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Unit VIII- Customs Union 

and regional groupings 

Day and Date:

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Unit Highlights«

Economic integrationPreferential trade arrangements

Free Trade Area (FTA)

Customs Union

Common Market

Economic Union

Effectso

f Custom

s Unio

nTrade creation

Trade Diversion

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Text book r eference chapt er s«

International Economics by Dominick

Salvatore ± Chapter 10

International Economics by Francis

Cherunilam ± Chapter 13

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Economic I nt egr at ion

 A commer cial policy of discr iminatively

reducing or eliminating trade barr iers onlyamong the nations joining together.

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Economic I nt egr at ion

Preferential trade arrangements

Free Trade Area (FTA)

Customs Union

Common Market

Economic Union

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Economic I nt egr at ion«

Preferent ial t r ade arr angements 

Preferential trade arrangements pr ovide

lower barr iers on trade among member nations than non-member nations.

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Economic I nt egr at ion«Free 

Tr ade Area (FTA)

FTA removes all trade barr iers among

member nations but individually the nationsare allowed to retain barr iers while trading

with non-members.

EFTA ±UK,Austr ia, Portugal, Denmark, Nor way, Sweden, & Switzerland

NAFTA ± USA, Canada, and Mexico

Southern Common Market (Mer cosur) ± Argentina, Brazil, Paraguay, and

Uruguay

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Economic I nt egr at ion«Cust oms 

Union

 A Customs Union removes all trade barr iers

among member nations as well as adopts acommon commer cial policy with the rest of 

the world.

Eur opean Union (now Eur opean Common Market) - Ger many,

France, Italy, Belgium, the Netherlands, and Luxembourg

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Economic I nt egr at ion«C ommon 

Mar ket 

 A Common Market goes further fr om a

Customs Union by allowing free movement of labor and capital among member nations.

Eur opean Union became Eur opean Common Market in 1993

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Economic I nt egr at ion«

Economic Union

Economic Union har monizes the

monetary and f iscal policies of itsmembers.

Benelux - Belgium, the Netherlands, and Luxembourg

United States of Amer ica

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Effects of  f or mat ion Cust oms 

Union

Trade Creation

Trade Diversion

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Effects of  f or mat ion Cust oms 

Union« Tr ade C reat ion 

Trade creation occurs when some domestic 

pr oduction of a member nation is replaced bylower-cost imports.

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Effects of  f or mat ion Cust oms 

Union« Tr ade Diver s ion

Trade Diversion occurs when lower-cost

imports fr om outside the Customs Union arereplaced by higher-cost imports fr om another 

member nation.

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Ot her  effects of  a Cust oms 

Union«

 Administrative savings

Greater bargaining power 

Increased competition

Economies of Scale

Stimulus to investment

Better utilization of economic resour ces

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Effects of  a Cust oms 

Union«det er mining f act or s  Level of pre-union trade barr iers

Pre-union trade and economic relationship of member nations

Level of Customs Union¶s trade barr ier with therest of the world

Size of the union and size of the member nations

Competitiveness/complementar ities of member nations

Geographical closeness of member nations

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To conclude«

In this unit we examined,

Economic integration in general and customs

union in particular  Economic integration leads to most eff icient

utilization of world resour ces and maximizes

world output and welfare.

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You s hould now know«

What is economic integration among

nations? In what ways it can happen?

Why?

What are the effe

cts?