Question

1) What is meant by “national treatment?” To whom does it apply?

2)   What is a “common external tariff?” What problem does it solve?

3)    What is the “big” change as we go from a customs union to a common market? Why is this a “big” change, or is it really “big”?

4) What is trade creation? Is it good or bad?

5) What is trade diversion? Is it good or bad?

Answer 1

Q1). National Treatment:-

As we know that national treatment is a principle in international law. This treatment is utilized in many treaty regimes involving trade and intellectual property, it should be keep in mind that it needs/requires equal treatment of foreigners and the locals. We cannot discriminate between the two when giving any sort of treatment. One thing must be keep in mind while applying national treatment is that national treatment only applies once a product, service of intellectual property has entered the market. If the service has not entered the market, we cannot apply National treatment. National treatment is an integral part of WTO. Together with the most favoured nation principle, national treatment is one of the corner -stones of WTO trade law. National treatment is found in all three main WTO aggrements(GATT, GATS AND TRIPS).

Q2). Common external tariff:-

As we know that a tariff is a tax imposed by one country on the goods and services imported from another country. Common external tariff is an import tariff applied equally by each country participating in a customs union for example The European Union impose a common tariff on imported whiskey from Japan. Since each and every country have to impose same tariff as the members of EU. The problems that are solved by common external tariff is to limit the external influences, liberalize intra-regional trade , promote Economic development and diversification in industrialization in the community. The examples of common external tariff are as:-

MERCOSUR countries, EU customs union and Common custom tariff of Eurasian Economic Community customs union.

Q3).

As we are aware, that a customs union is an agreement between countries that all goods and services coming into those countries from outside will face the same import tariffs/quotas. When those goods move across the internal borders of the customs union they are not treated like imports. The fact is that they are not coming this time directly from other countries.

A common market or single market eliminates tariffs/quotas rules between the participating countries, but keep in mind that it doesn't affect imports from outside .When we go away from the customs union to the common market , the big impact Is that it will not effect the imports from other countries. The free movement of goods is achieved within a customs union and the principle of non-discrimination.

Q4). As we know that formation of free trade can lead to trade creation and trade diversion. These terms trade creation and trade diversion are  given by economist Jacob Viner. Trade creation takes place when domestic consumers in countries import more goods and services as import prices fall due to a removal of import tariffs and import quotas; production will shift to a lower cost producer. Once a union is created, members agree to eliminate tariffs between themselves. The effect of this is that, facing lower priced, zero-tariff, imports from members, consumers increase their demand for these goods, and new trade will be created – a process called trade creation. Trade creation is generally good for an economy. Trade creation occurs if there is increased trade among the three countries as a result of the lower trade barriers . Which is generally regarded as a good thing.

Q5). Trade Diversion:- Trade diversion means, A shift in international trade caused by one nation giving trade preferences to another, resulting in a decline in trade with a third country. Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher-cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage. Trade diversion may occur when a country joins a free trade area with a common external tariff.

The decreased output of the good or service traded from one nation with a high comparative advantage to a nation of lower comparative advantage works against creating more efficiency and therefore against more overall surplus. It is widely believed by economists that trade diversion is harmful to consumers. Trade diversion is bad. Trade diversion has a negative impact on the welfare of non-members through lower market access as well as on members through reduced tariff revenue. The net welfare effect of shallow PTAs, therefore, depends on which of these two forces dominates.