Change of Trade Composition since the 1960s - Assignment Example

Change of Trade Composition since the 1960s Student’s Name Institution Affiliation Table of Contents Introduction 3 History of Composite Trading Activities 3 Theories on Regional Cooperation 4 World Trade Organization (WTO) and Trade Blocs 5 Levels of Trade Blocs 5 Examples of Regional Trading Blocs 5 1.0 “The Association of Southeast Asia Nations (ASEAN)” 6 2.0 EUROPEAN UNION (EU) 6 3.0 “Mercado Comun Del Cono Sul-Southern Cone Common Market (MERCOSUR)” 7 4.0 North American Free Trade Agreement (NAFTA) 7 5.0 Other Trade Blocs 7 How the Composition of Trade Has Changed 8 Conclusion 10 References 11 Introduction There has been a massive growth of trade and trade compositions over the past four decades. This is due to the emergence of regional, bilateral, and multilateral trade agreements. The effect of these agreements has been an improvement of the standards of living through increased productivity and commerce. It is been noted that these trade agreements have brought forth a new way of trading. Throughout the years, there has been growth of these agreements and they have had an impact on national and international trade (Salvatore, 1992). The history, implementation, and examples would draw a clearer picture. History of Composite Trading Activities The post World War II economic conditions especially among European countries led to a series of thoughts and ideas that was to put in place to improve the economies. The Breton Woods Conference came up with an idea to improve international trade (lynch, 2010). This consisted of trade subsidies, reducing trade barriers and imposing quantitative restrictions. With such a proposal, the focus was on not only local or national trade but also trade within a certain region. It was a proposal that by opening the borders of a country would have certain benefits (Canto, 1985). These include increased competition, as each member country would want to display and come up with a product of superior quality. Second, there would be an expansion of the markets for the members. This would imply that each nation had an opportunity to increase its production capacity. Third, advantages of economic of scale were to be experienced as the factors of production were to be mobile and pooled. Fourth, through this system, movement of goods and money was to be enhanced. Fifth, there would also be employment creation due to increase of trade, and last, the industries within the blocs would also benefit, as they would be protected from imports outside the group members that are cheaper. However, critics of these free trade agreements such as Jacob Viner had some areas of concern (Bourdet, Gullstrand & Olofsdotter, 2007). These included free movements of people between borders could lead to illegal immigrants moving from one country to another. Second, the bloc members could end up focusing on trade amongst themselves and ignoring other non-member but essential countries. Third, non-members of the blocs could feel left out because they were not to benefit from these agreements. Last, protection of local industries would also mean that some inferior firms would have protection at the expense of better firms producing quality goods outside the bloc. Despite the view from the critics, the process of economic and trade integration started to take effect. The process that took place can be broken into two separate stages. The first stage that took place between the early 1950s to the mid 1960s had concerns that include smooth flow of trade, increased consumption and how custom unions would affect the production process. The second phase is what took place and is currently felt from the mid 1960s to date. It involves changes, implementations and the increase of these blocs that have led to economic integration. Theories on Regional Cooperation During the period of implementation of regional cooperation, three different schools of thought brought three major theories forward. These are the Realism, Marxism, and Neoliberalism theories (Rigby, Smith & Lawlor, 1999). Neoliberals during the period of mid 1980s argued that countries would enter into trade agreements because of the absolute gains that they would derive. On the other hand, realists argue that cooperation among members is likely to take place because they expect relative gains. Over the years, the Marxism theory has been obsolete (Holzman, 1987). World Trade Organization (WTO) and Trade Blocs The WTO that replaced the General Agreement on Tariffs and Trade (GATT) has an aim of increasing world trade. It accomplishes this by solving dispute between members, reducing quotas, and enhancing tariff cuts. Regular meetings held in order to come up with better policies and reforms. It also serves as a strong tariff regulator (Geiger & Kennedy, 1996) Levels of Trade Blocs According to Peloso (2005), trade blocs are in the following categories: Preferential Trade Area (PTA), here trade barriers of members though lowered are eliminated in order to protect the group against foreign economies. Second, Free Trade Area (FTA), there is no restrictions in terms of trade within the group. However, a member country can set a certain restriction with other non-member countries. Third, Customs Union (CU), here there is free trade among members but as a group, they have a common tariff imposed on other countries. Fourth, Economic Union (EU), here there is an agreement in terms of; tariffs set on outsiders, free movement of members, labor, land, capital and entrepreneurship, free trade and similar micro and macro economic conditions. Last, Common Market (CM), here the members enjoy free movement, free trade and common tariffs are set on non-members. Examples of Regional Trading Blocs There has been a growth of regional trading blocs over the years as a result; some of the major ones are below; 1.0 “The Association of Southeast Asia Nations (ASEAN)” The Association of Southeast Asia Nations (ASEAN) is one of the largest trading blocs. Its establishment was in Bangkok on 8 August 1967. The members include Cambodia, Laos, Myanmar, Vietnam, Brunei Darussalam, Indonesia, Thailand, Philippines, and Singapore. Since its inception, ASEAN has brought about not only economic growth but has also promoted socio-cultural development and enhanced stability and peace within the region (Australia 1994) This bloc has introduced the Comprehensive Investment Area (ACIA). It aims to improve the investment flow between member countries and encourage industries such as fisheries, mining, forestry, agriculture, and manufacturing. ASEAN has also signed other free trade agreements with non-member countries such as Japan, India, Australia, Korea, New Zealand, and China (an estimate of trade worth $500 billion expected by 2015). All this is in an attempt to increase bilateral trade. The level of foreign direct investments within this bloc has increased substantially through the years. For example in the year 2010, the FDI doubled from “$37.9% to $75.8%” (Dell, 1963). 2.0 EUROPEAN UNION (EU) Originally known as the “European Coal and Steel Community (ECSC)” in 1951, it changed to EU in 1992. It has 27 European countries. The European Union has had a great impact not only to the member countries but also to the developing countries. It has provided funding, food aid and expert advice to developing countries. Its effect is in Western Africa and through the Sugar Reform. The European Union has also gone a step further and used a common currency (Euro) among its members (Brenton & Manzocchi, 2002). It has many areas of concern but the major ones are energy, agriculture, infrastructure, science and education, environment and healthcare 3.0 “Mercado Comun Del Cono Sul-Southern Cone Common Market (MERCOSUR)” It has both full and associate members. Full members are Uruguay, Argentina, Venezuela, Brazil, and Paraguay. Associate members are Peru, Columbia, Bolivia, Ecuador, and Chile. The major difference between associate and the full members is that associate members do not have benefits from tariffs but the however enjoy certain trade advantages. The bloc boasts of certain benefits to its members including, the same tariff across all the member countries, free trade movements, incentives to members, an ensured protection of goods produced within the bloc and job creation (Dell, 1963). Through the Colonia Protocol, non-members can invest within this bloc 4.0 North American Free Trade Agreement (NAFTA) With USA, Mexico, and Canada as members, NAFTA came to be on 1 January 1994. The emergence of this bloc has increased trade since free trade allowed for member countries to freely trade. In addition, a topic of interest is the fact that export levels have increased. The major areas of concern for this bloc apart from trade are education, environment, free movement of persons and industrial, and investment growth. Foreign Direct Investments in NAFTA countries grew by “8.8% in 2009, to $357.7 billion”. Both Canada and Mexico have benefitted from this trade agreement with increases in GDP. Mexico became a huge benefactor through provision of incentives on the corn sector (Eckes, 1995). 5.0 Other Trade Blocs “Organization of the Black Sea Economic Cooperation (BSEC), Andean Community Countries (ANDEAN), Caribbean Community (CARICOM), European Free Trade Association (EFTA), Commonwealth of Independent States (CIS), Economic Community of West African States (ECOWAS), Common Market for East and Southern Africa (COMESA) Southern Africa Development Community (SADC), South Asian Association for Regional Cooperation (SAARC), Pacific Community, Middle East Free Trade Area (MEFTA), Gulf Cooperation Council for the Arab States of the Gulf (GCC)” How the Composition of Trade Has Changed A critical diagnosis of the change of the trade composition shows that countries opted to come together to form trading blocs with a common interest. Researchers have concluded that regions are on physical proximity, closeness of individual GDPs, governmental commitment to the agreement and relatable trading regimes. Though there have been worldwide debates against regional trade blocs among some supporters of a worldwide free trade policy, it has played an important role in ensuring that trade has expanded (Rees, 1962). Prior to the 60s and 70s, the trade involved was mainly among countries. From an expert point of view conglomeration of some countries in a specific area would have numerous benefits. This was the main idea behind the proposals and eventual formation of economic integration systems. The advantages realized as were foreseen during the Breton Woods conference has seen to it that there is an increase in local and more importantly, global trade. As a result, more trading blocs are being formed and are being encouraged (Pomfrent, 1997). Regionalism is preferred to Multilateral trading system, which was widely favored in the USA among other countries. Even though many scholars argue that globalization is the future of international trade, regionalism has played its part as a strong alternative to prior forms of trade. Whether the argument is for or against current regional trade, analysts have come to a consensus that regional trade is indeed a complement to global trade (Davies, 1966). Between the period of 1960-1984, researches established the reasons that led to a disparity in agricultural production that eventually led to low pricing and fewer commodities at that time especially in developing countries. Substantial policy reforms carried out by the various affected countries and the opening up of their borders to allow for free trade have seen a significant increase in the trade of agricultural production. This research carried out by Valdes, Krueger, and Schiff shows that these strategies also led to a competitive price-setting mechanism and eventually saw the introduction of better and quality farm produce among various blocs (Krueger, Schiff & Valdes, 2010). Having a common market is essential to regional trade. As opposed to having small and segmented markets when trading between nations, trade blocs have introduced a system that has expanded intended markets. Indeed combining countries to form a common market has shifted the composition of trade to a more diverse system of exchanging goods (Kidron, 1972). Before the 1950s, local industries within a country were unprotected against the more established firms of other countries. Cheaper imports, given these circumstances would hurt the local firms and thus local economy. The introduction of trade barriers within giver blocs has ensured that local industries are safe and hence the growth of a nation is GNP (Kindleberger, 1962). The presence of a system of economic integration has further led to the emergence of a common voice under a given bloc. This has enhances collective bargaining and rights of the blocs are heard. This opposed to national trade has a lower impact to the international community especially if the nation in question is a small one. There has also been change in terms of trade diversification and specialization. Absence of trade barriers implies that a nation can get a commodity that member state produce in bulk. This in turn would imply that the same country could concentrate more on increased production of goods that it can easily manufacture in order to have commodities to trade with the other members (Drake, 2004). Over the past four decades, there has been an increased use of the advantages of economies of scale. This is through the free movement of factors of production. Conclusion The emergence of free trade and economic integration has changed the composition of trade drastically. Now member countries view trade from a bloc’s point of view instead of a country’s point of view. This evolution has brought with it diversification in both production and trade, increased security, there is an easier movement of goods, an increase in import and export trade, an opening up of the markets, and increase in production, improvement of infrastructure and free movement of factors of production. Though opening up of borders to free trading has come with its fair share of disadvantages, the benefits have outweighed the disadvantages. References Australia (1994). ASEAN free trade area: Trading bloc or building block?. Canberra: AGPS Press. Bhagwati, J. N., Krishna, P., & Panagariya, A. (1999). Trading blocs: Alternative approaches to analyzing preferential trade agreements. Cambridge, Mass: MIT Press. Bourdet, Y., Gullstrand, J., & Olofsdotter, K. (2007). The European Union and developing countries: Trade, aid and growth in an integrating world. Cheltenham, UK: E. 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