International trade
Naturally, countries enter in to regional integration blocs progressively. The process may start from mutual cooperation on issues of trade and security and gradually moves to rope in more areas of cooperation, eventually getting to the advanced form of regional integration. The world as of now has numerous regional integrations, which has meant that most countries subscribe to more than one group, something that has at times put nations in awkward situations because of the potential conflict of interest arising from the dual membership. There are many levels of regional integration, each of which is dictated by the extent of obligations it places on the member countries in terms of cooperation. They can be classified as follows (in order of integration levels from the least the least to the highest)
Free trade area
Customs union
Common market
Economic union
Political union
Free trade area
Introduction
The most basic form of economic integration is the preferential trade area (PTA). However, PTA is very similar to the free trade and can even be termed as a transitional stage for countries that have an eventual objective of transforming in to an FTA. There is no harm therefore in bypassing the preferential trade area in the analysis because the features of a trade area do not significantly differ from those of a free trade area.
Countries come together to form FTAs with an aim of reducing trade barriers in the form of tariffs, quotas and preferential treatment of goods but retain restrictions on labor and capital movements. Countries within such trading blocs have a harmonized tariff structure that eliminates tariffs and import quotas between themselves. Tariff are taxes placed on imported goods by countries for a variety of reasons, most prominent among them being to protect locally produced goods. Import quotas on the other hand are those limits placed on quantities of imports for particular goods.
By coming together into a free trade zone, the countries agree to give unlimited market access of their markets to the member countries in return for reciprocation. While a cornerstone of the free trade agreement is in the movement of goods and services, it does not dictate how the member countries relate to non-member countries. They retain the right to determine the tariff structures and other trade elements with non member countries. Due to its liberal policy on goods imported from non-member countries, the pact also regulates the practice of re-exportation.
The practice of re-exportation is the situation whereby a member country may import goods from a non-member country and then re-export to member countries by claiming full advantages as encompassed in the trade agreement. This may give such countries undue advantages in cases where reciprocal bilateral or multilateral trade agreements may exist with the non-member countries. To prevent this, FTA pacts usually have a clause on the origin of goods. The clause provides the criteria through which the origin of goods can be determined and how they are treated. Therefore, goods that are exported to the member countries have to have a threshold of originality for them to be accorded the special treatment.
The agreement also eliminates the preferential treatment for certain goods within the member countries. In advancement of certain interest, countries may have bilateral agreements that provide for reciprocity with regards to treatment of certain goods and services. Countries that enter in to free trade agreement trading blocs agree to treat each other equally, meaning that no goods or services from the member countries will enjoy preferential treatment. The objective of the agreement is to ensure that there is a level playing ground for the members.
The FTA works best where the member countries have complementary economies. These are economies whose factors of production differ from each other in a manner that gives rise to a situation whereby each of the member countries have niche in terms of production. In a way the FTA promotes the specialization and division of labor. By enabling countries to have access to goods and services they cannot produce efficiently at a lower cost, the agreement allows the countries to concentrate its construction factors on what they do best. This then creates a production environment that is efficient and high quality, which in turn enables the member countries to compete effectively with other producers outside the FTA.
FTAs also allow for structured agreements with outside parties. It may occur that an FTA enters in to a strategic agreement with an outside party, which may be a country or another trading bloc. In such cases the agreement is binding to the trading bloc as whole. An example of a Free Trade Agreement is the North America Trade Agreement. It is an agreement between the US, Canada and Mexico. For example, on the rules of origin, the agreement provides that a certain percentage of material and value addition be from the member country. Failure to meet the threshold means that the country cannot claim tariff treatment same to that of goods originating from the member countries. Even with the agreement in place, Mexicans still have to meet stringent visa requirements to immigrate to the US and Canada because the agreement does not provide for free movement of labor and investment.
Customs union
From an FTA, an integration bloc then progresses to a customs union, a more advanced form of integration. The most prominent feature of a customs union absent in an FTA is the common external trade policy on import quotas and external tariffs. Some blocs may however lack a common approach to quotas. A customs union can also be referred to as a free trade area with a common external tariff because it has all essential elements of an FTA but has the extra provision on tariffs.
A customs union leaves less room for discretion for the member countries in terms of trade policies because it has a high level of integration. Countries under such a trading bloc usually have similar trading policy- both internal and external. In terms of external policies on trade, the policy dictates tariff structure, import quotas (optional), environmental policy and other policies affecting trade within and without the member states.
For that reason, countries under a customs union trading bloc usually have the same stand in trade negotiation platforms such as World Trade Organization (W.T.O) and the United Nations commission on trade law (UNCITRAL). Countries under such blocs usually have their own internal consultations before heading out to such conventions and once there, they will have one representative making submissions on their behalf. Similarly, on secondary matters affecting trade such as environment, they usually take a similar stand and policy so that there is a level playing ground for the industries within the member states. The countries may, for example, have the same restrictions on matters regarding carbon emission so that one country is not placed at a disadvantage by having carbon emission policies that make its manufacturing more expensive that the rest.
Similarly, countries within the bloc employ similar treatment in their dealings with external tariffs. This is one of the salient features of a customs union. The countries charge equal tariffs to all imports from non-member countries. This has the effect of making imports from non member countries more expensive something that gives goods produced from within the member countries a competitive pricing advantage. In addition, the adoption of a common external tariff eliminates the problem of determination of origin for goods being traded within the bloc.
The problem of origin is one of the challenges facing the free trade area agreements. Issues related to product origin result from the lack of a common tariff in the F.T.A. However, for the customs union, the application of a common external tariff solves any issues related to origin because the application of the external tariff makes the goods from outside expensive regardless of any bilateral or multilateral agreements in existence. For a customs union therefore, there is not restriction on matters of re-exportation, thus eliminating the need for rules of origin.
A customs union also requires harmonization of internal trade policies that may affect trade between states. The most notable of this is the competition policy. The policy determines the competitive environment within a country and for purposes of creating a level playing ground, it is important that there be a harmonization of the policies within the member countries. . Failure to have homogeneous competitive policies may grant undue advantage to some of the firms. For instance, firms in countries in centrally planned economies may be at a disadvantage if the market is opened up due to a stipulation in a customs union agreement. In such cases, countries finding themselves in such circumstances may ask for some time allowance to allow them to prepare their firms for competition. A good example would be a country that feels that its sugar sector is not ready for open competition as dictated by the customs union agreement. The country may be allowed to set import quotas on sugar imports for a predetermined number of years after which the market for the particular is opened up to competition. It is because of such potential deficiencies that countries are cautious about rushing in to a customs union.
A good example of a customs union is the South African Custom Union (SACU). The union was initially founded in 1910, although back then it was formed by countries under colonial rule. It was reborn in 1969 by which time most of its five members were independent. The union has a tariff board that regulates the tariff structures for the member countries, and in addition, there is a tribunal that settles on disputes related to tariffs and anti-dumping policies. As a union, it successfully negotiated for a free trade area agreement with the European Union in 2006 and is currently trying to negotiate the same with the US.
Common market
The common market agreement goes a step further and allows for free movement of production factors, notably, capital, labor and enterprise. This agreement also eliminates non-tariff barriers to trade such as regulations. The integration is designed to ensure that there is unlimited movement of resources and enterprise, factors whose movements are restricted in the customs union arrangement. The arrangement calls for significant policy harmonization to ensure a smooth flow of the factors. By its nature therefore, a common market severely restricts independent policy pursuits on matters of trade by the member countries due to the interdependence between the member countries.
The unified changes in internal policies that characterize the common market are issues of consumer protection, professional qualifications, product quality standards and intellectual property. Given the unrestricted movement of capital, enterprise and labor, it is necessary that there is convergence in approach to such issues.
Professional qualification is a done to allow free movement of skilled labor within the member countries. Having a unified approach in terms of qualifications of persons will ensure save the professionals the agony of having to sit professional exams in every country they visit. Examples of these professionals include nurses, doctors, accountants and lawyers. Harmonization of qualifications will give consumers of professional services the confidence to engage any professionals regardless of their countries of origin.
Product safety standards are also harmonized to facilitate transfer of goods and enterprise. It does so by ensuring that firms within the member countries produce within a certain code of quality. This in turn makes it easy for them to sell their goods within the member states and at the same time, it becomes easier for owners of enterprise to transfer their capital from one state to the other because they are familiar with quality standards of respective countries. Regulations on manufacturing quality are closely related to that of consumer quality because they both the purpose of regulating what the consumer is served with.
The area of intellectual property rights is equally important. An intellectual property right is one of the most important now for most governments because technological innovations are the driving force in most of the mature economies. Countries with weak intellectual property rights tend to allow for copyright infringement, something that greatly reduces the value of the innovations. For that reason, trading blocs of this type provide for criteria of protecting intellectual rights. The union also requires some degree of fiscal and monetary policy harmonization. Some of the regulation required would be in areas such as customs and excise duty. Harmonization of such a policy would narrow avenues that would be exploited by member states who may want use such discretionary policies to discriminate against goods from such countries.
Another important element of a common market is the elimination of non-tariff trade barriers. Tariff barriers to trade are easy to identify and quantify. This is not the case with non tariff barriers because these are matters governments are required to institute on a need basis. A common market seeks to locate such barriers and eliminate them. An example of a trade barrier is one involving acceptance standards and quality checking. If a government wants intends to restrict goods from certain countries from entering its market, it may as well institute strict quality procedures for goods from such a country. To deal with such possibilities, countries within such a bloc locate and try to eliminate avenues for discrimination. An example of a measure to eliminate trade barriers is the harmonization of product standards and quality. By instituting standard measures for quality and manufacture, goods from within the member countries are precluded from stringent quality checks that would have had the effect of constricting movement of goods within the member states.
An example of a common market trading bloc is the Andean community. The trading bloc comprises South American countries of Bolivia, Peru, Ecuador and Colombia. Their areas of cooperation include technical regulations, migrations and common foreign policy. They also have a court of justice that adjudicates on matters of community provisions. The court is there to ensure that each of the community member sticks to the rules of the federation. Their policy on migrations requires that the only document for one to migrate within any of the member states is a national identification document belonging to any of the member states. With that, one is able to migrate within the community without any need to disclose the purpose of the migration.
Economic union
Economic union is also referred to as economic and monetary union. The two features that characterize the union are a single market and single currency. Apart from harmonized the free movement of goods, services and factors of production, the economic union also encompasses further harmonization of policies because of the use of unified currency. The best model for studying this agreement of is the European Union. The roots of the union can be traced to post World War II efforts to unite Europe, which resulted in an amorphous entity whose purpose was to set the stage for the federation of Europe to prevent extremist national ideals that led to the war in the first place. The union has since then undergone a metamorphosis that saw it transform itself in to an economic and customary union.
To begin with, an economic and monetary union has a unified fiscal and monetary policy. Fiscal and monetary policies are instruments used by the government to monitor and control the flow and circulation of money. For the reason that these countries have single currency, it is justifiable that there be a unified policy governing within the states to dictate how currency is managed. Some of the areas covered by the fiscal and monetary regulatory policies include budgeting, foreign exchange and management of inflation and deflation.
Within the EU for example, countries are restricted in their budgeting in terms of deficit. In preparation of their budgets, states within the union are allowed a limited amount of deficit financing as a percentage of the total budget. Another of the measures that are guided within the EU framework governs exchange rates. The countries use one currency and for effective transition from their individual currencies to take place, they were subjected to fixed conversion rates regime. The organization also has a central bank that administers the monetary policies prescribed by the treaty. In addition, the bank is responsible for issuing the common currency used within the union. An example of such a bank is the European Central Bank, the institution responsible for administering the EU monetary policy.
Another feature of the economic and monetary union is the decision making centralization. An economic union of this type has numerous decision making bodies to the extent that countries appear to lose the sovereignty in as far as national decision making is concerned. A good example is the UK, which for a long time considered its parliament the most superior law making body in the country. The legislature was further strengthened by the lack of constitution meaning that laws made in the UK parliament could not be challenged as being unconstitutional, unlike those of the USA and other world democracies. However, with the transformation of the EU in to a customs union, the countrys parliament has had to ensure that the laws it makes are consistent with the laws governing EU. Clearly, countries lose a substantial part of their autonomy by becoming members of an economic and monetary union as it has been demonstrated by the UK case.
Most of the policies in these countries are made centrally. The policies are as diverse and involve matters such as agriculture, fisheries, and telecommunications. The unions secretariat has many bodies, each of which has a specialized role. The EU for example has committees concerned with agriculture, telecommunications and so on. It also has a parliament that formulates common policies governing relations within and without the EU community. The resolutions passed by the EU parliament are binding to all members and superior in case of any contradictions with local legislations.
Political union
A political union is a union between states to create one state under one administration. This happens in a variety of ways depending on the relationship between the states uniting. Some may be forceful merger or acquisition or they may sometimes be a result of voluntary mergers. Whichever way, when two or more states come together to create one administrative unit, a political unit is formed. Formation of political states may happen through a number of ways
Incorporating union This is formed by former states dissolving themselves to form a new identity. The new state will form basis for all forms of governance although in some cases, the individual states may preserve some of their laws and customs. South Africa and the UK are perfect examples of such unions.
Incorporating annexation incorporating annexation is achieved by states dissolving themselves in to a single state and taking up the identity of an existing state that is already existing. That means other states losing identity while one of them retains its identity. A good example of this is the annexation of the Wales economy by England in the 16th century.
Federal union Federal Union happens when two states come together under one federal authority but retain their domestic laws and governance. For these states, the federal authority is there to provide guidance on international relations and defense, while the domestic relations are governed by the domestic governments. An example of such as state is Tanzania.
Federal annexation This happens when a state federates itself in to an existing state. The federated unit loses its identity but the federating state continues its existence. An example of this is the Texas state in the US.
Other unions under political unions classification are the mixed and historical unions.
World trade organization (WTO)
WTO was created in 1995 as a successor to the general agreement on trade and tariffs (GATT). The organization consists of 153 members, most of who are in developing countries. The organization was formed to promote international trade by working with all member nations and likeminded organizations to eliminate trade barriers. It is headquartered in Geneva, Switzerland with a secretariat consisting of 700 staff whose head is a director-general. The ministerial conference, which meets every two years is the highest decision making body in the organization. In between the ministerial council meetings, there is a general council that that meets in the interval to conduct the business of the secretariat. In addition to the two bodies there are a host of other bodies that deal with specialized business. These are committees concerned with the formulation and formulation of policies and are mostly made up of committees and subcommittees.
Major functions
The WTO has numerous functions but the major functions can be classified as follows
Administering and implementing trade agreements
One of the major visions of the WTO is open borders in terms of trade. It envisions a time when trade will be conducted across borders with minimal interference from both tariff and non-tariff barriers. To do this, the organization recognizes the value of the trade agreements between individual countries and between trading blocs as key to the vision. Consequently, the WTO pays close attention to trade agreements by providing and administering guidelines on how these agreements are drafted and implemented.
Under this role, the organization provides a forum for organizations to engage in negotiations and also settles disputes. It does so as a way of creating confidence within the trading world so as to encourage countries to participate in trade bloc formation agreements. Without oversight, some countries may take advantage of their privileged position to flout or retract from agreements that do not favor them such actions may lead to some nations developing a phobia to agreements. It is therefore in the interest of the WTO to encourage formation of trade agreements because eventually this would lead to a freer world in terms of trade.
Overseeing trade policies
The WTO acts as the global watchdog on matters of trade. It seeks to identify nations that frustrate free trade and enterprise through anti free trade policies within its laws and practices. In particular, the organization is interested in reducing or reducing protectionism within its member states as this represents one of the greatest impediments to free trade. Within the realms of overseeing trade policies as well, the organization settles disputes between states that may accuse each other of flouting certain principles of trade. The idea behind WTOs trade dispute system is that the law governing trade law should be predictable and stable. It therefore seeks to ensure that member states are accountable for any agreements they make so that anytime countries get in to agreements, they are sure of what to expect for the few years ahead.
Cooperating with international bodies with complementary and supplementary roles
WTO does not operate in isolation from other organizations whose roles complement or supplements its functions. They are in recognition of the value of cooperation with other organizations because ultimately, all of them have one aim to promote trade. For that reason, in its functions, the WTO cooperates with organizations such as UNCITRAL, EU, SADCC and other organizations whose existence is to promote trade and related activities. Their spheres of cooperation includes areas such as anti dumping, administration of trade law and agreement, rules on trade bloc formation amongst other functions.
Fundamental guiding principles
Trade without discrimination Under this principle, WTO requires its members to conduct its trade without any form of discrimination. Discrimination is recognized on two levels. The first level is on the national level. The idea behind this is that imported goods should be accorded the same treatment as the imported goods. Secondly, the principle recognizes the international discrimination, whereby a country may grant favors to certain countries to the exclusion of others. The principle requires that its members grant favors equally to all its trading partners on similar products.
Reciprocal treatment The principle states that nations must only negotiate if they are certain that doing so would be more beneficial than unilateral liberalization. In other words, the practice of negotiation should not be (mis)used to frustrate free trade.
Openness WTO advocates for openness between member countries on rules and regulations governing trade. Under this rule, member countries are required to publish their regulations on matters affecting trade. The general principle under this rule is that a country should be open and ready to do self assessment as well ready to be interrogated by other member states whenever necessary.
Commitments WTO member countries are bound by the agreements they get in to and in the event that they are not able to stick to them then they should make appropriate reparation to its trading partners on the same. If it is totally unable to honor any part of the agreement, then it should offer itself for arbitration by seeking to be subjected to dispute settlement.
Exceptions to discriminations The WTO rules provide for exceptions under which member states can be allowed to restrict free trade. This principle is aimed at ensuring that its members do not suffer for allowing free trade. The non discrimination may be overlooked under the following conditions
In case where the laws affecting trade are not intended for trade purposes. The laws may be for purposes such as social order or defense. In such a case, nations are exempted from strictly adhering to the principle of non discrimination.
Clauses made in the interest of promoting fair trade. Non discrimination principle may not be invoked in instances where the law, rule or article was made in the interest of fair competition.
Lastly, agreements or clauses entered in to for economic reasons may not be subjected to non discriminatory rules.
Conclusion
Regional integrations are the way to go for any country hoping to gain a competitive advantage in trade. It may however present some pitfalls in some instances such as countries that belong to more than one trading block. As countries get in to these blocs, it is important for them to be careful in their choices. Otherwise, trading blocs present very crucial tools for any country to navigate the dynamic world of trade.