Chapter_8_International_Trade_Agreements

Examples are the european union eu and the signatory

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Examples are the European Union (EU) and the signatory countries of Mercosur South America. All countries in the EU have identical tariffs with respect to each outside country, as does Mercosur.
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Regional Trade Agreements Rules of Origin If China is looking to export a good to Canada, it will want to do so at the lowest cost. If Canada has high tariffs on that good, but Mexico has low tariffs, why not export to Mexico and then trade it freely to Canada? Free trade areas have complex rules of origin. Specifies what type of goods can be shipped duty-free within the free trade area. The good from China to Mexico would not get duty-free access to Canada in this example. The good would first have to be used in the production of another good giving it enough “North American content” to qualify for duty-free access.
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Regional Trade Agreements Rules of Origin Specify, for each and every product, how much of its production has been done in North America. These rules are clearly not needed in a customs union since all the countries have common tariffs with outside countries. So why not just create a customs union and make it easier? Because tariffs with outside countries are a political issue, of which many countries wish to maintain control. So what are the economic effects of regional trade agreements, in either case?
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Regional Trade Agreements Trade Creation and Trade Diversion When trade agreements are made, the increased trade can be of two types. 1. Trade creation occurs when a member country imports a product from another member country that it made for itself before. Gain in consumer surplus for importing country due to lower prices. Gain in producer surplus for exporting country due to increased sales. No other country is affected because the good was not traded at all before—welfare gains for both countries. Same as opening trade effect in Ricardian or HO models.
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Regional Trade Agreements Trade Creation and Trade Diversion 2. Trade diversion occurs when one member country imports a product from another member country that it was previously importing from an outside country. –. Trade is taken away from one country and moved to another country. –. This is not always the most efficient move since the former country might have been producing at lower costs, but due to changes in tariffs, it ends up cheaper to import from the member country.
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Regional Trade Agreements Table 11.1 Cost of Importing an Automobile Part
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Regional Trade Agreements Numerical Example of Trade Creation and Diversion (Table 11.1) Trade Creation Assume there is a 20% tariff. After NAFTA, the U.S. will import from Mexico for $20, since it costs more to import from Asia ($22.80) or to make it themselves ($22).
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