Understanding Trade Agreements: Creation, Diversion, and Types

Trade Diversion and Creation

Trade diversion: A shift in the pattern of trade from low-cost world producers to higher-cost CU or FTA members.

-e: trade diversion

Trade creation: An expansion in world trade that results from the formation of a preferential trade arrangement.

B+d: trade creation

Rules of Origin in Regional Economic Integration

Define rules of origin and which form of regional economic integration requires them.

Rules of origin are required in Free Trade Areas to avoid trade deflection and prevent export companies from outside the FTA from benefiting unfairly. These rules are the criteria established to determine the national source of a product. They are important because duties and restrictions often depend upon the source of imports.

Regional Trade Agreements: Classification and Examples

Define regional trade agreements and their classification (with examples).

Regional Trade Agreements (RTAs) are reciprocal trade agreements between two or more partner countries to liberalize trade and investment flows with each other. These agreements are significant because LAC countries have been world leaders in forming them, and they have had a major impact on companies and economies in the region.

Sub-regional trade pacts

Examples include the Caribbean Community (CARICOM), the Central American Common Market (CACM), and the Southern Common Market (MERCOSUR). Bilateral agreements are also negotiated within the context of the Latin American Integration Association (LAIA, or ALADI in Spanish).

Free trade agreements

Examples include NAFTA, Canada-Chile, Canada-Costa Rica, and agreements among Chile, Mexico, and the countries of Central America. The agreements between MERCOSUR and the Andean countries also fit into this category.

Bilateral transcontinental agreements

Examples include Chile-EU, Chile-Korea, and Mexico-Japan. Chile, Mexico, and Peru have been especially active in pursuing agreements with Asian countries.

Mega-regional trade agreements

These are represented by the Trans-Pacific Partnership (TPP) agreement, for which negotiations were concluded in October 2015, and the Trans-Atlantic Trade and Investment Partnership (TTIP) between the EU and the U.S., and the Regional Comprehensive Economic Partnership (RCEP) in Asia, both of which are in preliminary stages of negotiation.

Differences Between FTAs and Customs Unions

Differences between FTAs and customs unions.

The key difference between FTAs and Customs Unions is that FTAs eliminate tariffs between members. Examples include NAFTA, the China–Costa Rica FTA, and the Chile–Mexico FTA. In contrast, Customs Unions not only remove tariff barriers among members but also adopt common external tariffs to be applied on non-members. The harmonization of external tariffs is to prevent trade deflection. MERCOSUR is an example of a customs union.