Regional Trade Arrangements

Regional Trade Arrangements

Table of Contents:

Types of Regional Trade Arrangements

Free Trade Agreement

Customs Union

Common Market

Economic Union

Regional Trade Arrangements: Case Studies

NAFTA

EU

GCC Union

Benefits and Costs of Regional Trade Arrangements

Welfare Effects of Regional Trade Arrangements

Static Effects of RTAs

Dynamic Effects of RTAs

Conditions inducing Regional Trade Arrangements

World Trade Organization and Regional Trade Arrangements

Multilateralism vs. Regionalism

The RTA and WTO Relationship

References

I- Types of Regional Trading Arrangements

A- Free Trade Agreement:

The main functions of a free trade agreement are eliminating tariffs on goods, abolishing of trade barriers such as restrictive regulation on trade in services. For the free trade agreement, member countries don’t establish common tariffs of outside signatories, so that each member country establishes certain trade restraints to outsiders independently. Moreover, one of the most important functions of the free trade agreement is establishing a stiff political and cultural relationship among member countries.

The free trade agreement is provided by GATT (The General Agreement on Tariffs and Trade) article 24 of general agreements regarding customs and trading and GATS (The General Agreement on Trade in Services) article 5 of general agreements regarding trade in services.

By 2002, more than 130 of schemes for the free trade agreements are reported to the WTO. Major examples of the free trade agreements are the following: NAFTA (The North American Free Trade Agreement), CEFTA (Central European Free Trade Agreement), and SAFTA (The South Asia Free Trade Agreement). In addition, the free trade agreements are usually established among 2 nations; however, there are some multinational free trade agreements.

B- Customs Union

In general, the functions of a customs union are based on free trade agreement -- eliminating tariffs on goods, abolishing of trade barriers such as barrier to trade in services. Moreover, for the customs union, member countries set common external trade restraints such as tariffs and quotas to the third nation. The purpose of the common external trade restraints is

Prominent examples of the customs union are the following: Benelux (Belgium, the Netherlands, and Luxembourg), EUвЂ"Turkey Customs Union, COMECON (The Council for Mutual Economic Assistance), and SACU (The Southern African Customs Union).

C- Common Market

A common market subsumes aforementioned regional trading agreements including free trade agreement, and customs union. Furthermore, the common market enables factor inputs such as land, labor, and capital to move freely among member nations; and besides it encourages entrepreneurings. The purpose of this function is to promote capital, labor, goods, and services move as facile as possible.

In order to permit member countries to these free movements, member countries need to adjust many sorts of policy area. More specifically, to achieve the free movement of labor, mutual certification of academic degrees and job certifications; and also compatibility of social policies are required. Additionally, to achieve the free movement of services, facilitation of establishment of facilities is required.

Well-known examples of the established common market are the following: EU (The European Union), MERCOSUR (Spanish: Mercado ComÐ"Ñ"n del Sur, English: Southern Common Market), and CARICOM (The Caribbean Community single market). Note that, however, the EU especially focuses on mutually certifying standardization and job certifications, and legislations regarding these things and making adjustment to policies.

D- Economic Union

With an economic union, member countries establish a supranational institution, which is a political and economic community. The institution optimizes national, social, taxation, and fiscal policies.

Currently there are not that many established economic unions in the world. Examples of established and pending economic union are as follows: Established: EU (The European Union) Pending: GCC (Gulf Cooperation Council), UNSUL (The Union of South American Nations), AEC (The African Economic Community), and SAEU (The South Asian Economic Union). In fact, the BLEU (Belgium-Luxembourg Economic Union) was once established; however, the union was annexed to the Benelux later on.

II- Benefits and Costs of Regional Trade Arrangements:

Ai- Benefits of Common Market

Generally speaking, the common market gives member countries the following advantages: 1) improving services such as transportation and communication provided by private and public sectors, 2) increasing employment and higher standards of living, and 3) promoting tourism among member nations.

Aii-Costs of Common Market

Initially, when member countries adapt for the common market, international competition becomes furious. This thing influences badly on certain divisions of national economy in the short run. For instance, companies which are sustained by a government with subsidies or protections from international markets may be buffeted about by the storms of the international competition, because of lacking in competitiveness against international markets. What is worse, if the companies fail to manage with the international competition, it will lead to increase in unemployment.

Understanding

Bi- Benefits of Economic Union

The economic union gives member countries the following advantages: 1) promote international comprehension, 2) greater overall democratic function, 3) creating economic unity, benefit, and evolution, and 4) foreign policy and common security as

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