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Regional Trade Agreements



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Regional Trade Agreements Chapter 8 Copyright 2009 South Western a division of Cengage Learning All rights reserved Regional Integration vs Multilateralism o regional trade blocs could be a complement to multilateralism by setting a precedent which other nations will follow o can lead to deeper integration o however regional agreements are also discriminatory in that some nations are treated differently than others o decreases incentives for nations to pursue multilateral agreements o trade bloc members may not gain additional economies of scale through multilateralism Types of Regional Agreements o free trade area agreement to remove trade barriers among members example NAFTA o customs union agreement to remove trade barriers among members and impose uniform trade restrictions against non members example Benelux o common market agreement that permits 1 free trade among members 2 common external trade restrictions and 3 free movement of factors of production example EU Types of Regional Agreements cont o economic union common market agreement with 1 common national taxation fiscal and social policies among members 2 transfers of sovereignty to a supranational authority example Belgium and Luxembourg 1920s o monetary union economic union with additional characteristic of common monetary policy and common currency example United States Static Effects of Trade Arrangements With Tariff before customs union red triangle consumer surplus green triangle producer surplus black rectangle tariff revenue a b deadweight loss Static Effects of Trade Arrangements With Customs Union agreement with Germany will lower the price to SG trade creation effect welfare losses now part of consumer surplus a production effect b consumption effect trade diversion effect area c lost benefits from lower cost suppliers Dynamic Effects of Trade Arrangements o economies of scale access to a larger market allows producers to become more efficient through greater specialization better equipment and



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