Analyze and describe the impact of the different forms of regional trading arrangements on international trade. 2. Analyze and describe the role of the major international trade and financial...

RUNNING HEAD: INTERNATIONAL ECONOMICS, PART 2 1
Assignment 2: International Economics, Part 2
Sherman Woodard
ECO 305, International Economics
08/19/2013
Dr. Frances Lea
INTERNATIONAL ECONOMICS, PART 2 2

Abstract
This paper deals with the different instruments of international trade policy. The paper
starts with the Regional Trading Agreement (RTA) policy and has shown its impact on
international trade. the next section deals with various international financial institutions (IFIs)
and their role in fostering trade. Then, the importance of strategic issues for international trade
and its issues have been discussed briefly. Finally, the discussion ends with different exchange
rate policies, and how exchange rate is determined.
Introduction
The main objective of international trade is to take the advantage of differences in factor
endowments, larger markets and the availability of modern technologies; and thereby making
gains from pure arbitrage, economies of scale and more sophisticated product differentiation.
International trade has also motivated innovation. As a result of increase in production
efficiency, competition has increased, average production costs has decreased due to economies
of scale in larger markets, international investment has gone up, resulting from an increase in
investment opportunities. Besides this there has been enhanced technological change resulting
from increased competition, all these dynamic effects change the welfare trajectory.
1) Analyze and describe the impact of the different forms of regional trading
arrangements on international trade.
The growth of regional trading arrangements (RTAs) is a recent development in the
sphere of international trade. The World Trade Organization (2000) data revealed that there were
about 240 RTAs, out of which 172 were in force, and the remaining 68 were stated as under
negotiation. Today, RTAs will play a significant role in world trade developments. About one-
INTERNATIONAL ECONOMICS, PART 2 3

third of the world’s trade is now taking place within regional trading arrangements. Trade
creation (TC) occurs when the introduction of an RTA allows supply from a more efficient
producer of the product. In contrast, trade diversion (TD) means that a RTA diverts trade, away
from a more efficient supplier outside the RTA, towards a supplier within the RTA, who is
comparatively less efficient. A Regional Trade Agreement has two types of effect on welfare
called:
i. Static effects
ii. Dynamic effects
RTAs have introduced a number of specific issues that affect the welfare consequences of
regionalism. We will discuss the major two among these.
i. The first is the requirement of rules of origin (ROO) in Free Trade Areas (FTAs)
to prevent the transshipment of imported goods from a country having a low tariff to a country
with a high tariff. Though the ROOs have increased in number recently, there is a growing
concern about their negative effects.
ii. The second issue is the potential for deeper integration through RTAs. Besides
goods trade, there are several other gains that can be had from regional integration, and RTAs
could be the natural starting point for achieving these.
The impact on international trade is both negative and positive by these arrangements.
The positive impact is due to...