Question

1. Regional trade agreements (RTA) were covered in class, where the arguments suggested by the proponents and the opponents of RTA were also discussed. State your personal opinion on RTA focusing on potential benefits and damages for world trade and giving examples.

Answer 1

Regional Trade agreements, are contracts between the countries which aim at reducing the trade and tariff barriers and allows for relaxation of trade among member countries. Since the establishment of International agencies such as the World Trade Organization, Regional Trade Agreements have become extremely popular among countries. The following are some of the key advantages and disadvantages in my opinion.

Advantages: -

1) Increased Trade & Economic Output

Regional Trade Agreements help in promoting trade and demand across the regions where it is implemented. Local demand at times may not be sufficient. Allowing trade agreements simply helps economies by exporting the additional goods in the market place.

For example, the trade volume between United States, Canada and Mexico grew three folds during the implementation of the NAFTA

2) Increased Foreign Direct Investments

As a result of Regional Trade Agreements, Foreign Direct Investment between participating nations grows in volume. This is because it gives a free hand for companies to invest in without being charged with additional tax burdens.

FDI in Mexico for an example grew "from $15.2 billion in 1993 to $104.4 billion by end of 2012". This highlights the importance which agreements have paid in promoting investment in countries which were earlier less developed.

3) Job Creation

Another critical feature of these agreements is the fact that they help in creation of jobs in the market. Increased demand requires additional hands to cough up the requirements which would mean that more people have chances of getting hired.

The agreements between United States, Canada and Mexico have led to the creation of over 17 Billion jobs and counting.

4) Reduced Prices

The prices of goods and services tends to remain the same in the areas it is implemented in. This is to ensure that each of the partners has the same level playing field. This reduces prices for most countries as tariff and taxes are relaxed.

For example, in the European Union, most products are available at similar prices across rich and middle-income countries alike. This helps in ensuring welfare for all.

Key Disadvantages: -

1) Job Losses: -

Even though, it may sound contradictory, yet the advantage for one becomes a disadvantage for the other. The United States lost lakhs of jobs to Mexican workers because of their disadvantage of costs. As companies were allowed to open business without any restrictions, they would prefer a low-income economy and this would prove to be costly for the local markets.

Thus, while regional integration increases overall trade and jobs, yet the shift is not indicated and could be a significant disadvantage

2) Increased Competition: -

While competition is good for any economy, yet small vendors and shop keepers may not be able to manage the business as they lack the required experience, man power as well as capital to do business. This creates a negative environment for them and they are unable to do business in the right manner.

For example, NAFTA proved to be of great problem for Mexican Farmers this is because they could not keep up with competition from non-conventional producers of the United States.

3) Environmental Degradation: -

When companies follow regional trade agreements, they prefer to take polluting industries into newer areas while reducing their own local pollution. What they do not realize is that environmental pollution occurs at the level of the entire economy and not just one country.

For example, Mexico became a breeding ground for heavy industries of the United States which freely were able to pollute its land.

4) Working Conditions: -

Again, working conditions could be a hazard for low income countries that join regional trade agreements. As minimum wages in the United States grew, companies took their production to Mexico but were never able to give proper conditions to live for them. This proved to be highly disadvantageous for the Mexican working population.

Please feel free to ask your doubts in the comments section if any.