Question

prepare a tecnical report that discuss about

"A custom Union (CU) constitute a partial movement towards free trade and must therefore lead to an improvement in world welfare" Explain this statement showing the effects of a CU, and explain how it is different from a Free Trade Area (FTA)

introductio: CU and FTA history

body: explantion the statment with advatge and disadvatge + how the different from each other + the imact of CU in the growth

conclustion: recommdations, summary, suggestions

1500 words for the report

Answer 1

Economic integration is the commercial policy of reducing or even eliminating the trade barriers among the various trading partners which are coming together to form a group.The degree of this integration may vary; this can be in different forms like free trade, customs union, preferential trade agreements, common market etc.

A free trade area is the form of economic integration where all the barrirs to trade are removed between various member nations but they are still retaining their own trade barriers with the non member nations as their own discretion.EFTA, NAFTA are examples for this.

Customs Union on the otherhand, allows no trade barriers among the member nations, and also it harmonises the trade policy towards the rest of the world.It is more liberalised form of free trade than the Free trade area.

The effects of customs unoin can be analysed partially now.

It can either create trade creation or tarde diversion effects.

Trade Creation effect occurs whwn the domestic production of a nation that is a member nation get replaced by a high cost import from the rest of the world. This can dfefinetely boost up trade in the customs union and is beneficial.

But when the member nation of the customs union are facing a situation in which the lower cost imports from outside the customs union are replaced by a higher cost import from a nation within the customs union.This can reduce the trade and thus creates the trade diversion effect.

The trade creation causes many advantages to the nation ,i.e, the resources will get fully employed or efficiently utilised and this efficient allocation of resources will definetely increase the welfare of the member nations. This will enhance the greater specialisation as the production is based on the camparative advantage. The whole world will benefit as a result of this due to the positive spill over effects in the form of increased imports. This can be claimed as the advantages of customs union.

Other advantages of Customs union are administrative savings, improvement in the collective terms of trade, incraese in the bargaining power which all are the static advantages.The dynamic benefits are increased competition, stimulus to investment, better utilisation of economic resources, economies of scale etc.

The negative effects of a customs union can be well explained by the trade diversion effects of the customs union.This is because the trade diversion will divert the route ot efficient production to inefficient production. The resources are not efficiently utilised here.This can increase or decrease the welfare of the member nations , but the world ouput and total welfare will decrease.

These impacts of customs union can be graphically illustrated as below:

   But in conclusion, we can say that though the Customs Union provides various dynamic as well as static gains, it only seves as a second best otion(it follows the theoty of second best).Free trade is the best option. There is a wide disagreement about the efficiency of customs union in bringinh world welfare.Some believes that these trade blocs will permit rapid tarde liberalisation while some others opposed this view that these blocs can lead to potential trade wars between nation and can affect the world peace.