1. Chapter 12: Trade Blocs and Trade Blocks

2. Figure 12.1 – Types of Economic Blocs经济集团p231

3. Trade discrimination 贸易歧视p232 • Advantages • Customs unions and free trade areas are remove the tariff and NTBs for some countries and therefore are a move toward free trade • Disadvantages • Incentive to purchase from high-cost producers within the FTA or customs union • Bilateralism of the 1930s • Tension re: new members • WTO: MFN principle最惠国待遇原则 (deviations背离)

4. Theory of trade blocs贸易同盟理论 • Trade diversion贸易转向 (from low cost to high cost producers) • Trade creation 贸易开辟(of more low cost trade) • The case of Britain: • Before any tariffs-import from Japan (point C) • After the tariff- import from Japan (point A); gov’t revenue a+c • After EEC – import from Germany • gain in consumer surplus a+b • Loss of gov’t revenue a+c • Net effect c-b

5. Figure 12.2 – Trade Diversion versus Trade Creation in Joining a Trade Bloc: UK Market for Imported Compact Cars

6. Theory of trade blocs • Trade creation – area b • More cars are purchased • Price is lower • Trade diversion • More and cheaper cars would have been imported from Japan had the tariff been removed • The net effect can be positive or negative • The lower the partner costs relative to the outside world, the greater the gains • The more elastic the import demand the greater the gains

7. Other gains • The trade bloc creates a larger market, hence scale economies • An increase in competition can reduce prices • An increase in competition can lower costs of production • Increased opportunities for business investment

8. The EU experience • Small gains from trade creation in manufacturing goods • Losses from the common agricultural policy • Unmeasured gains from competition, scale economies and productivity increases • What do you think?

9. The Single European Act • Removed separate national product standards • Removed restrictions on capital flows • Free movement of labour • New members • Smaller agricultural subsidies • Movement of labour is not free • Secure borders

10. Canada – US FTA • Canada stands to gain more from trade with the US because its export supply and import demand curves are less elastic • More price fluctuation; gains for export industries and losses for import competing industries • Gains in manufacturing and labour productivity

11. NAFTA北大西洋自由贸易区– learning activity • Summarize the important changes brought by the agreement • The pros and cons from Mexico’s point of view • The pros and cons from the US point of view • From the Canadian point of view

12. Figure 12.3 – Estimates of the Effects of the North American Free Trade Area on National Incomes and Wage Rates

13. NAFTA • Who loses? • Import competing producers • In the US-clothing, field crops, cars • In Mexico – fin services, chemicals, high-tech • Outside producers – clothing, textiles • Rules of origin are too complex and can be considered a NTB

14. Trade blocs of developing countries

15. Trade embargoes贸易禁运 • Consider a total trade embargo • The embargoing country loses area a due to restriction of free trade • In the target country consumers lose area b+c, producers gain area b • As long as c>a, the embargo works • An embargo may fail for political or economic reasons

16. Figure 12.4 – Effects of an Embargo on Exports to Iraq

17. Figure 12.5 – Two Kinds of Economically Unsuccessful Embargoes

18. An embargo can backfire • Inelastic export supply in the imposing country and elastic import demand in the target country • A>c • An embargo can have little economic impact on either side • Elastic export supply and import demand • Both a and c are very small

19. Conclusions: • Big countries pick on small ones • Sanctions must be extreme and sudden • Sanctions work better in a democracy