Cartel

1. What best describes a Cartel?
A cartel is a group of producers of goods or suppliers of services formed through an agreement

amongst themselves, whether or not through a formal agreement in writing, to regulate the
supply of goods or services with the basic intent to control the prices illegally or to restrict
competition in respect of the said goods or services. There are even some legalized cartels over
the globe, such as OPEC, which regulates petrol prices.
1.1. What is the difference between a cartel and a Mafia?
Both are criminal organizations. The traditional Mafia is Italian. The cartels are from Latin
America. The cartels primary business is narcotics. The Mafia’s primary business is illegal
gambling. The cartels are much more violent.
1.2. What does it do?
 These are formed to protect the self-interest of a group of producers. The producers work in a
group to regulate the prices of commodities.
 Through this, the producers can easily raise the prices by observing the demand-supply ratio for
the goods.
 This member can decide jointly to restrict the supply in the market.
 They can also choose to provide entry barriers to their market.
1.3. What are the advantages and disadvantages of Cartel?

Advantages
 It provides monopoly-type power to the member units.
 They can sell products at higher margins, maximizing the gross profits.
 The cost of advertising is reduced, and the product is easily known to the customers.
 No effect of the business cycle on the individual players.
 They can easily manage production efficiency as per supply constraints.
 A reasonable margin is assured for each member of the cartel.
 Big savings are achieved on economies of scale.
Disadvantages
 Individual monopolies affect the disposable income of customers.
 It creates inefficiencies in the market, which may affect the quality of the end product.
 It may have full regulation over the member, destabilizing other members.
 There is no motivation to increase efficiency in the market. Thus, prices of products
remain at a high cost.
 Demand will fluctuate as per customers’ needs and other economies of scale. However,
that cannot regulate the market.
 The individual members are not able to scale up their operations.
2. What is International Cartels and what does it do?

International cartels are associations or combinations of producers or traders from two or more
countries which aim at some degree of market control and regulation of competition. The
members are generally independent companies which are competitors, and membership is in
most cases voluntary
3. What does Foreign Trade Zones (FTZ) stand for?

According to U.S. Customs and Border Protection, “Foreign-Trade Zones (FTZ) are activated,
secure areas under U.S. Customs and Border Protection (CBP) supervision that are generally
considered outside CBP territory. These zones are generally located in or near CBP ports of entry
and are the United States' version of what are known internationally as free-trade zones.”
Basically, Foreign-Trade Zones offer importers, exporters, and those creating additional products
from imported goods, the opportunity to realize dramatic savings. In FTZs, certain businesses
can avoid or defer some of the duties and fees associated with international trade. FTZs also ease
a lot of the usual complexity and time loss associated with Customs oversight.
3.1. What are FTZ Basics and Benefits?
For many U.S. firms with big importing needs, Foreign-Trade Zones offer a considerable
strategic advantage because they compete with manufacturers from outside the U.S. Here are
some of the key benefits:
 Duty Exemption
 Duty Deferral
 Duty Reduction or Inverted Tariff
 Reduction of Merchandise Processing Fee (MPF)
 Tax Savings
 Labor, Overhead & Profit Savings
 Quota Avoidance
 Streamlined Logistics
Companies in Foreign-Trade Zones can also save on insurance costs because duty on FTZ
merchandise doesn’t need to be included when calculating insurable value. Transportation costs
tend to be lower as a result of more fluid logistics processes. Maintenance Fees are paid quarterly
instead of when goods arrive, saving time and hassle when handling shipments.
Goods can also remain in FTZs indefinitely even if they are subject to duty or taxation.
Exceptions to this rule may apply.
4. What are Custom Unions?
A customs union is an agreement between two or more neighboring countries to remove trade
barriers, reduce or abolish customs duty, and eliminate quotas. Such unions were defined by the
General Agreement on Tariffs and Trade (GATT) and are the third stage of economic
integration.
4.1. What are the main features of the Customs union?
Customs unions offer the following benefits:
A. Increase in trade flows and economic integration
The main effect of a free-trade agreement is that it increases trade between member countries. It
helps improve the allocation of scarce resources that satisfy the wants and needs of consumers
and boosts foreign direct investment (FDI).
Customs unions lead to better economic integration and political cooperation between nations
and the creation of a common market, monetary union, and fiscal union.
B. Trade creation and trade diversion
The effectiveness of a customs union is measured in terms of trade creation and trade diversion.
Trade creation occurs when the more efficient members of the union sell to less efficient
members, leading to a better allocation of resources.
Trade diversion occurs when efficient non-member countries sell fewer goods to member
countries because of external tariffs. It gives less efficient countries in the union the opportunity
to capitalize on their position and sell more goods within the union.
If the gains from trade creation exceed the losses from trade diversion, that leads to increased
economic welfare among member countries.
C. Reduces trade deflection
One of the main reasons a customs union is favored over a free trade agreement is because the
former solves the problem of trade deflection. This occurs when a non-member country sells its
goods to a low-tariff FTA (free trade agreement) country, which then resells to a high-tariff FTA
country, leading to trade distortions. The presence of a common external tariff in customs unions
helps avoid problems that arise from tariff differentials.
4.2. What is the difference between Free Trade and customs Union?
Unlike in free trade agreements, a common external tariff is imposed on non-members of the
union. When countries outside the union trade with countries in the customs union, they need to
make a single payment (duty fee) for the goods that have crossed the border. Once inside the
union, they can trade freely with no added tariffs.
4.3. What is the difference Common Market and Customs Union?
A custom union is where all obstacles of free movement of goods and services are removed and
a common external tariff is agreed. A common market is union of partners with free movement
of goods, services, and the addition of free movement of labour and capital.
References
Custom Union - Defintion, Purpose, Advantages and Disadvantages. (2021). Retrieved from Corporate
Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/economics/
customs-union/
Newton, B. (2021). What is a Foreign-Trade Zone Definition, Benefits & Options. Retrieved from Build
Your Better Here: https://buildyourbetterhere.com/foreign-trade-zones
Walles, G. (2018). Difference Between Common Market and Custom Union. Retrieved from Essay
Company: https://www.essaycompany.com/essays/economics/difference-common-market-
custom-union-4775

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1. What best describes a Cartel?

A cartel is a group of producers of goods or suppliers of services formed through an agreement

1.3. What are the advantages and disadvantages of Cartel?

2. What is International Cartels and what does it do?

3. What does Foreign Trade Zones (FTZ) stand for?

Customs unions offer the following benefits:

A. Increase in trade flows and economic integration

B. Trade creation and trade diversion

C. Reduces trade deflection

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