International trade assignment Free Trade Areas and Customs Union

Question

Description of the assessment task:
The purpose of this individual assignment is to provide the student with an opportunity to demonstrate his/her mastery of one or more related topics discussed during this module and apply them in the context of the topic of this assignment.

The student is required to select ONE question from the list below and submit a substantiated answer of between 1500 and 2500 words.

Questions;
1. Research the GDPs of the USA, Canada and each of the member countries of the EU. Now consider the international trade between the USA and each of these countries. Explain why the Gravity Model of International Trade offers an explanation of the figures you have found. Are there factors other than GDP that are influencing the trade between the USA and Canada?

2. International trade can have important effects on the distribution of income. Analyse these effects both in the short and the long term and explain what the effects of the shift in production of clothing from European countries to south-east Asia both for the European and the Asian countries involved.

3. Many, mostly developing countries imposed tariffs on imported goods to protect domestic manufacturers from cheaper and/or superior imported products. This was known as the Infant Industry Argument. Economists are now in general agreement that this policy did not work.Why did it not work? Illustrate your answer by studying the growth in GDP in China and India once trade restrictions were lessened.

4. International trade is a fact in our world today. It has brought many advantages with it such as the tremendous increase in the availability of goods in western civilisations, and cheaper consumer prices for very many goods. However the tremendous volumes of traded goods often with complex, extended international supply chains also has many disadvantages for the world we live in. Research this topic in the widest sense and analyse these disadvantages.

5. Classic models of international trade such as the Ricardian- or the Specific Factors Models all start with the premise of unrestricted trade. Barriers to international trade are however a very common phenomenon. Economists usually sight tariffs and quota’s as being the most disruptive factors in the free international flow of goods. Non-tariff barriers are however equally disruptive. Research this phenomenon and give at least 5 examples of non-tariff barriers excluding quota’s, embargo’s and bans.

6. There are many Free Trade Areas in existence today. Some of these Free Trade Areas are also Customs Unions. Research this topic. Describe what the main difference between a Free Trade Area and a Customs Unionis and give actual examples of both.

Answer

Introduction
This international trade assignment mentions about a free trade area which is a zone that encompasses member nations those who have come together for a free trade agreement. These agreements include an understanding between at least two countries for the reduction of trade barriers, importation of quotas and tariffs and for the increase of trading of goods and services with each other. It might also be considered as second stage economic integration where people are allowed to move freely. Free trade areas are taken as a special case in most favored nation’s principle of World Trade Union (Murinde, 2017). The practice of most favored nations did not become prevalent until the 20th century, there was a rift between the USA which favored the most favored nation practice whereas Britain which wanted to side with its Commonwealth preferences which marked the formation of the article XXIV of the GATT bond. In accordance with the article, countries may go in for such trading agreements provided that a) the preference is 100 percent b) it covers all the arenas of the trade c) that the average tariff barrier against third countries is not higher following customs union than before. After the world war years European Union became one of the most prominent and successful trading arrangement globally and this was initiated by the Treaty of Rome (Corbetand Robertson, 2016). The USA’s agreement to MFN principles and the fact that Europe was being integrated the world trading system was opening up to multilateralism, therefore, it is discussed in the international trade assignment thatthe post war years began to evolve mostly the evolving customs union. When regional economies come together to integrate, there is an increase in political and economic coordination. There are seven stages of economic integration: a preferred trading area, a free trade area, a customs union, union between economies and monetary. The benefits of economic integration illustrated in the international trade assignment include benefits of trade, employment and political cooperation. Due to cross border investment there is liberalization of trade leading to the growth of trade (Dhingra et al., 2017). Although there are several benefits of economic integration, it also comes with certain costs like disintegration of national sovereignty and diversion of trade. People can lose money because of free trade.

Free trade areas
A free trade area is domain whose members have come together for a free trade agreement and do not perpetuate any or maintain very less amount of taxes and quotas between them. Free trade areas smoothen up foreign trade and specialize in the division of labor free trade areas and make it easier for gains in international trade. However free trade areas however are being reprehended for having too much integration and not being cost effective thus artificially hindering free trade. Free trade areas tend to give a push to international trade and allow their respective member nations to divulge their specialization. In order to run a free trade area participating nations must come together to make rules as to how the new free trade are shall function, what tariff rates shall be fixed and how international trade debates shall be fixed, how the property rights shall be operated (Andersonand Yotov, 2016). The pattern of answering these questions depends on the political powers operating within these free trade areas. The main aim outlined herein international trade assignment is to generate and manage trade strategiesthat every member nation of free trade areas can agree upon. There are many trade manufacture and cost convenience that free trade areas provide. It enables customers to possess easy and high quality less expensive access to foreign goods as governments do away or reduces taxes and tariff rates over such goods.

The producers in free trade areas have to juggle and struggle with the increase of competition but they might also be able to create a group of potential suppliers and customers. Many could lose their jobs or face hardships as production shifts away where there is comparative advantage and effects of home markets make those industries more effective all over. The information provided in this section of international trade assignment illustrates that free trade areas may give rise to a higher standard of living resulting in economic development for most of the whole country free trade areas are often supported by free market economics (Meissner, 2016). Some people argue that free trade areas do not require such complicated political or governmental treaties instead they could just do away with the complex trade clauses and function unilaterally. In 2019 the Unites States participated in 14 free trade areas and one of the largest free trade area agreements was signed on 1, January 1994 known as the North American Free Trade Agreement(NAFTA). NAFTA was created in order to felicitate free trading among Mexico, US and Canada. Multiple tariffs on textiles, automobiles and agriculture were done away with. The three trade reforms that economists discuss are: unilateral, multilateral and bilateral. Britain, Chile and South Korea have opted for unilateral tariff reduction which calls for independent reduction of tariffs. Unilateral free trade reaps the advantages of free trade immediately (Zahniseret al., 2015). Multilateral and bilateral approaches have to consult tariff rates with other nations. By increasing the markets liberalization of economy and specialization of labor forces take place also added to it is growing competition.

Customs unions as a part of free trade areas
Customs unions were created so that member countries were able to freely trade with each other. It is seen in this section of international trade assignment that the function of the union is to reduce the burden of administration and finance among nations so that they are able to trade freely with each other and indulge in more economic cooperation. However the participating countries do not get to set their own trade deals. They usually restructure or make changes in their domestic domain in order to make a larger gain from the union. The European Union is the largest customs union in the world in terms of its money making production (Vinokurov, 2017). The function of custom unions is to integrate nations for economic benefits. The importance of custom unions can be seen when it is calculated with regard to trade creation and diversion of trade. The process of trade creation occurs where more efficient members sells to less efficient members leading to better distribution of resources. Diversion of trade occurs when nonmember but efficient countries sell lesser goods to member countries because of high tariff rates and quotas. It provides an opportunity for less efficient member states to consolidate their positions in the union and be able to sell more goods. If the profit coming from trade creation is more than trade diversion, then it leads to economic welfare among the member nations of the union (Yi, 2015). One of the main reasons stated in the international trade assignment that custom unions is mostly recommended among nations because it helps in solving the problem of trade deflection.

The creation of a custom union is benefitting in the long run. The international trade assignment examines that it gives an opportunity to the small economies to get in touch with industries that may not have been available for the option of domestic trade. They will also be able to create a large economy. As competition increases domestic markets will want to increase their efficiency and customs union will help them to get through by uniting economies with liberal trade policies. Customs unions are a part of free trade areas which indulges in common tariff externally. They are set up with trade agreements between member nations who together determine trade policies (Missios, Saggi& Yildiz, 2016). Ignifies that the research conducted on international trade assignment The purpose of building custom unions is to create a close knit political and cultural unity between member nations who come together in creating a customs union. The German customs union which was created in 1834 helped in economic development and political unification of Germany at that point of time. A customs union was established in 1924 by Switzerland and Principality of Liechtenstein and another one was established by Belgium, Netherlands and Luxemburg in 1948. The General Agreement on Tariffs and Trade proposes that if customs union has not been created, it should be created immediately not exceeding more than 10 years. Thus customs union integrate nations who are its members and are able to create a single internal market and monetary union leading to cultural and political integration. Customs union has to provide protective measures such as epidemic prevention, tariff rates and quotas. They also have to provide homogeneous foreign tariff rates (Balistreri, Kaffineand Yonezawa, 2019). The customs unions have two effects: static effect the trade creation and diversion and dynamic effect: static effects are not for member states. Dynamic effects are for member states which include attracting external investment, competition among enterprises and creating good market for import and export.

What is the difference between customs unions and free trade area?
A free trade union is one which permits its member nations to exchange goods beyond national boundaries without exercising any kind of tariffs or trade barriers. It also permits member states to negotiate with outside nations. In free trade areas there is consideration of trade services but in most cases there is no provision of free movement of labor and transportation. Customs union is one which permits free trade between its member nations but it calls for a tariff between the collective members and those which are outside. The members of customs union cannot carry out any free trade with other nations from outside. The contrast between customs unions and free trade areas is that custom unions tend to integrate member states more thoroughly (Ezeani, 2018). The free trade areas like North American Free Trade Agreement (NAFTA) are cohesive to a much less extent. The main points of difference between a customs union and a free trade area noted in the given context of international trade assignment are that a tough bureaucracy is required to keep an eye on the tariffs.

Figure 1: Customs union
(Source: Schippersand de Wit, 2020)

Each member state in a free trade area have the permission to apply various tariff rates , quotas etc. goods from areas outside cannot move freely inside the areas of free trade. Canada would not impose tariffs on goods from the USA and vice versa. They may, however do so from goods coming from Japan which are imported into the USA and cannot be imported to Canada. As noted in the international trade assignment, a customs union is a union for free trade with a common policy that deals with tariffs and measures having equivalent effect. The member states of customs union have the same tariff rates, quotas etc. once the goods get inside the custom nation they are allowed to move freely within the union. If any goods from Japan have been imported into Turkey, they can be imported freely into any European Union, member state without paying any duties on import (Schippersand de Wit, 2020). A common market is an adjunction of customs union which provides unconfined movement labor and capital among its members. Britain is a member of both free trade area and customs unions. As per the research on international trade assignment, the European Free Trade Association (EEFTA) is a free trade union while European Union is customs union. The members EEFTA may transport goods to 28 members of the European member free of tariff. European Union has to follow the rules set in Brussels as well as the rules passed by the European Court of Justice. They must also bring to into force the Common Customs Tariff (CCT).

Figure 2: Free trade areas

Conclusion
From the overall discussion on international trade assignment, it can be stated that free trade areas and customs union have their own advantages and disadvantages and there are several differences. In customs union they have a common tariff rate set by its member countries whereas in free trade that is not the case. The long term gains from free trade areas include those potential economies which have not been exploited in the international market, by doing away with tariffs they can lead to mass production. Customs unions and free trade areas are known as regional trade agreements. Both of these are constructed on Article 24 of GTTA and both of which tries to eliminate tariff barriers among participating members. However, the readings developed in the above context of international trade assignment signifies that both customs union and free trade areas breach the most favored nation constructed by WTO and thus there have numerous debates on this in the past. ?

References
Anderson, J.E. and Yotov, Y.V., 2016. Terms of trade and global efficiency effects of free trade agreements, 1990–2002.International trade assignmentJournal of International Economics, 99, pp.279-298.

Balistreri, E.J., Kaffine, D.T. and Yonezawa, H., 2019. Optimal environmental border adjustments under the General Agreement on Tariffs and Trade. Environmental and Resource Economics, 74(3), pp.1037-1075.

Corbet, H., and Robertson, D. (Eds.)., 2016. Europe's free trade area experiment: EFTA and economic integration. Elsevier.

Dhingra, S., Huang, H., Ottaviano, G., Paulo Pessoa, J., Sampson, T. and Van Reenen, J., 2017. The costs and benefits of leaving the EU: trade effects. Economic Policy, 32(92), pp.651-705.

Ezeani, E.C., 2018. Comparative advantage in de-globalisation: Brexit, America First and Africa's continental free trade area. Journal of international trade law and policy, 17(1/2).

Meissner, K.L., 2016. A case of failed interregionalism? Analyzing the EU-ASEAN free trade agreement negotiations. International trade assignment Asia Europe Journal, 14(3), pp.319-336.

Missios, P., Saggi, K., & Yildiz, H. M. (2016). External trade diversion, exclusion incentives and the nature of preferential trade agreements. Journal of International Economics, 99, 105-119.

Murinde, V. ed., 2017. The free trade area of the common market for Eastern and Southern Africa. Routledge.

Schippers, M. and de Wit, W., 2020. Reflections on the 50th Anniversary of the EU Customs Union. Erasmus Law Review, 12(3), pp.217-218.

Vinokurov, E., 2017. Eurasian Economic Union: Current state and preliminary results. Russian Journal of Economics, 3(1), pp.54-70.

Yi, J. (2015). Rules of origin and the use of free trade agreements: a literature review. World Cust. J., 9, 43-50.

Zahniser, S., Angadjivand, S., Hertz, T., Kuberka, L. and Santos, A., 2015. NAFTA at 20: North America's Free Trade Area and Its Impact on Agriculture. International trade assignment United States Department of Agriculture, Economic Research Service.