Trade Blocs: World Bank Report, 2000 02/19/2014
Competition and Scale Effects
RIAs combine markets. Consequences?
More competition; less monopoly power
Three types of gains:
Increased competition induces firms to cut prices and expand sales benefits consumers
Economies of scale can be more fully exploited
As you expand production, the cost of every additional unit is lower than the previous one
Reductions in internal inefficiencies
As competition increases within the RIA, non-member importers will also have to adjust. How?
Holds down the prices
RIAs also attract more FDI (Foreign Direct Investment) Why?
After NAFTA, Mexico was flooded with FDI from non-NAFTA members because it gave them access to the
entire North American market
Trade and Location Effects
Trade Creation v. Trade Diversion (TC v. TD)
Simple illustration on page 40
Examples of TD in the real world?
Empirical examples are hard b/c it is really difficult to measure these things. They are mixed.
RIAs lead to the relocation of economic activity
Industries expand in one country and contract in another
What’s the effect?
Convergence or divergence?
Speed up the growth of GDP once a member joins an RIA
Do worse relative to the group than you were doing before GDP wise
Examples: EU w/ Ireland, Spain, & Portugal Convergence
Example: EU w/ Greece Divergence (North vs. South would also be an ex)
Internal v. External Comparative Advantage
Example (pp. 53-54)
General Argument: countries with CA closer to the world average do better in an RIA than countries
with more extreme CA
Implication: RIAs between two poor countries will tend to cause divergence; but RIAs between two rich
countries will cause convergence
Consequences for RIA between rich & poor?
Convergence, so the best thing for poor countries to do is integrate with the rich
Agglomeration: tendency for certain types of economic activity to cluster in one location
Centripetal forces: positive externalities
Linkages between buyers and sellers
Centrifugal forces: negative externalities
Competition for immobile factors
Impact of an RIA:
Probably not a problem for RIAs among high-income countries
More likely to be a problem for RIAs among low-income countries
Divergence & Agglomeration may be particularly problematic for RIAs among developing countries
The Theory of Customs Unions
Jacob Viner, The Customs Union Issue (1950)
Essential features of a CU (FTA + CET):
Elimination of tariffs on imports from member states
Adoption of a common external tariff on imports from the rest of the world
Trade Creation v. Trade Diversion
Trade Creation: union-induced shift from consumption of higher cost domestic products to lower cost
products from another member-state (m-s).
Production change: reduction/elimination of the domestic production of goods; goods now imported
from another m-s
Consumption change: increased consumption of the good that is now imported due to lower cost
Trade Diversion: union-induced shift in the source of imports from lower cost external sources to higher
cost partner sources
Production change: shift from lower cost foreign sources to higher cost partner sources
Consumption change: decreased consumption of the good that is now imported from a higher cost
**With multilateralism, there is no trade diversion, just trade creation
**Regionalism is TC – TD
**Really hard to know how TC and TD balance
When is a CU More Likely to be Trade Creating?
The larger the economic area
The more numerous the countries in the union