Lecture V

INTERNATIONAL TRADE INSTITUTIONS AND REGIONAL

ECONOMIC ARRANGEMENTS

By:

Amsalu B. (MSc. In Economics)

Lecturer, Department of Economics

Unity University

Email: [email protected]

Unity, Ethiopia
 Why the stress on free world trade?
 The world economy went into a deep depression in the 1930s,
as many countries closed their barriers to trade with other
states. This led to:
 Mass unemployment

 Social upheaval

 Rise of fascism and World War II

 After Great Depression of 1930s, there was a need to reform the

international trading system.
 How to prevent chaos happening again?
 The starting point for the new order was laid at the Bretton Woods
Conference in 1944.
 In this conference, world economy was to be organized around three
cornerstones. That is;
 International Monetary Fund (IMF)

 International Bank for Reconstruction and Development (IBRD),

now commonly known as World Bank, and

 International Trade Organization (ITO)

 All countries encouraged to join these organizations, or face

exclusion from benefits of free world trade.
 International Monetary Fund (IMF)
 The IMF was established in December 1945 following
ratifications of the Articles of Agreement of the Fund, formulated
at the United Nations Monetary and Financial Conference held at
Bretton Woods in July 1944.
 The IMF is as a bank for national central banks and can loan
funds to countries
 Lends to countries with balance of payments problems –
countries that can’t make their payments
 Pushes for economic reforms – reforms such as allowing free
trade or reduce wasteful spending
 Cont’d
 The IMF has also become heavily involved in loans to LDCs,
imposing tight monetary policy on the borrowers.
 One proposal for the IMF is to act as an international
bankruptcy court.
 Nations have bankruptcy laws, proven essential for successful
economy.
 Bankruptcy insures investors of some repayment in case of
business failure.
 International bankruptcy is difficult and IMF can establish a
forum.
 Cont’d
 The Major Purposes of the IMF are;
 To encourage international monetary cooperation

 To facilitate the expansion and growth of international trade

 To assist member countries in correcting (temporary) balance

of payments deficits (subject to IMF conditionality)

 To promote foreign exchange stability.
 World Bank
 International Bank for Reconstruction and Development (IBRD),
now commonly known as World Bank.
 The IBRD (now the World Bank)was established in 1945, along
with the IMF.
 Aims to help development by advising and lending – with many
conditions – such as reducing wasteful spending or focusing
on a particular area of production
 Countries encouraged to lift import and export barriers, cut
subsidies and remove price controls – encouraging free trade
 These are longer term loans, used to put in place
infrastructure or other big projects.
 Major Purposes of the World Bank
1. Assist economic development of member countries by
providing loans where private capital is not available on
reasonable terms to help finance investment projects.
 That is, the Bank provides long-term development assistance.
2. Provide and coordinate a wide range of technical assistance
for member countries.
 The Bank conducts project feasibility and evaluation studies
and act as executing agency for development projects
financed by United Nations Development Program (UNDP),
and
 Cont’d
3. The Bank’s activities are complemented by two major affiliated
organizations:

1. International Finance Corporation (IFC), established in

1956, which stimulates private investments in developing
countries,

2. International Development Association (IDA),

established in 1960, to make loans (“soft loans”) at
subsidized rates to poorer developing countries.
o In 1995 – Uruguay Round took effect - GATT – was transformed
into the World Trade Organization (WTO)
o Headquartered in Geneva and International organization with
151 members
o Multilateral trading system including trade in services,
intellectual property and investment
o Dispute settlement: dispute panel with established time
limits and appellate body accused party unable to block final
decision
 The WTO deals with the rules of trade between countries
 It developed from the General Agreement on Tariffs and Trade
 WTO agreements set the ground rules for international
commerce – Designed to ensure free trade and to prevent
unfair trade advantages
 The WTO embodied the main provisions of GATT and provides
a mechanism intended to improve the process of resolving trade
disputes among member nations.
 Currently WTO has gone beyond and tariff reductions to
liberalize various non tariff barriers.
 Objectives of WTO
 The major objectives of WTO are the following.
1. Achieving over all sustainable economic development by
 Raising the standards of living
 Achieving full employment and increasing volume of real
income and effective demand
 Expanding production and trade in goods and services
2. To ensure optimal use of world's resources by:
 promoting the protection and preservation of the
environment;
 Augmenting resources commensurate with the respective
needs and concerns at different levels of economic
development.
 Cont’d
3. The poorest countries may get a share in the growth of
international trade consistent with their needs of economic
development to take effective steps.
4. Reduction of barriers and elimination of discrimination in
international trade.
5. To develop a more viable and durable multilateral trading
system.
6. For coordinating policies in the field of trade, environment
and economic development to take effective steps.
 Functions of WTO
1. It has been providing a forum for negotiations between the
member countries on matters of trade relations and terms.
2. It has been providing a framework for the implementation of
the agreements arrived at as a result of the negotiations.
3. It has been providing facilities for the administration,
implementation and operation of the terms of the General
Agreement and Multilateral Trade Agreements and Plurilateral
Trade Agreements pertaining to trade in civil aircraft, dairy
products, bovine meat and government procurement.
 Cont’d
4. It has been administering an understanding on rules and

procedures governing the settlement of disputes.

5. It has been offering all cooperation to the IFM and the IBRD
and its affiliates in making the global economic policy more
coherent.
 WTO Principles
• To help trade flow as freely as possible

• To achieve further liberalization gradually through

negotiation
• To set up a neutral means of settling disputes

• Non-discrimination, freer trade, predictable policies,

encouraging competition.
• Extra provisions for less developed countries.
 Cont’d
• Unfulfilled promises with respect to one or more of the
WTO agreements.
• The most important new aspect of the WTO is generally
acknowledged to be its “dispute settlement” procedure.
• A basic problem arises when one country accuses another of
violating the rules of the trading system.
• A dispute can arise when one country adopts a trade policy or
violates the WTO agreements.
• The WTO member countries use a multilateral system of settling
disputes instead of taking actions unilaterally, meaning abiding by
the agreed WTO procedures and respecting judgments.
• The WTOs priority is to settle disputes through consultations and
not to pass a judgment.
 Cont’d
• The ability to adjudicate disputes between member countries
regarding compliance with the Agreements.
• The WTO’s main purpose is to monitor the trade liberalization
agreements reached by GATT member countries in Uruguay Round.
• The most important “power” of the WTO is its ability to adjudicate
disputes between member countries regarding compliance with the
Agreements.
• Dispute resolution is conducted by the Dispute Settlement Body
which includes one representative from each WTO government.
• The four main steps to a WTO dispute case are;
• 1. consultations, 2. panel formation, 3. appeals, and 4.
resolution.
 Cont’d
How different is WTO from the old GATT?
GATT WTO
Ad hock and provisional Its agreements are permanent

Had contracting parties Members

Allowed existing domestic Does not permit
legislation even it violates
GATT
Less power full to enforce, More powerful, dispute settlement
slow dispute settlement mechanism is faster and more
efficient
 Reading Assignment

What is the difference and WTO and GATT?

 International Trade Organization (ITO)
 In 1947, United Nations Economic and Social Council convened in Havana,
Cuba, international conference on trade and development for the purposes of
promoting the production, exchange, and consumption of goods.
 The conference drew up the Havana Charter which proposed the establishment
of International Trade Organization (ITO).
 However, the Charter failed to receive the necessary number of ratifications
because of the disagreements on the extent of the authority of the proposed
ITO over actions of governments.
 In particular, the Charter was never ratified by US Senate. Thus, the ITO was
never established.
 Originally, it was thought that GATT would become part of the International
Trade Organization (ITO), whose charter was negotiated in Havana in 1948 to
regulate international trade.
 General Agreement on Tariffs and Trade (GATT)
 GATT was an international organization, created in 1947 and
headquartered in Geneva (Switzerland), devoted to the promotion
of freer trade through multilateral trade negotiations.

 The GATT, now replaced by the World Trade Organization was

signed at the Geneva (Switzerland) Conference in 1947 and
entered into effect in 1948.

 It is a multilateral trade agreement which sets out the rules of

conduct and provides a forum for trade negotiations among the
“contracting parties” or signatories.”
 Cont’d
 Negotiations under the GATT take the form of 'Rounds', of
which the Uruguay Round is the eighth.

 These negotiations are multilateral in that all contracting

parties meet at the same time but in the early rounds, at least
concessions were agreed on a bilateral basis between major
trading partners.

 The procedures governing the bilateral negotiations and the

manner in which these are transformed into multilateral
agreements are the subject of the basic principles of the
GATT.

 The three objectives of GATT are to provide:

 Cont’d
I. A framework for the conduct of trade relations

II. A framework for and to promote progressive elimination of

trade barriers,

III. A set of rules (codes of conduct) that would inhibit countries

from taking unilateral action.

 The Principles of GATT-three basic principles:

1. Non-discrimination

2. Reciprocity and

3. Transparency
 The Principles of GATT
 GATT rested on three basic principles:

1. Nondiscrimination. This principle refers to the unconditional

acceptance of the most-favored-nation principle discussed
earlier.

2. Elimination of nontariff trade barriers (such as quotas),

except for agricultural products and for nations in balance-of-
payments difficulties.

3. Consultation among nations in solving trade disputes within

the GATT framework.
 The Trade Agreements Act of 1934
 During the early 1930s, world trade in general and U.S. exports in
particular fell sharply because of:
1. Greatly reduced economic activity throughout the world as a
result of the Great Depression and
2. Passage in 1930 of the Smoot–Hawley Tariff Act, under which the
average import duty in the United States reached the all-time
high of 59 percent in 1932, provoking foreign retaliation.
 The Smoot–Hawley Tariff Act was originally introduced to aid
American agriculture. But through log-rolling in Congress, large
tariffs were imposed on manufactured imports as well.
 The aim was clearly beggar-thy-neighbor to restrict imports and
stimulate domestic employment.
 The 1962 Trade Expansion Act and the Kennedy Round
 It was primarily to deal with the new situation created by the
formation of the European Union, or Common Market.

 The Trade Expansion Act in 1962 was passed by the Congress to

replace the Trade Agreements Act.

 The Trade Expansion Act of 1962 authorized the president to

negotiate across the board tariff reductions of up to 50 percent
of their 1962 level (and to remove completely duties that were
5 percent or less in 1962).

 This replaced the product-by-product approach of the Trade

Agreements Act.
 Cont’d
 Under the authority of the 1962 Trade Expansion Act, the United
States initiated, under GATT auspices, wide-ranging multilateral
trade negotiations. These were known as the Kennedy Round.

 Negotiations in the Kennedy Round were completed in 1967 and

resulted in an agreement to cut average tariff rates on
industrial products by a total of 35 percent of their 1962 level, to
be phased over a five-year period.

 By the end of 1972, when the agreement was fully implemented,

average tariff rates on industrial products were less than 10
percent in industrial nations.
 The Trade Reform Act of 1974 and the Tokyo Round
 Under the authority of the Trade Reform Act of 1974, the United States
participated in the multilateral tariff negotiations known as the Tokyo Round,
which were concluded in 1979.
 Negotiated tariff reductions phased over an eight-year period, starting in
1980, averaged 31 percent for the United States, 27 percent for the
European Union, and 28 percent for Japan.
 A code of conduct for nations in applying nontariff trade barriers was also
prescribed to reduce the restrictive effect of these nontariff barriers.
 The total static gains from trade liberalization under the Tokyo Round
amounted to an estimated $1.7 billion annually.
 The dynamic gains arising from economies of scale and greater all-around
efficiency and innovations, the figure might rise to as high as $8 billion per year.
 The Trade Reform Act of 1974 and the Tokyo Round
 This code included:
1. Agreement on a government procurement code,
2. uniformity in the application of duties in countervailing and
antidumping cases, and
3. A “generalized system of preferences” to the manufactured,
semi manufactured, and selected other exports of developing
nations.
 The Uruguay Round
• WTO monitors each member county’s trade policies with respect to the
trade agreements that were made in Uruguay Round.

• In December 1993, the Uruguay Round, the eighth and most ambitious round
of multilateral trade negotiations in history, in which 123 countries
participated, was completed after seven years of tortuous negotiations.

• The aim of the Uruguay Round was to establish:

• Rules for checking the proliferation of the new protectionism and

reverse its trend;

• Bring services, agriculture, and foreign investments into the negotiations;

• Negotiate international rules for the protection of intellectual property

rights;

• Improve the dispute settlement mechanism by ensuring more timely

decisions and compliance with GATT rulings.
• The agreement was signed by the United States and most other
countries on April 15, 1994, and took effect on July 1, 1995.
• The major provisions of the accord were the following.
• 1. Tariffs: Tariffs on industrial products were to be reduced from;
• an average of 4.7 percent to 3 percent, and the share of
goods with zero tariffs was to increase from 20–22 percent to
40–45 percent;
• Tariffs were removed altogether on pharmaceuticals,
construction equipment, medical equipment, paper products,
and steel.
• 2. Quotas: Nations were to replace quotas on agricultural
imports and imports of textiles and apparel with;
• Less restrictive tariffs by the end of 1999 for agricultural
products and
• By the end of 2004 for textiles and apparel;
• Tariffs on agricultural products were to be reduced by 24
percent in developing nations and by 36 percent in industrial
nations, and tariffs on textiles were to be cut by 25 percent.
• 3. Antidumping. The agreement provided for tougher and
quicker action to resolve disputes resulting from the use of
antidumping laws, but it did not ban their use.
• 4. Subsidies. The volume of subsidized agricultural exports was
to be reduced by 21 percent over a six-year period;
• Government subsidies for industrial research were limited
to 50 percent of applied research costs.
• 5. Safeguards. Nations could temporarily raise tariffs or other
restrictions against an import surge that severely harmed
domestic industry.
• But it barred countries from administering health and safety
standards unless based on scientific evidence and not simply
to restrict trade.
• 6. Intellectual property. The agreement provided for 20-year
protection of patents, trademarks, and copyrights, but it
allowed a 10-year phase-in period for patent protection in
pharmaceuticals for developing countries.
• 7. Services. The United States failed to secure access to the
markets of Japan, Korea, and many developing nations for its
banks and security firms, and did not succeed in having France
and the European Union lift restrictions on the showing of
American films and TV programs in Europe.
• 8. Other industry provisions. The US and Europe agreed to continue talking
about further limiting government subsidies to civil aircraft makers,
opening up the distance telephone market, and limiting European
subsidies to steelmakers;
• The US also indicated that it intended to continue negotiating the further
opening of the Japanese computer chip market.
• 9. Trade-related investment measures. The agreement phased out the
requirement that foreign investors (such as automakers) buy supplies locally
or export as much as they import.
• 10. World Trade Organization. The agreement also called for the
replacement of the GATT secretariat with the WTO in Geneva with authority
not only in trade in industrial products but also in agricultural products and
services. Trade disputes were also to be settled by a vote of two-thirds or three
 The Doha Round
 In November 2001, the Doha Round was launched in Doha,
Qatar.
 The agenda included
1. The further liberalization of production and trade in
agriculture, industrial products, and services, and
2. The further tightening of rules for antidumping measures
and safeguards, as well as investment and competition
policies
 Outstanding Trade Problems and the Doha Round
 Despite the great benefits resulting from the successful completion
of the Uruguay Round, many serious trade problems remain.
 One problem is continued widespread trade protectionism.

 A second problem is that subsidies and tariffs on agricultural

products remain very high; antidumping measures and safeguards

are still possible and frequently abused, and so the potential for
serious trade disputes remains.
 A third trade problem is the tendency for the world to break up

into three major trading blocs: the European Union (EU), the
North America Free Trade Area (NAFTA), and a (much less
defined) Asian bloc.
 Cont’d
 The fourth problem is the call by some developed countries,

such as the US and France, for the establishment of labor and

environmental standards.

 These are supposed to ensure a “leveling of working conditions”

between developed and developing countries and avoid “social

dumping” by the latter (i.e., developing countries competing
unfairly by denying their workers basic rights and decent wages
and working conditions).
 Issues of Globalization
 Does Globalization Provide us with a Fairer Distribution of
Wealth?
 Globalization can be defined as the worldwide integration of
economic, cultural, political, religious, and social systems. This
demonstrates the vast range the term includes.
 Globalization is not entirely a new phenomenon.
 As a process of change, globalization embraces politics, economics,
technology, culture, lifestyle, and environment.
 Globalization has brought opportunities and challenges for countries in
the world. Globalization — including issues related to capitalism,
economic justice, health, migration and immigration, communication,
borders, education, etc.
 Cont’d
 The increasing integration of economies around the world, particularly
through trade and financial flows, but also through the movement of ideas and
people, facilitated by the revolution in telecommunication and transportation.

 Other than the criticisms raised earlier, opponents of globalization point to:

 Falling share of world trade taken by developing countries – MDCs getting

richer, LDCs staying poor

 Subsidies and tariffs set by rich developed economies: USA steel tariffs, EU
agricultural subsidies are two of the culprits

 Ant globalization movement The loose organization that blames

globalization for many human and environmental problems throughout
the world and for sacrificing human and environmental well-being to
the corporate profits of multinationals.
 There are several factors behind globalization
1. The growth of financial market: International finance has grown more than world
trade and has become one of the integrating forces.
2. The demise of the soviet system and the end of the cold war: After the demise of
the soviet system and the end of the cold war, the world is no longer divided along
ideological stance but by competition for scarce resources and markets.
3. The growth of corporate activities: global integration has been the result of the
growing activities of the multinational corporations.
4. The advent of fast and efficient information, communication and
transportation technology: this has allowed reducing the importance of distance. It
reduced communication and transportation costs.
5. Internationalization of environmental problems: this refers to international
environmental problems such as global warming and acid rain.
6. External and internal openings of the national economies: External opening
refers to the general liberalization and deregulation trends in the world economy.
 Globalization & Its Relation to Urbanization & Regional Development

 Globalization is a powerful and inevitable socio-economic force,

there is an urgent need to address its impact on the space
economy, regional development policy, and people and
communities at the local level.

 Globalization has impact on urbanization, uneven development,

regionalization etc.

 Globalization and urbanization are characterized by more

people living in urban places.
 Cont’d
 In terms of regional development, as globalization deepens,
regions need to be able to cope up with the changing situations
and create regional economic resilience.
 In global information-led socio-economic system, the
strategic importance of local and regional governments is to
become managerial centers for global activities that can be
subsumed under three headings: economic competitiveness and
productivity, socio-cultural integration, and political
representation.
 Cont’d
 In terms of regionalization, the paradox of globalization is that
on one hand it has brought internationalization and integration
of the world economy, while on the other hand it has given rise to
the formation of economic blocks and regional unions such as free
trade zones, growth triangles, and growth polygons.
 Free trade zones and cross-border regional unions are formed
to enhance investment and trade within the region and thereby
increase the competitive edge of the region in the global market.
 Cont’d Cont.……

 In general, globalization as the inevitable socio-economic

processes and its impact on the space economy suggest a radical
revision of regional policy.
 The conventional model of regional planning as one
component of state-centered planning strategies which has been
an important feature of the macro planning of many
developing countries over the last few decades will have to be
redefined, reconstructed and reconfigured in the current global
situation.
 Regional Economic Cooperation and Integration
 The theory of economic integration refers to the commercial
policy of discriminatively reducing or eliminating trade barriers only
among the nations joining together.

 The degree of economic integration ranges from preferential trade

arrangements to free trade areas, customs unions, common
markets, and economic unions.

 Economic Integration is a process where barriers to trade are

reduced or eliminated to facilitate trade between regions or nations.

 It ranging from theoretically completely free trade to the use of

special trade agreements.

47
 Cont’d
 Removing trade barriers comes with costs and benefits, depending on the

degree of economic integration and the level of cooperation between member

regions or nations.
 Reducing barriers to trade has the tendency to cut costs associated with economic

activities.
 Not having to pay taxes, tariffs, fees, and other expenses can be beneficial for

trading partners.
 This causes the volume of trade to increase, as trading partners actively seek out

deals in regions where some degree of economic integration has been achieved.
 For nations outside integration agreements, however, barriers to trade can be

created as they may not be able to compete with preferred trading partners.
 A free trade area is the form of economic integration wherein all barriers are
removed on trade among members, but each nation retains its own barriers to
trade with nonmembers. 48
 The Rationale for REI
 EI-Agaa, writing in 1982, lists clear reasons why regional economic
integration may appear to be advantageous to countries as
follows:
 Enhanced efficiency as the result of specialization

 Increased production levels as a result of the exploitation of

economies of scale
 Improved international bargaining positions as a result of

increased size
 Enforced efficiency gains as a result of increased competition, and

 Increased rate of growth as a result of technological advances.

 Forms of Integration
 Many economies attempted some degree of economic
integration.
 Some nations use free trade zones to stimulate trade with
partners.
 Others sign free trade agreements like the North American Free
Trade Agreement (NAFTA).
 In European Union (EU), a high degree of economic and
monetary integration has been accomplished between member
nations.
 Various EU nations may also have trade agreements with nations
outside the union.
50
 1. Free trade area (FTA)
 It the most common method integration which formed when at

least two states partially or fully abolish custom tariffs on their inner
border.
 To exclude regional exploitation of zero tariffs within the FTA there

is a rule of certificate of origin for the goods originating from the

territory of a member state of an FTA.
 Each member nations has its own independent right to create trade

relation with the non-member nations.

 The member nations can have either the tariff or non-tariff

barriers with the non-members.

 Non-member countries may find it profitable to export a product to

the member countries whose protection levels against the outside

world are higher. 51
 2. Customs Union
 It is composed of a free trade area with a common external tariff, but
in some cases they use different import quotas.
 Purposes for establishing a customs union normally include
 Increasing economic efficiency

 To avoid competition deficiency

 Establishing closer political & cultural ties b/n member countries.

 A customs union involves

 Trading goods between countries without any customs duties and

tariffs,
 Application of a common external tariff on imports from third

countries and
 The application of common trade policies.
52
 3. Common market
 It is an economic integration which accepts the rules and

regulations of customs union.

 Group formed by countries within a geographical area to

promote duty free trade and free movement of labor and capital
among its members.
 European community (as a legal entity within the framework

of European Union) is the best known example.

 Common markets impose common external tariff on imports

from non-member countries.

53
 4. Economic union
 It is a type of trade block which is composed of a common market

with a customs union.

 The participant countries have both common policies on

 Product regulation,

 Freedom of movement of goods, services and factors and

 a common external trade policy.

 Purposes for establishing an economic union include

 Increasing economic efficiency and

 Establishing closer political and cultural ties between the member

countries.
54
 Experiences of African Trade Blocs
1. East African Community (EAC)

 It is the regional intergovernmental organization of the Republics of

Burundi, Kenya, Rwanda, Uganda and Tanzania with its
Headquarters in Arusha, Tanzania.

 The Treaty for Establishment of EAC was signed on 30 November

1999 and entered into force on 7 July 2000 following its approval by
the original three Partner States–Kenya, Uganda and Tanzania.

 Rwanda & Burundi acceded to the EAC Treaty on 18 June 2007 and
became full Members of EAC with effect from 1 July 2007
 3. East African Community (EAC)
 The EAC is one of the more naturally homogenous of the African
trade blocks given
 The prevalence of Swahili as a common language in its member

countries and
 Their long history of regional cooperation, even going back to

colonial times.
 The EAC aims at widening and deepening co-operation among the
Partner States in political, economic and social fields for their mutual
benefit.

 EAC bears great strategic and geopolitical significance and prospects

of a renewed and reinvigorated East African Community.
 Cont’d
 The EAC countries established

 Customs Union in 2005

 Common Market by 2010,

 Monetary Union by 2012 and

 Political Federation of the East African States.

 The EAC combined

 population of 120 million people,

 land area of 1.85 million sq. kilometers and

 GDP of $41 billion

 3. Common Market for Eastern & Southern Africa (COMESA)
 The Member States of COMESA are: Burundi, Comoros, Democratic

Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya.

Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland,

Uganda, Zambia, and Zimbabwe.

 COMESA traces its genesis to the mid-1960s.

 It was under these circumstances that the UN Economic Commission for

Africa (ECA) convened a ministerial meeting of newly independent states

of Eastern and Southern Africa in 1965 to consider proposals for the

establishment of a mechanism for promotion of sub-regional economic

integration.
Southern African Development Community(SADC)
 The founding Member States are: Angola, Botswana, Lesotho,
Malawi, Mozambique, Swaziland, United Republic of Tanzania,
Zambia and Zimbabwe.
 SADC is the largest, the most integrated and the most successful of
all of the African trade blocks in terms of regional cooperation and the
mutual benefit of the members.
 While South Africa may be the driving force behind a lot of SADC's
economic integration, all member countries have greatly benefited.
 Out of many truly came an organization greater than the sum of its
parts.
 Several SADC countries have the highest GDP in Africa.
 Cont’d
 It the main aim of coordinating development projects in order to
lessen economic dependence on the then apartheid South Africa.

 SADC was formed in Lusaka, Zambia on April 1, 1980, following the

adoption of the Lusaka Declaration - Southern Africa: Towards
Economic Liberation.

 The transformation of the organization from a Coordinating

Conference into a Development Community (SADC) took place on
August 17, 1992 in Windhoek, Namibia.
 Africa Free Trade Zone (AFTZ)
 It is a free trade zone announced at the EAC-SADC-COMESA
Summit on Wednesday October 22, 2008.
 AFTZ is also referred to as the African Free Trade Area in some
official documents and press releases.
 The only natural member of the AFTZ not included was
Somalia, due to the civil war that has left most of that country
without a functioning government.
 It consisting of 26 countries with an estimated GDP of
$624billion

61
 Trade Creation and Trade Diversion
 In the analysis of preferential trading arrangements, the first
case is referred to as trade creation, while the second is trade
diversion.

 Whether a customs union is desirable or undesirable depends on

whether it largely leads to trade creation or trade diversion.

 In addition to the overall reductions in tariffs that have taken

place through multilateral negotiation, some groups of countries
have negotiated preferential trading agreements under which
they lower tariffs with respect to each other but not the rest of
the world.

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 Cont’d
 Two kinds of preferential trading agreements are allowed under the GATT.
 Customs unions, in which the members of the agreement set up
common external tariffs, and free trade areas,
 They do not charge tariffs on each others' products but set their own
tariff rates against the outside world.
 Either kind of agreement has ambiguous effects on economic welfare.
 If joining such an agreement leads to replacement of high-cost domestic
production by imports from other members of the agreement the case of
trade creation a country gains.
 But if joining leads to the replacement of low-cost imports from outside the
zone with higher-cost goods from member nations the case of trade diversion a
country loses.
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THAKS!!!

END!!!

THAKS!!! 64