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Economic Integration: Customs Union and Free Trade Areas
Economic Integration: Customs Union and Free Trade Areas
Economic Integration: Customs Union and Free Trade Areas
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1 Introduction
Examine economic integration in general
and customs unions in particular Discuss the trade-creating customs union, trade-diverting customs union and the dynamic effects of customs unions Discuss the brief history of various attempts at economic integration
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Key Terms
Economic integration Preferential trade arrangement Customs union Common market Trade creation and diversion Theory of second best Bilateral agreements
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A trade creating customs union is a union that leads to trade creation only and increases the welfare of both member and nonmember nations. Trade creation occurs when some domestic production in a nation (a member of the customs union) is replaced by lower-cost imports from another member nation. If all resources are fully employed before the formation of a customs union, a customs union increases the welfare of member nations because it leads to greater specialization based on comparative advantage. It also increases the welfare of nonmembers because some of the increase in its real income spills over into increased imports from the rest of the world.
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Nation A $10
Nation C $6
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Before: 100% tariff. Nation A and nation B forms a customs union. DX SX SB+T E SC+T SB SC
X
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resources
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6 Economic Integrations
The larger economic integrations
European Union European Free Trade Association North American Free Trade Agreement (NAFTA) Asian-Pacific Economic Cooperation (APEC)
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The European Union was founded by the Treaty of Rome, signed in March 1957 by West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg, and came into being on January 1, 1958. The common external tariff was set at the average of the 1957 tariffs of the six nations. Free trade in industrial goods within the EU and a common price for agricultural products were achieved in 1968; restrictions on the free movement of labor and capital were reduced by 1970. Membership increased to 15 after the United Kingdom, Denmark, and Ireland joined in 1973, Greece in 1981, Spain and Portugal in 1986, and Austria, Finland, and Sweden in 1995. It became 25 when Malta, Cyprus, Poland, Hungary, Czech, Slovakia, Slovenia, Estonia, Latvia, Lithuania joined the EU on May 1, 2004.
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7 Discussion Questions
What is economic integration? What are the different forms? What is meant by trade creation and trade diversion? What are the static welfare effects of a trade-creating and trade-diversting customs union? What dynamic benefits are the nations forming a customs union likely to receive? How do they arise? How large are they? What are the leading economic integrations in the world?
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THANK YOU!
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