ECONOMIC INTEGRATION: AN OVERVIEW OF THE THEORETICAL AND EMPIRICAL LITERATURE (original) (raw)
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Understanding the Welfare Implications of Preferential Trade Agreements
Review of International Economics, 2000
This paper examines various implications of preferential trade agreements, namely customs unions and free trade areas, in the context of a multicountry general equilibrium model. The model is calibrated to represent countries with symmetric endowments, and aggregate and disaggregate welfare change measures are used to quantify the welfare effects of preferential trade agreements. It is found that free trade areas are better than customs unions on welfare grounds for the world as a whole. Welfare decompositions suggest that a significant fraction of the welfare changes is explained by the volume-of-trade effect for both types of preferential trade agreements.
A political economy analysis of free trade areas and customs unions
1994
Following lead, trade theorists have generally treated trade policy as exogenous in evaluating the welfare effects of preferential trading arrangements. The general approach has been to start with a tariff distorted equilibrium and ask whether a particular set of preferential tariff reductions between union partners is welfare-improving for each participating country, the union and the world as a whole.'
Trade liberalisation and economic integration are central to the success of the Treaty establishing the Common Market for Eastern and Southern Africa (COMESA) regional trading bloc. COMESA's liberalisation and integration programme boasts of a free trade area (FTA) launched in the year 2000 in which at least half of the twenty member states are currently participating. The regional bloc's integration programme is envisaged to be taken further through the formation of a customs union via a common external tariff (CET) planned to be in place by end of 2004. This study provides a quantitative assessment of the likely implications of the implementation of the COMESA Treaty to establish the FTA and then form a customs union through the CET. The focus of the analysis is on the implications of the accompanying trade liberalisation on macroeconomic aggregates including those that have a bearing on poverty reduction; industry structure; welfare; and the trade diversion versus trade creation question. The study uses a multi-country multi-commodity applied general equilibrium model ⎯ GTAP (Global Trade Analysis Project) ⎯ in its analysis. The study sought to provide empirical evidence relevant to the policy debate on the following questions. First, what countries gain and which lose based on the impacts on GDP, employment and other macroeconomic aggregates from the FTA and customs union. Second, based on the empirical evidence of the resulting industry structure from the FTA and customs union formation, what can be said on the question of whether COMESA should proceed at its current speed to be a customs union considering that some of its members are also members of the South African Development Cooperation (SADC), which also aims to move to a free trade area although at a reduced speed than COMESA. Third, using the simulation results of the implications of the FTA and customs union on value added in different sectors, can the study show what sectors lose and what sectors gain for each of the five COMESA member countries. Fourth, what are the welfare implications for the five COMESA member countries and which of them gains and which lose from the FTA and the customs union? Fifth, how does the formation of COMESA FTA and customs union affect trade expansion through the trade creation and trade diversion effects? The following are some of the findings of the study. COMESA is better of with free trade. There are positive economic gains for all regions from free trade. So the regional bloc should move to liberalise faster to realise the gains. While some countries will benefit more, the implementation of the liberalisation policies would need to be undertaken with long-run outcomes in mind. Second, the economic gains from the liberalisation process will need to be placed in perspective of the entire political and strategic interests of different member nations in COMESA. Policies to distribute gains equally and efficiently might also need to be formulated. Third, it is clear from the study that COMESA seems better off with a customs union. While FTA gives good outcomes, the customs union must be preferred. However, the analysis of our results have also suggested that the medium-term framework of the transition from FTA to a custom union may not be appropriate as the sectors where growth from the customs union would be optimised take longer to adjust. Fourth, the results from both the FTA and customs union implementation are clear that trade diversion will not take welfare gains away. So the counter arguments for free trade policy in the region are not so valid. Member nations should consider trade liberalisation as a serious policy. It is a policy that has potential to contribute to poverty reduction in the long-run especially from lower incidence of income poverty.
Understanding the Welfare Implications of Preferential Trade Agreementsa
2016
Abstract: This paper examines various implications of Preferential Trade Agreements (PTAs), namely Customs Unions (CUs) and Free Trade Areas (FTAs), in the context of a multi-country general equilibrium model based on comparative advantage considerations. We calibrate the model to represent countries with symmetric endowments, and compare the impact of those agreements with free trade and a non-cooperative Nash equilibria. Utilizing aggregate and dis ggregate welfare change measures, we quantify the welfare effects of trade arrangements. In particular, we develop a numerical approximation procedure to decompose the welfare changes into two components associated with the variations in terms of trade and volume of trade. The results of our analysis indicate that FTAs r bet er than CUs on welfare grounds for the world as a whole since both member and nonmember economies enjoy welfare benefits in an FTA. Further, we show that, for certain endowment distributions, upon formation of an FT...
Deepening of regional integration and multilateral trade agreements
Journal of International Economics, 2001
We construct a three-country, two-bloc, multi-product trade model in which tariff agreements between customs union members are binding whereas inter-bloc tariff agreements are self-enforcing. Our main objective is to explore how the liberalization of trade between customs union members (i.e., the deepening of regional integration) affects the sustainability of tariff agreements with the rest of the world (ROW). We derive conditions under which Kemp-Wan (1976) adjustments in the external tariffs of union members result in self-enforcing tariff agreements with ROW, and then use these adjustments to evaluate the general tariff-setting incentives of all trading partners. Our analysis reveals that the deepening of regional integration may enlarge the set of self-enforcing tariff agreements, and that this possibility crucially depends on the degree of substitutability in consumption. We also study the effects of regional integration on welfare and incorporate political-economy considerations into the analysis.
Welfare Effect of Free Trade Agreements: A Theoretical Note
Foreign Trade Review, 2019
Kemp and Wan (1976, Journal of International Economics, 6(1), 95–97) show that customs unions can be welfare enhancing if the imports from the rest of the world (ROW) by the union members are fixed both before and after the formation of the union. This note extends their argument to the case of (a) two small open economies (SOEs) joining a free trade agreement (FTA) and (b) a single SOE joining a pre-existing FTA among similar economies. The particular compensation principle considered is the one suggested by Grinols (1981, Journal of International Economics, 11(2), 259–266). According to this argument, welfare gain is ensured if tariff revenue rises in the post-FTA situation. For our case, this compensation principle translates to the following: welfare gain can be ensured only when import from ROW (with whom the FTA was not signed) rises. Since this will amount to a (meaningless) negative trade diversion effect in the context of the FTA, the source of any such revenue rise has to ...
On necessarily welfare-enhancing free trade areas
Journal of International Economics, 2002
The well-known Kemp-Vanek-Ohyama-Wan proposition establishes that if two or more countries form a customs union (CU) by freezing their net external trade vector through a common external tariff and eliminating internal trade barriers, the union as a whole and the rest of the world cannot be worse off than before. Owing to the fact that a Free Trade Area (whose member countries impose country specific external tariff vectors) does not equalize marginal rates of substitution across its member countries (in contrast to a CU), the literature has been unable to provide a parallel demonstration regarding welfare improving Free Trade Areas (FTAs). The present paper eliminates this gap. In extending the result to the case with intermediate inputs, the paper also sheds new light on the rules of origin required to support such necessarily welfare enhancing FTAs. We show here that provided no trade deflection is permitted, all that is required by way of rules of origin is that the goods produced within the union -whether final or intermediate -be allowed to be traded freely. The proportion of domestic value added in final goods does not enter as a criterion in the rules of origin.