Xavier Lincoln

Good day. There are some more points. Import and export restrictions: Every country charges customs duties on imports to protect its home industries. Similarly, tariff rates are put on exports of raw materials. Importers and exporters have to face tariff restrictions.They are required to fulfil several customs formalities and rules. Foreign trade policy, procedures, rules and regulations differ from country to country and keep on changing from time to time.Documentation: Both exporters and importers have to prepare several documents which involve expenditure of time and money.Study of foreign markets: Every foreign market has its own characteristics. It has require­ments, customs, weights and measures, marketing methods, etc., of its own. An extensive study of foreign markets is essential for success in foreign trade. It is very difficult to collect accurate and up to date information about foreign markets.Problems in payments: Every country has its own currency and the rate at which one currency can be exchanged for another (called exchange rate) keeps on fluctuating change in exchange rate create additional risk.Remittance of money for payments in foreign trade involves much time and expense. Due to wide time gap between dispatch of goods and receipt of payment, there is greater risk of bad debts.

I agree with Mr. Leon Lacroix that close geographical proximity plays a crucial role in increasing trade. However, as the gravity model suggests, the size of the economy also determine the volume of trade. Distance between two trading partner may increase the logistic cost. Yet, it might be compensated by the large trade volume. Thus, both distance and size of the economy would be determining factors in forming a trading bloc.I also agree that the literature is not clear whether trading bloc would encourage trade creation or trade diversion. It might be both. At the beginning of the trading bloc, trade diversion would occur. Trade among members would replace trade with non-members. Later on, as the welfare of the members increases, trade creation might occur.

Thank you for your question, Valerii. Disadvantage of Flexible Exchange Rates : The following are the main drawbacks of the system of flexible exchange rates Low Elasticities: The elasticities in the international markets are too low for exchange rate, variations to operate successfully in bringing about automatic equilibrating adjustments. When import and export elas­ticities are very low, the exchange market becomes unstable. Hence, the depreciation of the weak currency would simply tend to worsen the balance of payments deficit further. Unstable conditions: Flexible exchange rates create conditions of instability and uncertainty which, in turn, tend to reduce the volume of international trade and foreign investment. Long-term foreign investments arc greatly reduced because of higher risks involved. Adverse Effect on Economic Structure: The system of flexible exchange rates has serious repercussion on the economic structure of the economy. Fluctuating exchange rates cause changes in the price of imported and exported goods which, in turn, destabilise the economy of the country. Unnecessary Capital Movements: The system of fluctuating exchange rates leads to unnecessary international capital movements. By encouraging speculative activities, such a system causes large-scale capital outflows and inflows, thus, seriously disturbing the economy of the country. Depression Effects of Capital Movements: Speculative capital movements caused by fluctuating ex­change rates may lead to the problem of extremely high liquidity preference. In a situation of high liquidity preference, people tend to hoard currency, interest rates rise, investment falls and there is large-scale unemployment in the economy. Inflationary Effect: Flexible exchange rate system involves greater possibility of inflationary effect of exchange depreciation on domestic price level of a country. Inflationary rise in prices leads to further depreciation of the external value of the currency.