Financial markets

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6 International Trade Agreements

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Chapter Overview Regional economic integration is the process whereby countries reduce or remove barriers to trade (e.g. tariffs, quotas, embargoes, sanctions) between themselves. There are 5 varying levels of regional economic integration; but, the key aim is to increase trade between participating countries and reduce costs for producers and consumers of goods and services.

Elements That Are Addressed in the Process of Integration

These agreements are generally designed to promulgate trade by reducing and/or removing tariff and non-tariff barriers to the free movement of goods, services, and

factors of production. Tariff barriers involve financial methods (e.g., taxes on imports) of protecting national industries from foreign corporation competition.

Non-tariff barriers refer to laws and regulations affecting trade including barriers that governments use (e.g. quotas, embargoes, sanctions, levies) to ensure

Alleviating the barriers to trade of goods and services

Reduction of barriers to investment

Easier movement of labor between members

Tax and monetary policies

Administration of the integration agreement1

accountability and quality.2 “Successful regional economic integration is contingent upon the integration of national economies and multilateral links

between firms and provinces of integrating countries.”3 Cooperation from geographically proximate nations forms a group with the goal of abolishing discrimination between economic units belonging to member nations. The end result promotes transactions in various economic, political, and social activities to benefit all citizens of the participating nations. Thus, the intended outcome of regional economic integration is to promote economic prosperity and stability among signatory nations.

Agreements between participating nations are managed and promoted through

trading blocs. A regional trading bloc is a group of nations in a geographic region

engaged in economic integration.4 Paradoxically, the intent to form a trading bloc may range from the potential of trade creation to the desire for economic protectionism. As such, trading blocs are a notable feature of the international economy, enabling scope and scale advantages—a result of globalization. Signatory nations and their corporations exploit existing competencies, resulting in increased global competitiveness. Some established regional agreements, such as the European Union, incorporate the highest level of integration. Meanwhile, the Americas, Asia, and Africa have created trading blocs with lesser and varying levels of integration. Currently, most industrialized and less-developed nations are participants of at least one trading bloc. It is estimated that more than 50 percent of world trade is conducted through regional trade agreements. This includes bilateral free trade agreements between countries or groups of countries not in the

same region of the world.5

A paradox exists in that trading blocs can provide protection from global competitiveness prompted by nations outside of the bloc. The objectives behind the desire to protect the trade interests of participating regions are as follows:

Establish some form of regional control regarding trade that fulfills the interests of nations within that region

Page 165Measures that are frequently deployed to regulate the effects of global competition include the following:

While the topic of barriers to trade was discussed in Chapter 3, a review of the barriers is included because they are essential to understanding regional economic integration.

For most of the world, regional trading blocs are committed to officiate and develop trade activities for signatory nations. Trading blocs typically maintain two global, environmental business agendas for participating nations: economic benefit and political benefit. The largest trading blocs include the European Union (EU), North American Free Trade Agreement (NAFTA), El Mercado Común del Sur (MERCOSUR), Common Market of Eastern and Southern Africa (COMESA), and Association of Southeast Asian Nation (ASEAN). These blocs trade natural resources, healthcare, labor, and manufactured resources.

Establish tariffs that protect intra-regional trade from “outside” forces

Promote regional security and political concerns or to develop trade in such way as to enhance the security in the region

Promote South-to-South trade, e.g., between Africa and Asia, and between Latin American countries

Promote economic and technical cooperation among developing countries

Import quotas (limiting the amount of imports into the country so that domestic consumers buy products made by their countries in their region)

Customs delays (establishing bureaucratic formalities that slow down the ability for the imported product from abroad to enter the domestic market

Subsidies (government financial assistance toward sectors of the home economy so that they have an influx of capital)

Boycotts and technical barriers

Bribes and voluntary restraints6

These agreements are designed to reduce and ultimately remove tariff and non- tariff barriers to the free movement of goods, services, and factors of production between each other. A major benefit is improvements in the standards of living for signatory nation citizens. The global business professional understands that these trade blocs develop over time, and generally follow a sequence of evolutionary stages.