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PTAs and Economic Integration

Outline
1

International trade agreements and the WTO
GATT
WTO

2

PTAs and economic integration
Types of integration
Trade creation
Trade diversion
Overall eects of integration
Dynamic considerations

3

Summary
Main conclusions

Origin of international trade agreements

In 1930, the United States passed the Smoot-Hawley Act
...


In 1947 23 countries agreed General Agreement on Taris and Trade
(GATT)
covered taris on merchandise

GATT

World Trade Organisation
Formed in 1995 after Uruguay Round to implementing multilateral
trade negotiations (and enforce them)
The World Trade Organization is based on a number of agreements:
1
...

2
...
Agreement on Trade-Related Aspects of Intellectual Property (TRIPS)

covers international property rights (not patents and copyrights)
AND dispute settlement procedure
disputes heard and decided by panel
if decision not respected punished by other countries imposing trade
restrictions

WTO (cont
...
Reducing tari rates through multilateral negotiations
2
...
National treatment - treating foreign and local goods equally
4
...
Eliminating nontari barriers
quotas and export subsidies are changed to taris

more transparent
easier to negotiate

WTO (cont
...
g
...
g
...
g
...
)

Economic union, e
...
Eurozone?
Harmonisation of economic policies (generally monetary or scal policy)
Members give up powers
Strong central institutions which dictate common economic policy

Complete economic integration, e
...
USA
All economic policy areas are harmonised
The capacity of states to implement independent policies disappears
Central institutions become the centres of economic decision-making

Do PTAs increase welfare?
PTAs reduce some trade barriers and increase none

⇒

increase world

welfare?
Not necessarily: have two eects on trade:
1
...
Trade diversion
low-cost (eciently produced) imports from suppliers in third countries
being replaced by more expensive (less ecient) imports from a partner
country because of tari advantage

reduces welfare

Trade creation example
Consider UK market for cars
UK levies 100% tari on imported cars

Unit costs

UK

France

Cost of production

20

12

15

-

12

15

20

24

30

-

-

15

20

12

30

Tari
No FTA

Price in UK
Tari

UK-France FTA

Price in UK

China

With no FTA: buy UK cars (even though France more ecient)
P=20
tari revenue=0

With UK-France FTA: buy French cars
P=12 (consumers ¿8 better o )
tari revenue=0
Welfare gain of ¿8 through allowing more ecient production

Trade creation
Before free trade area - 100% tari on all imports

P

D

S

PROW+T
PF+T
PROW
PF
Q

Trade creation (cont
...
)
If enter free trade area with France - taris removed

P

D

S

PF+T
PF
Q
Imports from
France in FTA
Trade creation works just like the removal of taris from all foreign suppliers
can now buy good from more ecient producer=> welfare gains

Welfare eects of trade creation
P

D

S

PF+T
PF
Q
Imports from
France in FTA
Use diagram to show changes in consumer and producer surplus and tari
revenues to identify net welfare eects of trade creation
...
)
Inport from ROW - none from France

P

D

S

PROW+T
PF
PROW

Imports from ROW with tariff

Q

Trade diversion (cont
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Overall eect of free trade area/customs union
The net eect of forming FTA/customs union on the welfare of the
home countrydepends on relative importance of trade creation and
diversion
may be positive, negative or zero

`Viner's ambiguity'
Ex ante predictions of the welfare eects of introducing customs
unions cannot be given as they will depend on the case in question
...
The greater the trade between the countries before forming the FTA
lower share of goods from non-members reduces trade diversion
higher domestic production increases trade creation

2
...
The higher the tari before forming the FTA
increases chance of trade between members when removed

Factors inuencing welfare eects

4
...
The higher the number of countries joining the FTA, and the greater
their size
raises probability that lowest cost producer member

6
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178-190, 202-217
...
, J
...
Jones (2007) World Trade
and Payments: An Introduction
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Boston, MA: Pearson

Addison Wesley
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Chapter 5 of Senior Nello, S
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3rd ed
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