Economic integration can reduce trade costs, improve the availability of goods and services and increase the purchasing power of consumers in the Member States. Despite the perceived benefits, EU economic policymakers recognise that EU labour markets suffer from rigidity, regulation and tax structures that have contributed to high unemployment and low job responsiveness to economic growth. This is especially true for relatively low-skilled workers. There is also a potential disadvantage for an individual member in sharing tariff revenues. Members who trade relatively more with countries outside the Union, such as the United Kingdom, may not receive their “fair share” of customs revenues. Before a country joined a free trade agreement, it had already politically imposed distortions in the form of tariff barriers applied to imports of goods. This means that the initial equilibrium can be characterized as the second best balance. When the free trade agreement is concluded, some of these distortions will be eliminated, i.e. the tariffs applied to the FTA partners. However, other distortions remain, namely the customs duties levied on third countries. If the partial reduction in tariffs significantly increases the negative impact of remaining tariff barriers with non-FTA countries, the efficiency gains caused by free trade within the FTA could be offset by the negative welfare effects caused by remaining trade barriers outside the FTA, and national welfare could decrease. Below we present the economic argument of trade diversion and business creation.
These concepts are used to distinguish between the effects of the free trade area or the formation of a customs union, which can be beneficial, and those that are detrimental. As mentioned earlier, preferential trade agreements are often supported because they represent a movement towards free trade. If free trade is the most economically effective policy, it seems that any move towards free trade should be beneficial in terms of economic efficiency. It turns out that this conclusion is wrong. Even if free trade is the most effective, it is not true that a step in this direction necessarily increases economic efficiency. Whether a preferential trade agreement increases a country`s prosperity and increases economic efficiency depends on the extent to which the agreement leads to a diversion of trade from the creation of trade. Economists argue that free trade zones are particularly suitable for African countries created under colonial occupation when land has been divided, often without taking into account the economic sustainability of newly created land. However, the opposite statement is also possible – that is, “if a free trade agreement causes more trade diversion than trade creation, then the free trade agreement can reduce a country`s well-being.” This case is actually very interesting, as it suggests that a move towards free trade by a group of countries can actually reduce the national well-being of the countries concerned. This means that a move towards a more effective free trade policy must not increase economic efficiency. Although this result may seem counterintuitive, it can easily be reconciled with the theory of the second best. Political cooperation between countries can also be improved through stronger economic relations, which encourage the peaceful settlement of conflicts and lead to greater stability.
The Southern Common Market, Mercado Común del Sur or MERCOSUR, was originally created in 1988 as a regional trade agreement between Brazil and Argentina and expanded to Uruguay and Paraguay in 1991. Over the past decade, Bolivia, Chile, Colombia, Ecuador and Peru have become associate members, and Venezuela is in the process of becoming a full member. Figure 9.10 “Harmful Trade Diversion” shows where trade diversion is detrimental to a country`s accession to a free trade agreement. The graph shows the supply and demand curves for country A. PB and PC represent the free trade supply prices of the product of countries B and . C respectively. Note that country C should be able to deliver the product at a lower price than country B. (Note that for this to be possible, country B must have tariffs or other trade restrictions on imports from country C, otherwise the entire B market would be supplied by C.) Overall, global companies have benefited from regional trade agreements by having more uniform criteria for investment and trade, as well as fewer barriers to entry.
Companies that choose to produce in a country find it easier and cheaper to transport goods between the member countries of that trading bloc without incurring additional tariffs or regulations. Effects of the free trade area on consumers in country A. Consumers of the product in the importing country benefit from the free trade area. The fall in the domestic price of imported goods and domestic substitutes increases the consumer`s surplus in the market. See Table 9.16 “Welfare Effects of The Formation of Free Trade Areas: Cases of Trade Diversion” and Figure 9.10 “Injurious Trade Diversion” for the magnitude of the change in consumer surplus is presented. In this section, we present an analysis of trade diversion and business creation. The analysis uses a partial equilibrium framework, which means that we take into account the impact of preferential trade liberalization in relation to a representative sector of the economy. Later in this section, we will examine how the results of representative industrial cases can be extended to account for trade liberalization covering all trade sectors. Employment opportunities tend to improve as trade liberalization leads to market expansion, technology trade and cross-border investment.
On June 29, 2010, China and Taiwan signed the Framework Agreement for Economic Cooperation (ECFA), a preferential trade agreement between the two governments aimed at reducing tariffs and trade barriers between the two sides. This is the most important agreement since the separation of the two countries at the end of the Chinese Civil War in 1949.34 It will boost the current $110 billion in bilateral trade between the two sides. China absorbed Hong Kong in 1999 after the end of the centenary lease with Britain. While Hong Kong is now administered by China as a Special Administrative Region (SAR), it continues to enjoy special economic status. China is eager for Hong Kong and Taiwan to serve as gateways to its huge market. Taiwan`s motivation for signing the agreement was, in large part, an attempt to get China to stop pressuring other countries to sign trade agreements with it.35 Without a single external tariff, trade flows would be distorted. For example, if Germany imposes a 10% tariff on Japanese cars while France imposes a 2% tariff, Japan would export its cars to French car dealers and then resell them to Germany, thus avoiding 80% of the tariff. This is avoided if a common tariff is shared between Germany and France (and other members of the customs union). In 2004, Scott Baier and Jeffrey Bergstrand published that there are three economic determinants that are essential to the formation of APTs.
Countries are more likely to participate in APTs if they have low transport costs and larger savings. Third, countries of similar economic size are likely to benefit most from APTA training. Economic determinants such as GDP, similarity in economic size and distance between countries correctly predict more than 80% of TPAs in force from 2020 onwards. [3] There are four main types of regional economic integration. For a variety of reasons, it often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not possible otherwise. .