Class Outline

1
Class Outline

• Blocs and Blocks
• Trade Blocs
• Types of Economic Blocs
• Trade Discrimination
• Why Blocs are Good and Bad
• Trade Diversion and Creation
• Other Gains from Trade Blocs
• Embargoes
• Reading Chapter 11 Textbook

2
Definitions

• Trade Blocs Each member country can import from
  another member countries freely, or at least
  cheaply, while imposing barriers against imports
  from outside countries
• Trade Embargoes (Trade Blocks) some countries
  discriminate completely against certain other
  countries usually because of a trade dispute

3
Types of Economic Blocs
4
Types of Economic Blocs
5
Trade Discrimination

• Nowadays nearly half of world trade occurs within
  trade blocs
• The 15 countries of the EU
• The 4 members of the European Free Trade Area
  (EFTA)
• Other free trade agreements between European
  Countries
• The 3 countries of NAFTA
• The 4 countries of the Mercosur
• Other trade agreements between different
  countries

6
Why Blocs are Good or Bad

• Blocs are Good
• Forming a free trade area must be good because it
  is a move towards free trade
• Free trade should improve welfare in these
  countries
• Blocs are Bad
• Blocs may encourage people to buy from a high
  cost partner supplier
• Trade regulations are still a problem
• Countries create friction with those that are
  left outside of the bloc

7
Trade Creation and Trade Diversion
Price
Trade Diversion Dominates
A
Initial Prices in Home Country
6,000
a
b
B
Price for Partner Country
5,500
c
C
5,000
Outside World Price
D
Demand
10
15
20
Quantity Imported
8
Trade Creation and Trade Diversion
Price
Trade Creation Dominates
A
Initial Prices in Home Country
6,000
B
a
b
5,100
Price for Partner Country
C
c
5,000
Outside World Price
D
Demand
10
19
20
Quantity Imported
9
Other Gains from a Trade Bloc

• Increase in Competition can reduce prices
• An increase in competition can lower production
  costs
• Firms can lower costs by expanding their scales
  of production
• Forming the trade bloc increases opportunities
  for business investments

10
Trade Embargoes

• The U.S. practices economic warfare more readily
  than any other country.
• In 1998 over 75 foreign countries were the target
  of some form of economic sanction imposed by the
  U.S.
• Up to 20 billion of U.S. exports per year were
  blocked by sanctions in the mid-1990s at a net
  cost of 1 billion per year

11
Total Embargo
Sn Export supply from non-embargoing countries
Price
Price
E
P1
DomesticSupply
b
c
SnSe World Export Supply
a
P0
F
P0
a
Dm Iraqs Import Demand
DomesticDemand
Q0
Quantity
Quantity
12
Embargo that Backfires
Price
Sn
SnSe
P1
E
b
c
P0
F
Dm
a
Q0
Quantity
13
Irrelevant Embargo
Price
Sn
SnSe
E
P1
b
c
P0
F
a
Dm
Q0
Quantity