Free Trade Agreement and Economic Blocs - Coursework Example

Economic Integration xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Free Trade Agreement and Economic Blocs xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Instructor Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Submitted Table of Contents Table of Contents 1 1.0 Introduction 2 2.0 Scope of the argument 4 3.0 Stages of economic integration 4 3.1 Free Trade Agreement 4 3.2 Custom Unions (CU) 5 3.3 Common Market 5 3.4 Economic Union (EU) 6 4.0 Free Trade Agreement and Economic bloc as building blocks 6 4.1 Fostering of new markets 6 4.2 Improvement and exchange of knowledge through new technology 8 4.3 Reliable prices of goods between members’ nations 8 4.4 Productive competition among member countries 9 4.5 Increase flow of goods and services across nation members’ borders 10 4.6 Fostering political and social stability 10 4.7 Effective use of resources/ stimulation of investment/ economies of scale 11 5.0 Conclusion 12 5.0 References 13 1.0 Introduction In the recent past, various countries have been involved in engaging in economic integration. Economic integration is defined as an arrangement existing between different regions which is widely marked by minimal or elimination of trade barriers through the harmonization of economic and monetary policies. In simpler terms it refers to elimination of both non tariff and tariff barriers to flows of factors of production, services and goods between different regions of a nation or group of nation (Christiansen 2006). The aim of nation engaging in economic integration is to minimize costs for producers and consumers as well as maximizing on trade between nations taking part in the agreement. This study will widely focus on determining whether economic bloc and free trade agreements are building blocks or stumbling blocks in relation to regional economic integration as far as liberalized trade is concerned. It is quite evident that trade facilitation have recently become a hot debate between scholars and policy makers. According to Christiansen (2006), while many economic tariffs are becoming more liberalized, trades across the globe are encountering problems of moving goods and services across the borders. Researches indicate that trade facilitation by way of economic integrations reforms are broadly increasing international trade and the impact displayed by these integrations is considered to be significant especially those in relation to tariff elimination. Because economic integration requires a broad comprehensive approach, most researchers are currently grappling with the debate of understanding whether economic bloc and free trade agreements are stumbling block or building block as far as liberalized trade is concerned. The paper will employ a broad definition of key terms that facilitate economic integration. David (2009) asserts that, economic integration measures under the Free Trade Agreement (FTA) and economic bloc are very important because the substantial non-tariff barriers existing among FTA members. It is quite observable that even with elimination of tariffs by many nations, goods and services may not be traded smoothly even between FTA members. Further, while various multilateral organizations such as world Custom Organizations (WCO) and World Trade Organizations greatly focus on the creation of international principles and standards of economic integration, various concrete measures need to be implemented at both bilateral and regional segments. This is because both regional and bilateral levels of trade liberalize trade that greatly entails coordination in terms of facilitating trade flows. 2.0 Scope of the argument In the past, free trade agreements in relation to economic integration were highly regarded as precursors to interior oriented economic blocs thus being considered as stumbling blocks. However, this argument has shifted from being stumbling block to building blocks since they are been considered to have a positive impact on global trade liberalization. This study will therefore focus on discussing Free Trade agreements and economic blocs as building blocks rather than stumbling blocks as far as trade liberalization are concerned. 3.0 Stages of economic integration As global trade and investment level continue to increase, it is quite notable that economic integration between nations is also broadening. The known economic integration include European Union (EU), North America Free Trade Agreement (NAFTA), Mercado Comun del Cono Sur (MERCOSUR) and Association of Southeast Asian Nations (ASEAN). Although it is quite obvious that most relationships between countries do not follow a certain precise pattern, economic integration which is formal perceived to follow stages which initially focus on removing the various trade barriers thus establishing a strong economic union (David 2009). 3.1 Free Trade Agreement Free Trade Agreement is considered as the initial stage of economic integration. This stage ensures that import tariffs are eliminated as well as import quotas between members’ countries. These agreements have been perceived to be limited to few sectors or in a broader perspective it encompasses all aspects involved in within global trade. Further these agreements have developed certain formal mechanisms that assist in resolving of disputes thus creating an economic understanding between members’ countries thus co-ordination and stability. It is perceived for FTAs to function properly, all its members should greatly establish rules of origin for all goods and services entering the predesigned free trade area. Goods that are usually produced with the designed free trade area may cross border tariffs with no payment but, rules of initial requirements must be met to clarify that the goods were actually produced in the exporting country. 3.2 Custom Unions (CU) A CU is usually built on a free trade area. Here, other than internal barriers of trade there is the requirement that members’ nations harmonize their stipulated trade policies. These policies include the establishment of a common external tariff and substantial import quotas on the various products and services entering the free trade area from third party countries (Christiansen 2006). The policies further indicate the need of establishing a general trade remedies such as countervail measures and anti-dumping of goods. The chief or main benefit of CU is the elimination of original need of rules over the designed free trade area. In order to gain maximum benefits within a CU, members’ nations have to do away with certain degree of freedom and especially that which possesses the ability of setting an independent trade policy. 3.3 Common Market Common market is a greater representation of a major step towards economic integration. From all the provisions contained in the CU, common market eliminates all barriers in relation to people mobility, capital and resources within the free area trade in question. In addition, the common market ensures that regulatory treatment of products standards are eliminated across borders (Edward 2008). It is evident the establishment of a common market requires efficient policy harmonization with the designed free trade area. For instance, free movement of labor widely necessitates agreement on a staff certification and qualification. The main advantages associated to common market are that there are great expected gains in economic efficiency. 3.4 Economic Union (EU) EU is defined as the deepest form of economic integration that adds up to the needs of a common market harmonizing key policies within a free trade area. Usually, most EUs requires formal coordination of both fiscal and monetary policies not forgetting industrial and transportation policies, regional development and labor market. Further, most economic unions are frequented with a common currency with designed unified monetary policies. A common currency ensures that high exchange rates are eliminated thus great improvement in the EU functioning since trade is allowed to flow within economic efficient paths without being affected by high exchange rates (Edward 2008). 4.0 Free Trade Agreement and Economic bloc as building blocks The following described points emphasizes on why free trade agreement and economic bloc are considered to be building blocks as opposed to stumbling blocks, in relation to economic integration as far as trade liberalization is concerned. 4.1 Fostering of new markets It is quite observable that with good structured FTAs and economic blocs that are implemented under the principles of inclusiveness and openness, economic blocs and FTAs are considered to be building blocks as opposed to stumbling blocks in this era of globalization. This is because FTAs and economics blocs have been in the forefront of fostering new global markets openings in various designated ways (Hettne 2003). Firstly, FTAs are considered to achieve a broader economic integration among its members as opposed to multilateral accords due to their commonness in interest and simpler and reliable negotiating basis. Further, the FTAs process is considered to be a self reinforcing that is usually set through the establishment of free trade area. Evidently, ad these free trade areas enlarges it widely displays attractive measures that pulls non members to join so as to receive the same trade preferences that are been enjoyed by member nations (Hettne 2003). Free Trade Agreement as well as economic blocs is considered to make sense since there display the relation of investment and trade as the key building blocks towards these ties. Since FTA agreement between India and ASEAN, the volume of trade and investment has increased in these two regions. These open up markets for increased competitive exports due to shorter delivery duration which are coupled with low cost thus facilitating more exports as opposed to imports (Hettne 2003). Further, both FTAs and economic blocs have helped various nation members in realizing the potential and advantage displayed in investment and trade between members’ countries. It is evident that once cross border barriers have been eliminated there is usually a sense of dynamism that ensures that products factors are effectively distributed in members. Nation engaging in economic integration is enjoying lower prices of goods and services, transfer of productive knowledge, increased competition which result in high growth in economy (Jong-Wha 2005). 4.2 Improvement and exchange of knowledge through new technology FTAs and economic blocs in relation to economic integration and trade liberalism not only does it affect import and export patterns but also improves technology within member countries. Increase and improvement of technology is considered to be a building block since member countries are able to work effectively and efficiently. Knowledge from improved technology is distributed among member countries enable faster growth in economy through to increase accumulation of knowledge (Wild 2010). It is quite significant that combination of endogenous growth with new ideas that arises from new technologies stimulate not only growth of economy but also social and political stability. This enhances human capital that causes increase in research to spread across members’ countries thus improvement in production and business operation. In this way trade liberation that arises from economic integration ensures that developing countries are on a structurally greater growing path just like the developed countries. Further, empirical research indicates that role of economic integration by way of FTAs and increased new technology stimulates knowledge spillovers between developing and developed countries. 4.3 Reliable prices of goods between members’ nations According to Jong-Wha (2005), trade reforms that are usually part of FTAs and economic blocs are widely involved in setting off of prices. Therefore, trade liberation normally increases export prices while minimizing importing prices which an economic advantage to its nation members. The great existence of various functional distribution channels (wholesalers, retailers and transporters) determine price changes in countries that are non FTA members thus incurring extra economical price. It is observable that when diversity between countries is intensified goods consumed increases resulting to positive effects since marginalized individual purchases goods that are cheap thus increasing the purchasing power of certain commodities. It is certain that when there is tremendous growth in a countries economy, the poor people are considered to benefit more based proportional basis. Further, trading reforms which are in the likes of polices widely create an effect that highly promotes trade within member countries (Sutherland 2000). Due to trade liberation, more countries take up the opportunity of homogenizing their own policies placing more focus on economic integration. Such trends in economic trends and trade liberalization create broader similarities in market laws and practices within nation members so as to create a standardized region (Sutherland 2000). This result to minimal costs linked to global commerce thus adapting approaches of finding new markets. Free Trade Agreement and economic bloc are building blocks in relation to economic integration because they have well designed commitment mechanism which is usually build upon reciprocated preferences. The commitment is that which is based on I reduce tariffs if and only if you reduce them against me. This widely is considered to ensure that there is no likelihood by any member country to reverse its trade liberalization since if it reneges on the stated preferences this will lead to cancellation of the agreement. 4.4 Productive competition among member countries Based on ASEAN and India, this Free Trade agreement highly aims at establishing a liberal, competitive and transparent trade between these two parties. With current globalization, trade flow between ASEAN and India has intensified since the drawing of this agreement. This widely defined the agreement as a building block as far as liberalized trade is concerned. It is due to these agreements that India has been able to come up with a substantial liberalized trade policy framework widely coupled with liberal investments (Tina 2011). This has been of benefit not only to the India government but rather it has broadened up opportunities for Indian markets across Asia. The agreement has further created joint venture that exist between ASEAN and India by way of pooling together their strength thus grabbing all advantages of any emerging opportunities brought about by increased globalization. Free trade agreements have greatly improved infrastructure of members’ countries improving their roads, transits systems, ports and communications. Improved infrastructure then have led to the improvement of health sector, banking system to facilitate multilateral trade and integrated regional and national townships. 4.5 Increase flow of goods and services across nation members’ borders Free Trade agreements and economic bloc are considered to be building blocks as most nations engage in them as a way of increasing flow of goods and services across the borders. This is very important since these agreements and blocs reduce indirect and direct barriers that tend to exists between different nations. Both FTA and economic blocs also known as trade blocks are considered to be main global trends (Kelly 2004). These agreements and blocs have been found to widely revolve along geographical boundaries thus creating a harmonized trade relation. It is observable that such economic conglomeration displayed in FTAs and trade blocks creates a major role of ensuring that developing countries are not marginalized on trade basis. Recent studies show that conglomeration displayed by both regional and world trade such as ASEAN, EU and NAFTA greatly fuel economic growth globally (Tina 2011). 4.6 Fostering political and social stability Free Trade Agreement has widely been considered to be fostering political stability among member nations. This is very essential since there is greater support and continuation of democratic processes between countries thus, reducing on the likelihood of both social and political disruptions. For instance, this can be elaborated by the greater motivation that exist in United States in its liberalization with Mexico trade was to promote a democratic government that will highly focus on introducing market oriented policies. This ensures that open markets enhances economic growth thus improving Mexican way of leaving and increase economic prosperity thus a stable political free trade area (Kevin 2010). FTAs and economic blocs as far as trade liberalization is concerned encourage members’ nations in undertaking various political, social and economic reforms for their own benefit. For example, NAFTA helps in creating a stable political environment for its members so that to ensure there is maximum trade liberalization. Based on social stability, economic blocs and free trade agreement creates a free trade area that is free from poverty (Rosamond 2000). This is achieved by way of improving border educational systems, health care, sewage and water so as to accommodate population increase. For instance, free trade agreement existing between Mexico and United States, united states have assisted in increasing effort on Mexican government in coming up with major ways in which both air and water pollution can be controlled. Goods that are exchanged between these two countries are packed with materials that ensure there is minimal pollution due to their recyclable nature. 4.7 Effective use of resources/ stimulation of investment/ economies of scale Countries that are establishes there trade through FTAs and economic bloc are able to effectively utilize their economic resources due to the free movement of capital and labor. Based on the overall efficiency of both individuals and industrials organizations there is a likelihood of increasing on additional labor and greater accessibility to low cost capital (Lamy 2000). This automatically indicates that there are low consumer cost thus high incomes to organizations. Further, formation of economic blocs and FTAs stimulates outside investment in both marketing and production thus maximum utilization of economic resources. In order for member nation to attain a more advantageous competitive ground and to maximize its investment, these agreements act as building blocks towards achieving this since they ensure that resources are greatly utilized. Another benefit linked to FTAs and economic blocs is that of economies of scales. Enlarged market areas that are usually created by economic blocs and free trade agreement substantially tend to increases members’ economies of scale. It is evident that if production process in members’ countries possesses a certain designed economic of scale then, there will be increase in output thus reduced consumer prices. Most countries that enjoy economic integration indicate that after becoming part of FTA and economic bloc, they were able to achieve great economic of scale in their industrial organizations (Tina 2011). 5.0 Conclusion In conclusion, it is quite is evident the concept of economic blocs and free trade agreement is crucial step towards enhancing and promoting international trade. Clearly, in relation to economic integration and trade liberalization, these two can be termed to be more of building blocks as opposed to stumbling block. Although, there are factors that categorize economics blocs and free trade agreement to be stumbling blocks, the large numbers of factor that categorizes them into building blocks out do them. The importance of these two has widely contributed to improvement of economic, social and political environments of member nations. Further, with the current global economy, more countries are realizing the need of coupling in trade so as to establish an economic competitive advantage. It is therefore important to state that the primary aim of both FTAs and economic blocs is that of establishing a favorable economical framework thus alienation of poverty among citizens of member countries. It is quite evident that most of the known economic integration has created a feeling of trade liberalization, which is an important factor towards promoting strong relations between member countries. In order for countries to improve on their trade capabilities within this era of globalization, there is need for them to consider economic integration not only for economic improvement by also for their citizen improved living conditions. 5.0 References Christiansen, T. 2006. ‘European Integration and Regional Cooperation’, in John Baylis and Steve Smith, eds., the globalization of World Politics: an Introduction to International Relations, third edition. Oxford: Oxford University Press. pp. 579-597. David, L. 2009. Trade creation and diversion effects of preferential trade associations on agricultural and food trade. Journal of Agricultural Economics 60:1, 17-39. Edward, D. 2008. International institutions and the volatility of international trade. International Organization 62:04, 621. Hettne, B. 2003. ‘Global Market versus the New Regionalism’, in David held and Anthony McGrew, eds., The Global Transformations Reader; an Introduction to the globalization Debate .Cambridge: Polity Press. pp. 359-369. Jong-Wha,L. 2005. Free Trade Areas in East Asia: Discriminatory or Non discriminatory?. The World Economy 28:1, 21-48. Kelly, B. 2004. ‘Economic Globalisation?’, in David Held, ed., A Globalising World? Culture, Economics, Politics. New York: Routledge, pp. 85-125. Kevin J. 2010. Trade Agreements and Trade Opportunities: A Flexible Approach for Modeling Australian Export and Import Elasticities. Review of International Economics 18:3, 513-530. Lamy, P. 2000.. "Stepping Stones or Stumbling Blocks? The EU's Approach towards the Problem of Multilateralism Vs Regionalism in Trade Policy." The World Economy 25 (10): 1399-413. Rosamond, B. 2000. Theories of European Integration, the European Union Series. New York: St.Martin's Press. Sutherland, W. 2000. "Global Imperatives and Economic Reform in the Pacific Island States." Development and Change 31(2): 459-80. Tina M. 2011. Nonreciprocal Trade Agreements and Trade: Does the African Growth and Opportunity Act (AGOA) Increase Trade? International Studies Perspectives 12:1, 46-67. Wild, J. 2010. The challenges of globalization. International business. JCY: Pearson Education Press. Read More