GS-3, Indian Economy, Uncategorized

Economic integration and different types of trade agreements

What is economic integration & why go for it?

Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state.

  1. The objective of this integration is to increase the combined economic productivity of the countries – easier access of goods and services
  2. Other by-product of integration is competitiveness. If 4-5 countries come together to form a closely knit family (of sorts), they would create barriers to entry of an external (possibly much larger player) to disrupt the region with cheaper goods

What is a trade agreement?

A trade agreement is a contract/agreement/pact between two or more nations that outlines how they will work together to ensure mutual benefit in the field of trade and investment.

This can be bilateral (2 countries) or multilateral (2+ countries). 

Once a trade agreement is finalised, we get to read about these Trade Blocs – a type of intergovernmental agreement, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

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trade-agreements-hierarchy

 

#1. PTA – Preferential trade agreement

A preferential trade agreement, is a trading bloc that gives preferential access to certain products from the participating countries.

This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. 

Some examples:

  • Asia-Pacific Trade Agreement (APTA): formerly known as the Bangkok Agreement, was signed on 31st of July 1975 as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). ESCAP is the regional development arm of the United Nations for the Asia-Pacific region.
  • India-Mercosur Preferential Trade Agreement (PTA): Mercosur is a sub-regional blogs with its member countries – full members are Argentina, Brazil, Paraguay, Uruguay and Venezuela.

#2. FTA – Free trade agreement

A free-trade area is a trade bloc whose member countries have signed a free-trade agreement (FTA), which eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them.

Please note that you cannot distinct PTA and FTA by just saying that the former has fewer barriers and later has no barriers at all. FTA does not mean everything is free! PTA closely follows FTA.

  • Evolution of SAPTA to SAFTA (South Asian PTA to FTA)
  • ASEAN FTA (Trade agreement within the Southeast asian nations)

What would happen if countries want to move more closer (beyond material trade)?

When the countries go beyond FTA and agree for a greater degree of economic integration which includes improving the attractiveness to capital and human resources, and to expand trade and investment, it would result in CECA or CEPA.

  • CEPA = Comprehensive Economic partnership Agreement
  • CECA = Comprehensive Economic Cooperation Agreement

CECA and CEPA have very minor differences, if you will. While CECA comes first with elimination of tariffs, CEPA comes later including trade in services and investments. CEPA has a bit wider scope than CECA.


#3. Customs Union

An agreement among countries to have free trade among themselves and to adopt common external barriers against any other country interested in exporting to these countries.

Some examples:

  • Southern Common Market – Mercosur (Argentina; Bolivia; Brazil; Paraguay; Uruguay; and Venezuela)
  • Gulf Cooperation Council (GCC) – Its member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates
  • East African Community (EAC) – composed of 5 countries in the African Great Lakes region in eastern Africa: Burundi, Kenya, Rwanda, Tanzania, and Uganda

#4. Common Market

A type of custom union where there are common policies on product regulation, and free movement of goods and services, capital and labour.


 

#5. Economic Union

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy.


#6. Economic and monetary union

When an economic union involves unifying currency it becomes a economic and monetary union. Eg – Euro!

 

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