Economic_Integration_&_Terms_of_Trade.

1. Economic integration is trade unification between different nations or states by partial or full abolishment of custom tariffs on trades which take place within the borders of each state or nation. This is done to lower the prices for distributors and consumers and the goal is to increase trade. The main objective of economic integration is said to be an increase of welfare. The increase in trade between members of economic unions leads to the increase of the GDP of its members which, in turn, leads to better welfare – a goal of any state or nation around the world. Another objective of pursuing economic integration is for states to stay or become regionally and globally competitive. The degree of economic integration can be categorised into six stages, namely: i. Preferential trading area ii. Free trade area iii. Customs union iv. Single market v. Economic and monetary union vi. Complete economic integration These stages differ in the degree of unification of economic policies. 2. Definition and features of: a) Free trade area – a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It is the second stage of economic integration. Countries usually choose this type of economic integration if their economical structures are complementary. On the other hand, if their structures are competitive, countries are more likely to choose customs union. b) Customs union – a type of trade bloc composed of a free trade area with a common external tariff. The participant countries set up a common external trade policy. In some case, they use different import quotas. Common competition policy is also helpful in avoiding competition deficiency. Countries usually establish a customs union in hopes of achieving economic efficiency and establishing closer political and cultural ties between the participant countries. Customs union is the third stage of economic integration and is usually established through a trade pact. c) Economic union – a type of trade bloc composed of a single market with a common currency. An economic union can be distinguished from a mere currency union by the single market, which the currency union does not have. The economic (and monetary) union is the fifth stage of economic integration. An economic and monetary union is also established through a trade pact. 3. Examples of economic integration: a) European Union The European Union (EU) is an economic and political union of 27 member states (Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom). The EU has developed a single market through a standardised system of laws which apply in all member states, ensuring the free movement of people, goods, services and capital. Currently, a single currency is in use between the 16 members of the eurozone (an economic and monetary union of 16 EU member states which have adopted the euro currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands Portugal, Slovakia, Slovenia and Spain). b) European Free Trade Association The European Free Trade Association (EFTA) is a free trade organisation between four European countries (Iceland, Norway, Switzerland and Liechtenstein) that operates parallel to, and is linked to, the European Union (EU). EFTA was established as a trade-bloc-alternative for European states who were either, unable to, or chose not to join the then-European Economic Community (EEC) which has now become the EU. c) ASEAN Free Trade Area The ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of South East Asian Nations (ASEAN) supporting local manufacturing in all ASEAN countries. AFTA now comprises of 10 countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia). The primary goals of AFTA are to increase ASEAN’s competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers, and attract more foreign direct investment to ASEAN. ASEAN uses the Common Effective Preferential Tariff (CEPT) scheme as its primary mechanism of achieving the aforementioned goals. Unlike the EU, AFTA does not apply a common external tariff on imported goods. Each ASEAN country may impose tariffs on goods entering from outside ASEAN based on its national schedules. However, for goods originating within ASEAN are applied tariff rates of 0 to 5 percent. This is known as the CEPT scheme. d) North American Free Trade Area The North American Free Trade Area (NAFTA) is an agreement signed by the governments of Canada, Mexico and the United States, creating a trilateral trade bloc in North America. The goal of NAFTA was to eliminate barriers of trade and investment between the USA, Canada and Mexico. The implementation of NAFTA in 1994 brought the immediate elimination of tariffs on more than one half of US imports from Mexico and more than one third of US exports to Mexico. NAFTA also seeks to eliminate non-tariff trade barriers. According to Isaac (2005), overall, NAFTA has not caused any trade diversion, aside from a few industries such as textiles and apparels, in which rules of origin negotiated in the agreement were specifically designed to make US firms prefer Mexican manufacturers. 4. International institutions: a) International Monetary Fund The International Monetary Fund (IMF) is the international organisation that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organisation formed with an objective to stabilise international exchange rates and facilitate development through the enforcement of liberalising economic policies on other countries as a condition for loans, restructuring or aid. It also offers highly leveraged loans to poorer countries. Countries contribute to a pool which can be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first created because it helped the world stabilise the economic system and now works to improve the economies of its member countries. The IMF describes itself as “an organisation of 186 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty”. b) The World Bank World Bank is a term used to describe an international financial institution that provides leveraged loans to developing countries for capital programs. The World Bank has a stated goal of reducing poverty. It sees the five key factors necessary for economic growth as follows: a. Build capacity – strengthening government and education government officials. b. Infrastructure creation – implementation of legal and judicial systems for the encouragement of business, the protection of individual and property rights, and the honouring of contracts. c. Development of Financial Systems – the establishment of strong systems capable of supporting endeavours from micro credit to the financing of larger corporate ventures. d. Combating corruption – support for countries’ efforts at eradicating corruption. e. Research, Consultancy and Training – the World Bank provides a platform for research on development issues, consultancy and conducting training programs (web based, on line, tele-/video conferencing and class room based) open for those who are interested from academia, students, government and non-government organisation (NGO) officers. c) The World Trade Organisation The World Trade Organisation (WTO) is an organisation that intends to supervise and liberalise international trade. The WTO replaced the General Agreement on Tariffs and Trade (GATT) in 1995, under the Marrakech Agreement. The organisation deals with the regulation of trade between participating countries; it provides a framework for negotiating and formalising trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments. 5. Terms of trade is defined as the relationship between the prices at which a country sells its exports and the prices paid for its imports. If a country’s export prices rise relative to import prices, its terms of trade are said to have moved in a favourable direction, since, in effect, it now receives more imports for each unit of goods exported. The terms of trade, which depend on the world supply of and demand for the goods involved, indicate how the gains from international trade will be distributed among trading countries. An abrupt change in a country’s terms of trade (e.g., a drastic fall in the price of its main export) can cause serious problems in its balance of payments (i.e. comparative advantage). 6. A country’s terms of trade can be calculated by comparing the country’s export and import prices relative to each other.