luxemburg

formed Economic

Unions soon after 2nd

World War

Every Economic and monetary union has

also an Economic Union

Single market of the European Union

CARICOM Single Market and Economy of the Caribbean Community

Union State of Russia and Belarus

Monaco - European Union

USA formation

EU goes further by harmonizing or even unifying monetary & fiscal policies of

member states. This is the most advanced economic integration process.




Common Market

Common Market

Group formed by countries within a geographical

area to promote duty free trade and free

movement of labor and capital among itsmembers.

European community (as a legal entity within the

framework of European Union) is the best known

example.

EU became a Common Market in 1993

Common markets impose common external tariff

(CET) on imports from non-member countries.




Economic Integration:

Theoretical

Formulations

Is a solution and

problem too!




Case of ASEAN

ASEAN




East Asian Community – EAC

ASEAN – 10 Member Grouping

ASEAN + 3

ASEAN + 6

ASEAN CEPA

TPR

Regional Structural, Political & Strategic

Issues: Implications?

Notions & Possibilities!




Notion of East Asian Community!

Financial

Joints/ India

Absent

Geography, Contiguity, Economic

Growth Trajectory proposes

feasibility of EAC & Beyond




ASEAN + 3

ASEAN + 3 =

ASEAN + China+ Japan +

South Korea




ASEAN + 6 =

16 Member

ASEAN + China +Japan + South

Korea

+India + Australia

+ New Zealand

= CEPA or RCEP




TPR

Currently in negotiations

Announced interest in joining

Potential future members

ASEAN + 3

ASEAN + 6




Regional Economic Integration –What it Means?

Japan has more

than 09 Bilateral/

Multilateral FTAs

in the region

Korea has more

than 07 Bilateral/

Multilateral FTAs

in the region

Singapore has

more than 14Bilateral/

Multilateral FTAs

in the region

Japan has more

than 09 Bilateral/Multilateral FTAs

in the region

Noodle

bowl Effect

!




Thailand more

than 08 FTAs

in the region

Philippines more

than 05 FTAs in

the region

China more than

08 FTAs in the

region

Net effect is a

Noodle bowl

Effect !

Bhagwati, Greenaway, and Panagariya (1998) and Panagariya (2000) surveyed the

theoretical economics literature on FTAs and the spaghetti bowl, which pre-dates

the rise of Asian FTAs and the noodle bowl.

166 by

June 2009

(ADB).




Trade Creation

& Customs

Union-

J. Viner

J. Meade

& H.G Johnson

J. Viner pioneered the development of the theory of

Customs Union in 1950.

Focused on the production effect of Trade Creation &

ignored consumption aspect.

In 1955, J. Meade extended the Customs Union Theory

to analyze the consumption effect also

H.G Johnson developed it further and added both the

production and consumption triangle to obtain total

Welfare Gain of a Customs Union.

Lipsey & Lancaster – 1956, further extended it to Theory

of 2nd Best

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Trade Creation Diversion