11/14/2012

Economic
Union$

As a Global Society, the world is

increasingly interdependent
Economic interdependence fosters
the formation of economic unions.

MKD/BKS/ITC-EU

11/14/2012

Key Terms
Economic integration
Preferential trade arrangement
Customs union
Common market
Trade creation and diversion
Theory of second best
Bilateral agreements

MKD/BKS/ITC-EU

Definition & Different Forms

Economic integration is the commercial policy of
discriminatively reducing or eliminating trade
barriers only among the nations joining together.
There are different forms
Preferential trade arrangements (PTA)
Free trade areas (FTA)
Customs unions (CU)
Common markets
Economic unions
MKD/BKS/ITC-EU

11/14/2012

Preferential Trade Arrangements

Preferential trade
arrangements provide
lower barriers on some
trade among participating
nations than on trade with
non-member nations. It is
the loosest form of
economic integration.

MKD/BKS/ITC-EU

Free Trade Area

A free trade area is the form of economic
integration wherein all barriers are removed
on trade among members, but each retains
its own barriers to trade with nonmembers,
such as EFTA, NAFTA

MKD/BKS/ITC-EU

11/14/2012

Customs Union
A customs union allows
no tariffs or other
barriers on trade among
members, and in
addition it harmonizes
trade policies (such as
the setting of common
tariff rates) toward the
rest of the world, such
as EU, or European
Union.
MKD/BKS/ITC-EU

Common Market
A common market
goes beyond a
customs union by
also allowing the free
movement of labor
and capital among
member nations. The
EU achieved the
status of a common
market at the
beginning of 1993.
MKD/BKS/ITC-EU

11/14/2012

Advantages of
Economic Unions
More efficient industries
Access to larger markets
Access to natural, human, & capital
resources without restrictions
Greater influence on world market
MKD/BKS/ITC-EU

Economic Union
An economic union
goes still further by
harmonizing or even
unifying the monetary
and fiscal policies of
member states. This is
the most advanced type
of economic
integration. An example
is Benelux.

MKD/BKS/ITC-EU

11/14/2012

Duty--Free Zones
Duty
Duty free zones or
free economic zones
are areas set up to
attract foreign
investments by
allowing raw
materials and
intermediate
products dutyduty-free.

MKD/BKS/ITC-EU

Trade--Diverting Customs Union

Trade
It is a customs union that leads to both trade creation
and trade diversion. It may increase or reduce the welfare
of member nations, depending on the relative strength of
these two opposing forces.
Trade diversion occurs when lowerlower-cost imports from
outside the union are replaced by higher cost imports from
a union member. This is because of the preferential trade
treatment given to member nations.
Trade diversion reduces welfare because it shifts
production from more efficient producers outside the
customs union to less efficient producers inside the union.
Thus, trade diversion worsens the international allocation
of resources and shifts production away from comparative
advantage.

MKD/BKS/ITC-EU

11/14/2012

Trade-Diverting & Trade Creating CU

A trade-diverting customs union results in both trade
creation and trade diversion, and therefore can increase or
reduce the welfare of union members, depending on the
relative strength of these two opposing forces. The welfare of
non-members can be expected to decline because their
economic resources can only be utilized less efficiently than
before trade was diverted away from them.
While a trade-creating customs union leads only to trade
creation and unequivocably increases the welfare of members
and nonmembers, a trade-diverting customs union leads to
both trade creation and trade diversion, and can increase or
reduce the welfare of members (and will reduce the welfare of
the rest of the world).
MKD/BKS/ITC-EU

Disadvantages of
Economic Unions
Closing of some industries
Concentration of some industries in
certain countries, leaving marginal areas
behind (undeveloped)
Agribusiness replacing family farms
Difficulty in agreeing on common
economic policies.
MKD/BKS/ITC-EU

11/14/2012

Examples of
Economic Unions
NAFTA
(North American Free Trade
Agreement)
EU
(European Union)
ASEAN
(Association of Southeast Asian
Nations)
OPEC (Organization of Petroleum
Exporting Countries)
MKD/BKS/ITC-EU

NAFTA (North American Free Trade

Agreement)
NAFTA went into effect on Jan 1, 1994.
It links Canada, the US, and Mexico in a free trade
sphere or group.
called to eliminate duties on 1/2 of all U.S. goods
shipped to Mexico & phasing out other tariffs (fees)
over 14 years.
Trade Restrictions were to be removed from many
categories, including motor vehicles and automotive
parts, computers, textiles, and agriculture.
MKD/BKS/ITC-EU

11/14/2012

Did you get them Right?

LABELLING
SUPPLIED
MAPS

EU (European Union)
There are 25 member countries across Europe
Domestically, they attempt to lower trade
barriers, adopt a common currency, and move
toward convergence of living standards.
Internationally, the EU aims to bolster Europe's
trade position and its political and economic
power.
LABEL MAP
MKD/BKS/ITC-EU

11/14/2012

CHECK

http://www.cia.gov/cia/publications/factbook/geos/ee.html
MKD/BKS/ITC-EU

ASEAN (Association of Southeast

Asian Nations)
This is a free trade agreement among
Asian countries-similar to NAFTA

LABEL MAP

MKD/BKS/ITC-EU

10

11/14/2012

Get hands on!

http://www.mapsofworld.com/world-aseanmember-map.htm

MKD/BKS/ITC-EU

OPEC (Organization of Petroleum Exporting

Countries)

OPEC's member countries hold about 2/3 of the

world's oil reserves. They supply 40% of world's
oil production & 1/2 of the exports.
The Organization has 11 Member Countries

LABEL MAP

MKD/BKS/ITC-EU

11

11/14/2012

COMPARE!

MKD/BKS/ITC-EU

MKD/BKS/ITC-EU

12