5 Levels of Int’l Trade With an Avocado

This week in my int’l political economy class we’ve been learning about trade, and integration, and how nation states interact with each other globally. Quite a few blog posts will come out of these classes, so I hope you keep coming back for more! I think definitions are really important and not only will the next five levels of integration help you understand upcoming posts in this blog, but it will also give you better knowledge and insight when you watch the news, and you’ll appreciate a wonderful little avocado even more. With that, let’s bite in!

Level 1: Free Trade Area

The best real world example of a Free Trade Area is of course NAFTA which includes The United States, Canada, and Mexico. For me personally, I haven’t been sure what to think about NAFTA. A lot of people seem to be against it, but I think now I’ve gained a better opinion on it. I think it’s good. It’s only the first level of integration, and by definition, it poses less of a threat to state’s sovereignty. For the countries included in NAFTA it means that there are less barriers to trade with each other, and these countries are not limited to their group, they can also trade with non-member states. This is probably something I should touch on later, but just to be clear: trade is a good thing because it allows for competition in prices, and if there’s competition in prices it means that you can buy more delicious avocados for less. (Avocados are already expensive, can you imagine how expensive they’d be if we could only buy them from California?) What I am confused by though is that in the book I have to read for class  (Global Political Economy by Theodore Cohn) said that FTAs are good for countries with sensitive political relationships. Maybe this is where you can help me down in the comments. How is the US’s political relationships with Canada and Mexico sensitive?

Level 2: Customs Union

While there are a lot of FTAs globally, Customs Unions are not as common. The most important one in the world today is the European Union or EU. According to Cohn, CUs are similar to FTAs except they also have an external tariff towards non-member states. Remember that in an FTA, states can trade with their group as well as whoever they would like. In a CU, those choices become limited or barriers are put up. This is what prevented Britain from joining until 1973, at that time it started to phase out its common wealth practices.

Back to the avocado for a moment, Let’s say the US and Mexico formed a CU, and for some reason Canada wanted to export avocados to the US. If the US wanted the avocados from Canada they would have to pay a common external tariff, CET, to import them. So a CU limits a state’s  sovereignty and therefore it’s ability to trade with other non-member states.

Level 3: Common Market

Once again the EU is a good example of a Common Market. At this level it has the same qualities as a CU, but now includes factors of production (Land, Labor, Capital). Now, labor and capital can move more freely across borders. This allows for easier trade between countries with less government intervention.

If NAFTA became a common market then, labor could be traded freely between the three countries. Let’s say Mexican farmers have really green thumbs and are not only good at producing avocados but have the skills to do that with other produce as well. At this point it’s an incentive to become a common market since the Mexican farmers could grow produce more efficiently. At a common market level, the citizens from all three countries could move freely across borders and capital could do so as well.

Level 4: Economic Union

Once again the European Union is the best example for this, and an Economic Union has all the characteristics of a Common Market and it integrates all the countries’ infrastructure and monetary policies even further. If the union is operating at 100%, then the countries even have the same currency, as we see with the euro.

Let’s return to our NAFTA group. Let’s say it became an economic union. At this point all three countries use one currency, let’s say the US dollar, or maybe it could be a completely new currency like Europe did. Now, The United States, Canada, and Mexico share a currency, I wonder if that means that we also share each other’s debt? Who buys avocados would probably be affected then. Because if the currency is the same, then that should mean that money lost in exchanging currencies would no longer be a problem. Because at that point then, our fiscal and monetary policies would be tied together. What would happen then? Would it still be considered an economic union if the world goes for bitcoin in the future but chooses not to integrate in other ways? Is that even possible. These are all topics that will be explored in this blog.

Level 5: Political Union

There are no current political unions in the world, because they require all the previous levels of integration plus a ruling body that combines foreign and defense policies. At this point states have relinquished pretty much all of their sovereignty. Remember in the global political system that we have right now, there is no ruling authority. The US can’t go to a governing body and say that North Korea is breaking the law. There are no repercussions for a state behaving “badly”. Right now we get to govern ourselves.

What about the avocados? Let’s say the US and Canada formed a political union. If Canada had a dispute with Mexico, and took it to a ruling body that decided Mexico was in the wrong and should be punished, then it would be able to order that the US use its military to help Canada. Right? Because the ruling body combines foreign and defense policies. Then the price of avocados would shoot up because the US gets a lot of good quality avocados from Mexico. Of course there a lots of good things that could happen from a political union, but I used this example to illustrate how difficult integration could be and why this hasn’t been successful so far.

Finally:

I know that it’s probably stupid to talk about avocados and global integration and trade policies. But, my goal with this blog is to talk about things in not only a way people can understand, but that they can relate to. Economics and politics is usually boring to people because they feel it doesn’t apply to them, or the scale of which we think about it is too big. If I can talk about something we all love, then it’s easier to get excited about economics. That’s what I want to do, I want to get you excited about a subject that most people cringe away from.

Disclaimer: I’m not an expert (yet) on anything I talk about, and please don’t mistake me for giving advice. I’m a student that wants to learn about economics which is a really important topic. Please learn with me so we can be more informed citizens.

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