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Sunday, February 23, 2014

Free Trade Agreements and the Development of Super Hubs



Economic development is a major concern for regions and nations. Having a model to map how Free Trade Agreements work together is important for creating better policy. The authors Chong & Hur (2006) discuss how hub and spoke models can be used to see these relationships. They furthermore move into who receives the greatest economic advantage in such models under certain conditions. The information can be added into existing research on the dynamic value creation that occurs within economic hubs. 

The far majority of regional trade agreements (RTA) are actually Free Trade Agreements (FTA) whereby tariffs, restrictions, quotas, and preferences on many of the products exchanged between two countries. When two countries seek to enhance their economic strength by mutually working together they may sign FTA agreements based on finding a chain of production. This may require the updating of technology to ensure that products are tracked. 

The hub and spoke model (HAS) allows for a greater analysis of the benefit or detractors of overlaying agreements. Previous models analyzed economic impacts of single agreements. A HAS can allow for the analysis of greater amounts of agreements to determine if they have a benefit for a region or country. It allows the mapping of overall agreements and the totality of their benefits. 

In general, being the hub allows an area to be the center of international activity for all of the spokes. The spokes have access to the hub and the hub has access to the spokes. Reduction of costs for importing and exporting reduces the cost of the product and improves upon exportation of products. 

A super hub is a location that is the center of many different hubs and spokes throughout the global economy. Products, wealth, and opportunities are at their greatest within a super hub. As countries connect to hubs to create their own framework and these hubs connect to super hubs the system becomes interconnected. Those at the center of the hubs create greater opportunities and investment due to duty-free access of all participating members (Wonnacott, 1996).

In order for hubs and spokes to work at a maximum level that raises economic output they will need to reduce trade transaction costs.  Agreements that encourage a level of integration include intellectual property protection, foreign investment, competition policies, dispute settlements, telecommunications, and environmental protections. Criteria are defined for each of the agreements and have hidden costs and benefits that make themselves known over time. Generally, the more integrative the less the cost and greater the benefits. 

When conditions are imperfect conditions across the globe there is a loss of trade but super hubs and hubs have less loss than others. This may be manipulation of currency, high import tariffs, corporate espionage, corruption, and many other factors that give one country an unfair advantage over others. This encourages a warped or manipulated system that impacts other transactional costs and relationships among competing countries. 

The authors found that strong emerging economies prefer hub status over a simple trade zones due to inherent economic benefits. They will not stop with one free trade agreement and are likely to make many overlapping FTAs to create a hub based upon their competitive strengths.  They seek to integrate the interactions of their economies with others even though there may be temporary adjustments and labor shifts. 

Comment: The authors define a super hub as a central connected location of two or more pairs of countries with FTAs. However, the world is a little more complex and most countries are economically connected. A super hub is a place where the greatest creativity, investment, value creation, and movement of products occurs. Some of these products will come in, be adjusted, and exported while others are organically developed. The super hub has super connectivity to other hub locations that connect to smaller suppliers. In other words, they have the greatest amount of sales ability to move products throughout the world due to the overlapping economies, strategic plan, and well-designed FTAs.  Their skills, infrastructure, investments, and technology make them a place of heightened trade and ecological livability.

Chong, S. & Hur, J. (2008). Small Hubs, Large Spokes and Overlapping Free Trade Agreements. World Economy, 31 (12).

Wonnacott, R. J. (1996). Canadian Trade Policy: The GATT’s 1995 Review’, in S. Arndt and C. Milner (eds.), The World Economy – Global Trade Policy 1996(Oxford: Blackwell Publishers), 67–80.

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