McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 12: Trade Blocs Chapter 12: Trade Blocs and Trade Blocksand Trade Blocks

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Figure 12.1 – Types of Figure 12.1 – Types of Economic BlocsEconomic Blocs 经济集团经济集团

p231p231

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Trade discrimination Trade discrimination 贸贸易歧视易歧视 p232p232

AdvantagesAdvantages Customs unions and free trade areas are Customs unions and free trade areas are

remove the tariff and NTBs for some remove the tariff and NTBs for some countries and therefore are a move toward countries and therefore are a move toward free tradefree trade

DisadvantagesDisadvantages Incentive to purchase from high-cost Incentive to purchase from high-cost

producers within the FTA or customs unionproducers within the FTA or customs union Bilateralism of the 1930sBilateralism of the 1930s Tension re: new membersTension re: new members

WTO: MFN principleWTO: MFN principle 最惠国待遇原则 最惠国待遇原则 (deviations(deviations 背离背离 ))

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Theory of trade blocsTheory of trade blocs贸易同盟理论贸易同盟理论

Trade diversionTrade diversion 贸易转向 贸易转向 (from low cost to high (from low cost to high cost producers)cost producers)

Trade creation Trade creation 贸易开辟贸易开辟 (of more low cost trade)(of more low cost trade) The case of Britain:The case of Britain:

Before any tariffs-import from Japan (point C)Before any tariffs-import from Japan (point C) After the tariff- import from Japan (point A); gov’t After the tariff- import from Japan (point A); gov’t

revenue a+crevenue a+c After EEC – import from GermanyAfter EEC – import from Germany

gain in consumer surplus a+bgain in consumer surplus a+b Loss of gov’t revenue a+cLoss of gov’t revenue a+c Net effect c-bNet effect c-b

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Figure 12.2 – Trade Diversion Figure 12.2 – Trade Diversion versus Trade Creation in versus Trade Creation in Joining a Trade Bloc: UK Joining a Trade Bloc: UK

Market for Imported Compact Market for Imported Compact CarsCars

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Theory of trade blocsTheory of trade blocs Trade creation – area bTrade creation – area b

More cars are purchasedMore cars are purchased Price is lowerPrice is lower

Trade diversionTrade diversion More and cheaper cars would have been More and cheaper cars would have been

imported from Japan had the tariff been removedimported from Japan had the tariff been removed The net effect can be positive or negativeThe net effect can be positive or negative

The lower the partner costs relative to the The lower the partner costs relative to the outside world, the greater the gainsoutside world, the greater the gains

The more elastic the import demand the greater The more elastic the import demand the greater the gainsthe gains

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Other gainsOther gains

The trade bloc creates a larger The trade bloc creates a larger market, hence scale economiesmarket, hence scale economies

An increase in competition can An increase in competition can reduce pricesreduce prices

An increase in competition can lower An increase in competition can lower costs of productioncosts of production

Increased opportunities for business Increased opportunities for business investmentinvestment

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The EU experienceThe EU experience

Small gains from trade creation in Small gains from trade creation in manufacturing goodsmanufacturing goods

Losses from the common Losses from the common agricultural policyagricultural policy

Unmeasured gains from competition, Unmeasured gains from competition, scale economies and productivity scale economies and productivity increasesincreases

What do you think?What do you think?

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The Single European ActThe Single European Act Removed separate national product Removed separate national product

standardsstandards Removed restrictions on capital flowsRemoved restrictions on capital flows Free movement of labourFree movement of labour New membersNew members

Smaller agricultural subsidiesSmaller agricultural subsidies Movement of labour is not freeMovement of labour is not free Secure bordersSecure borders

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Canada – US FTACanada – US FTA

Canada stands to gain more Canada stands to gain more from trade with the US because from trade with the US because its export supply and import its export supply and import demand curves are less elasticdemand curves are less elastic

More price fluctuation; gains for More price fluctuation; gains for export industries and losses for export industries and losses for import competing industriesimport competing industries

Gains in manufacturing and Gains in manufacturing and labour productivitylabour productivity

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NAFTANAFTA北大西洋自由贸易区北大西洋自由贸易区– – learning activitylearning activity

Summarize the important changes Summarize the important changes brought by the agreementbrought by the agreement

The pros and cons from Mexico’s The pros and cons from Mexico’s point of viewpoint of view

The pros and cons from the US point The pros and cons from the US point of viewof view

From the Canadian point of viewFrom the Canadian point of view

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Figure 12.3 – Estimates of the Figure 12.3 – Estimates of the Effects of the North American Effects of the North American Free Trade Area on National Free Trade Area on National

Incomes and Wage RatesIncomes and Wage Rates

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NAFTANAFTA

Who loses?Who loses? Import competing producersImport competing producers In the US-clothing, field crops, carsIn the US-clothing, field crops, cars In Mexico – fin services, chemicals, In Mexico – fin services, chemicals,

high-techhigh-tech Outside producers – clothing, textilesOutside producers – clothing, textiles Rules of origin are too complex and can Rules of origin are too complex and can

be considered a NTBbe considered a NTB

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Trade blocs of Trade blocs of developing countriesdeveloping countries

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Trade embargoesTrade embargoes 贸易禁运贸易禁运 Consider a total trade embargoConsider a total trade embargo

The embargoing country loses area a The embargoing country loses area a due to restriction of free tradedue to restriction of free trade

In the target country consumers lose In the target country consumers lose area b+c, producers gain area barea b+c, producers gain area b

As long as c>a, the embargo worksAs long as c>a, the embargo works An embargo may fail for political or An embargo may fail for political or

economic reasonseconomic reasons

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Figure 12.4 – Effects of an Figure 12.4 – Effects of an Embargo on Exports to IraqEmbargo on Exports to Iraq

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Figure 12.5 – Two Kinds of Figure 12.5 – Two Kinds of Economically Unsuccessful Economically Unsuccessful

EmbargoesEmbargoes

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An embargo can backfireAn embargo can backfire Inelastic export supply in the imposing Inelastic export supply in the imposing

country and elastic import demand in country and elastic import demand in the target countrythe target country

A>cA>c An embargo can have little economic An embargo can have little economic

impact on either sideimpact on either side Elastic export supply and import Elastic export supply and import

demanddemand Both a and c are very smallBoth a and c are very small

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Conclusions:Conclusions: Big countries pick on small onesBig countries pick on small ones Sanctions must be extreme and suddenSanctions must be extreme and sudden Sanctions work better in a democracySanctions work better in a democracy

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