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Preferential Trade Arrangements

Preferential Trade Arrangements. Chapter 9. Preferential Trade Agreements. Since world war II: trade barriers around the world have fallen significantly International trade have grown significantly

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Preferential Trade Arrangements

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  1. Preferential Trade Arrangements Chapter 9

  2. Preferential Trade Agreements • Since world war II: • trade barriers around the world have fallen significantly • International trade have grown significantly • Multilateral trade negotiations sponsored by GATT is partly responsible for this reduction of trade barriers • Apart from GATT, various countries have agreed to reduce further barriers among themselves. Such agreements are known as preferential trade arrangements or regional trade liberalization

  3. Types of Preferential Trade Arrangement • Two types: • Free Trade Areas (FTAs) • Custom Unions (CUs) • FTA: An agreement among several countries to eliminate internal barriers to trade but to maintain existing barriers against nonmember countries. • Example: NAFTA; MERCOSUR; CUSTA • CU: An agreement among several countries to eliminate internal barriers to trade and to form barriers against nonmember countries. • European Union

  4. Economic Analysis of Preferential Trade Arrangements SA P $5.00 $4.00 SB+tariff SC+tariff $3.00 a c b d SB $2.00 e g f h i SC $1.50 DA O Q I G E F H J

  5. Economic Analysis of Preferential Trade Arrangements • Effects of the formation of FTA or CU on international trade • Trade diversion is a shift in the pattern of trade from low-cost world producers to higher-cost CU or FTA members • Trade creation is an expansion in world trade that results from the formation of a preferential trade arrangement

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