final project draft

Are RTAs helpful or harmful to the world economic system?

ECN 500: global Economics

Colorado State University – Saudi Electronic University

Anas Mohammed S Althaqeb

2nd December 2013

Introduction

Regional Trade Agreements (RTAs) refer to trade accords that a country signs with others in order to gain preferential treatment when trading with them within the agreement (Carbaugh, 2011). These agreements allow countries to trade preferentially with each other capitalizing on resources and other common interest? . Owing to the numerous advantages that RTAs have brought not only to specific countries but also to group of countries, they have increased in numbers across the entire world. Since their inception in the late 20th century, RTAs have spread rapidly. Thew foucs of this paper is to assess RTAs and their impact on the world economic system? It is important to mention that the lack of progress in international trade negotiations does not undermine the steps that international players have made to enhance global trade liberalization. To the contrary, many governments in the international markets are proactive in trying to negotiate new RTAs (Bhagwati, 2008). For instance, despite the global financial crises that typified the world in 2008-2009, World Trade Organization (WTO) confirmed over 25 new regional trade agreements. This research paper utilizes the latest research, global occurrences and empirical research that expound on regionalism. In addition, paper will draw insights from various texts that have been instrumental throughout this course. As such, the main aim of this paper is to explore whether the increase of RTAs have a positive impact on development or a cause of concern.

Impacts of Regional Trade Agreements (RTAs)

At the outset, it is imperative to highlight that regional trade agreements may lead to market liberalization as well as discrimination Source. While it is true that trade liberalization is critical for international trade, trade discrimination is undesirable especially in the contemporary global economy. However, some economists argue that such ‘objective discrimination’ could be productive if the resources are directed from inefficient domestic suppliers to a more efficient market (Bhagwati, 2008). In other words, such trade discrimination leads to the creation of new trade opportunities in the global economic arena (Bhagwati, 2008). According to them therefore, trading blocs and regionalism does not necessarily lead to negative discrimination especially when they generate resources from inefficient markets to efficient markets. Significantly, Limao (2006) argues that discrimination may be apparent particularly when a specific trading bloc generates resources from advanced and efficient suppliers to inefficient producers within the region. This is referred to as trade diversion. To that end, regional trade agreements may lead either to creation of trade or diversion of the same. Include a sentence on the effects.

Various theoretical frameworks advocate for the impacts of RTAs especially when they create trade. They argue that the essence of international trade is to increase movement of goods and commodities and as such create trade (Limao, 2006). To them, trade creation should be the primary focus of trading blocs. As such, trade diversion is an unintended consequence that should not overshadow the primacy of trade creation. It is therefore important to use empirical methods to quantify the effects of RTAs. Unfortunately, quantifying the effects of RTAs is not always a simple matter for both economists and other interested parties (Carbaugh, 2011). The rationale is that it requires extensive knowledge of what could happened were the trade agreements not in place. This is a rather assumptive argument and as such, not a reliable and empirical method of measuring the effects of RTAs.

Other approaches are important in unraveling the arguments made for or against trading blocs and RTAs in general. Many models and schools of thought attempt to analyze the impacts of regional trade agreements, h However, the results are not consistent. The reason is that the different studies dwell on specific research methodologies and the time frames the way conducted (Limao, 2006). Besides, results for different regional blocs are always dissimilar. For instance, results of a research seeking to understand the impacts of EU-South Korea Free Trade Agreement could be fundamentally different from a similar research conducted on EU-Canada Economic Integration Agreement. Despite the inconsistencies that have been apparent in a myriad of studies, it is almost unanimous that many RTAs create trade as opposed to diverting trade (Carbaugh, 2011). In addition, when there is trade diversion resulting from RTAs, its scale is usually relatively insignificant.

Trade Creation and Low Tariffs

According to various authors, trade creation dominates the impacts of regional trading blocs. The rationale could be that governments are always able to choose their trading partners exemplary well. According to Baier & Bergstrand (2004), trade creation is always the result of many bilateral agreements because the countries within an agreement have more similarities than differences. For instance, many countries that form a specific trading bloc have the similar GDPs and are located close to each other. As such, they experience similar economic and political factors.

It is important to mention that countries that formation of trading blocs tend to lower external tariffs or eliminate . This does not only happen amongst the trading partners but also to importing countries that do not belong to the RTA (Limao, 2006). In other words, when a country lowers its tariffs in order to comply with a specific requirement of the trading bloc they belong, it follows therefore that if they do not lower tariffs for non-members, the other countries will not reciprocate. As such, RTAs ensure that other countries benefit from liberalization that follows such activities. This has been a major contributor to economic development in developing countries. Coupled with regional trade agreements, the double liberalization of international trade increases the benefits accruing the developing countries. This implies that RTAs lead to more trade creation than the actual trade creation trading countries sign in an agreement This is excellent, expand on this analysis In other words, the countries’ decision to liberalize the market may lead to reduced diversion of trade as anticipated.

Further, it is essential to emphasize that governments reduce their tariffs voluntarily in RTAs. As such, it is not always expected that such moves would lead to reciprocity from the member countries. Although it may seem counterproductive for some countries to reduce their tariffs, they serve the purposes of stimulating further trade not only in the short run but also in the long term (Baier & Bergstrand, 2004). For instance, if a government experiences political pressures and sets unreasonably high trade tariffs for the benefits of its domestic economy, it would be unreasonable for the country to enter a trade agreement with other countries. Give an example of country and product

The rationale is that it would be forced to lower its tariffs to salvage its import-competing firms within the same region. They would undoubtedly suffer from tough competition and discrimination from such trading blocs (Baier & Bergstrand, 2004). In addition, it is important to highlight that various aspects of unreasonably high tariffs could injure the protectionism regime of a specific country. The rationale is that the free access to markets of members of a specific trading bloc may adversely affects the market share of the local industry that might be forced to liquidate or exit the market at the expense of domestic economy (Limao, 2006). To that end, it is essential to note that regional trade agreement makes it increasingly difficult for other member states to raise their external tariffs.

As elucidated by Carbaugh (2011), regional trade agreements may create an outflow of revenues in an otherwise redistributive channel. The rationale is that external protection has become an avenue of more costs than anticipated revenues from such international or regional trade arrangements. In fact, raising tariffs within a trading bloc leads to incidences of trade diversion as opposed to trade creation. According to Carbaugh (2011), external tariffs usually fall when RTAs are formed because t the cost of external protection rises while at the same time gains increase in political economy in the end. According to various studies conducted on RTAs, lowering tariffs is important for the development of underdeveloped countries and has much remuneration not only for the partners but also for non-members. This does not apply for industrialized countries such as United States and Britain. Economists say that preferential trade blocs of developed countries do not necessarily need to reduce their external tariffs. This is because their tariffs are very low for the countries and can rarely be raised due to RTAs.

Critique

While many economists tend to argue that regional trade agreements are always encouraged and productive, it is important to highlight various shortcomings of the RTAs. They argue that World Trade Organization (WTO) is currently experiencing stagnant negotiations due to the rapid spread of the RTAs. RATs comprise global trade arrangements? The rationale is that many countries have pledged too much commitment to their respective trading bloc and as such, they are unable to commit themselves fully to WTO. This has impeded further trade liberalization. To counter the arguments highlighted by the opponents, proponents of RTAs pinpoint that the increase of regional trading blocs could help countries to have better experience of how the trading blocs work. This would not only lead to more liberalization but also help WTO to increase their ability to resolve issues that affect international liberalization. As such, it is important to highlight that the arguments and counter arguments cannot lead to a consensus unless we evaluate the opposing views empirically. All economists should ensure that the perspectives regarding whether RTAs are beneficial or harmful are subjected to empirical research methodologies. This way, it is possible to strike a balance between various perspectives and points of view.

Summary

Apparently, there has been a wave of trade blocs across the world that has been instrumental in the world trading system. Most studies point out that regional trade agreements imply trade creation due to the ability of governments to choose their partners appropriately due to similarities in terms of economic performance and geographical location. However, RTAs could lead to trade diversion especially when some countries within a specific trading bloc decide to raise external tariffs due to political pressures. To that end, it remains unclear whether the RTAs threaten international trade liberalization or they strengthen the already liberalizing world. It is therefore imperative to conductive empirical research to ascertain different outcomes of RTAs in various regions and specific countries (Baier & Bergstrand, 2004).

In the next parapgran. Conclude with some recommendations…..

References

Baier, S. & Bergstrand, J. (2004). Economic Determinants of Free Trade Agreements Journal of International Economics, 6(4), 29-63.

Bhagwati, J. N. (2008). Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Oxford: Oxford University Press.

Carbaugh, R. (2011). International Economics. 13th Ed. Mason, OHIO: Cengage Learning.

Limao, N. (2006). Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the US. American Economic Review, 9(6), 896-914.

�Empirical means your original research, not cited works.