International Trade Policy improve conformity of trade and productive sector policies, long-term innovation, science, technology strategies, legal, regulatory and administrative frameworks with WTO requirements and international norms and standards; • support to improve food safety compliance, enforcement and export potential of food products; • promote increased export opportunities for agricultural and industrial products through an upgraded conformity assessment, infrastructure and an improved investment environment;
International Trade Policy. This possibility of a loss is another example of the theory of the second best. Think of Britain as initially having two policies that distort incentives: a tariff against U.S. wheat and a tariff against French wheat. Although the tariff against French wheat may seem to distort incentives, it may help to offset the distortion of incentives resulting from the tariff against the United States by encouraging consumption of the cheaper U.S. wheat. Thus, removing the tariff on French wheat can actually reduce welfare. Returning to our two cases, notice that Britain gains if the formation of a customs union leads to new trade—French wheat replacing domestic production—while it loses if the trade within the customs union simply replaces trade with countries outside the union. 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. Case Study Trade Diversion in South America In 1991, four South American nations, Argentina, Brazil, Paraguay, and Uruguay, formed a free trade area known as Mercosur. The pact had an immediate and dramatic effect on trade: Within four years the value of trade among the nations tripled. Leaders in the region proudly claimed Mercosur as a major success, part of a broader package of economic reform. But while Mercosur clearly was successful in increasing intraregional trade, the theory of preferential trading areas tells us that this need not be a good thing: If the new trade came at the expense of trade that would otherwise have taken place with the rest of the world—if the pact diverted trade instead of creating it—it could actually have reduced welfare. And sure enough, in 1996 a study prepared by the World Bank’s chief trade economist concluded that despite Xxxxxxxx’s success in increasing regional trade—or rather, because that success came at the expense of other trade—the net effects on the economies involved were probably negative. In essence, the report argued that as a result of Mercosur, consumers in the member countries were being induced to buy expensively produced manufactured goods from their neighbors rather than cheaper but heavily tariffed goods from other countries. In particular, because of Mercosur, Brazil’s highly protected and somewhat inefficient auto industry had in effect acquired a captive market in Argenti...
