Transcript Carbaugh, International Economics 9e, Chapter 9

International Economics
By Robert J. Carbaugh
9th Edition
Chapter 9:
Regional Trading Arrangements
Copyright ©2004, South-Western College Publishing
Regional trade agreements
Types of regional trade arrangements
 Free trade areas (NAFTA, for example)
 Customs unions (Benelux)
 Common markets (EU)
 Economic/monetary union
Carbaugh, Chap. 9
2
Regional trade agreements
Effects of regional trade agreements
 Static effects
 Trade creation effect (consumption effect,
production effect)
 Trade diversion effect
 Dynamic effects
 Economies of scale
 Greater competition
 Investment stimulus
Carbaugh, Chap. 9
3
Regional trade agreements
Static effects of a customs union
Carbaugh, Chap. 9
4
Regional trade agreements: case studies
The European Union
 Created by the Treaty of Rome (1957)
 Policy aims included:




Abolition of tariffs, quotas and other restrictions
Common external tariff
Free movement of capital, labor and business
Common policies on transport, agriculture, and
competition and business conduct
 Coordination of monetary and fiscal policies
Carbaugh, Chap. 9
5
Regional trade agreements: case studies
The European Union (cont’d)
 Lowering of barriers caused within-region
trade to grow much more quickly than
overall world trade in the 1960s
 Steps to remove remaining barriers (198592) further increased integration
 Maastricht Summit (1991) began process of
economic and monetary union (EMU)
 EMU came into full effect in 2002 with the
introduction of a common currency, the euro
Carbaugh, Chap. 9
6
Regional trade agreements: case studies
EU Economic & Monetary Union
 Member nations which met economic criteria by
1999 replaced their national currencies with the
euro in 2002
 New European Central Bank created to control
monetary and exchange rate policy
 “Convergence criteria” required for membership:




Price stability
Low long-term interest rates
Stable exchange rates
Sound public finances
Carbaugh, Chap. 9
7
Regional trade agreements: case studies
Other key EU policies
 Common agricultural policy (CAP)
 Support payments to farmers
 Variable import levies
 Export subsidies
 Government procurement policies
 All EU businesses can bid for larger contracts
in any nation
Carbaugh, Chap. 9
8
Regional trade agreements: case studies
CAP: variable levies and export subsidies
Carbaugh, Chap. 9
9
Regional trade agreements: case studies
Opening up government procurement
Carbaugh, Chap. 9
10
Regional trade agreements: case studies
European Union enlargement
 The EU is negotiating with 12 applicant nations,
mostly transition economies in eastern Europe,
for EU membership by 2004
 Candidate members had to demonstrate their
fitness by achieving:
 Stability of institutions, and guaranteed democracy, rule
of law, human rights and protection of minorities
 A functioning market economy which is ready to
compete in the EU market
 Adherence to the EU’s aims of political, economic and
monetary union
Carbaugh, Chap. 9
11
Regional trade agreements: case studies
Costs & benefits of EMU
 Europe does not meet all the requirements
of a theoretical “optimal currency area”
 Advantages of EMU - real but small:




Lower transaction costs
Price comparisons easier
Exchange rate risk eliminated
Stimulates competition
Carbaugh, Chap. 9
12
Regional trade agreements: case studies
Costs & benefits of EMU (cont'd)
 Disadvantages of EMU:
 Loss of monetary policy and the exchange
rates as economic adjustment tools
 Use of fiscal policy for adjustment is also
constrained
 Adjustment to shocks therefore depends on
wage flexibility and labor mobility, which are
both low in Europe
Carbaugh, Chap. 9
13
Regional trade agreements: case studies
North American Free Trade Agmt. (1994)
 Gradual and comprehensive elimination of
trade barriers among US, Mexico and
Canada over 15 years:





Full, phased elimination of import tariffs
Elimination of most NTBs
Protection of intellectual property rights
Dispute settlement procedures
Side agreements on environmental protection
and labor law
Carbaugh, Chap. 9
14
Regional trade agreements: case studies
NAFTA's benefits
 Mexico stood to gain the most, with access to
large industrial markets and new inward
investment flows
 Canada maintained its preferences in the US
market and hoped for future access to South
American markets
 US stood to gain from access to the Mexican
market and cheap labor and parts, access to
reliable oil supplies, and less immigration
pressure; but the benefits were modest
Carbaugh, Chap. 9
15
Regional trade agreements: case studies
Concerns about NAFTA
 Main US losers from NAFTA would be importprotected industries competing with Mexican
producers, and unskilled workers
 US industrial workers also worried about lower
pay scale in Mexico and plant relocations
 Concerns Mexico would not enforce
environmental protection measures
 Side agreements on environment and labor law
were concluded to address those concerns
Carbaugh, Chap. 9
16
Regional trade agreements: case studies
NAFTA’s impact so far
 Trilateral trade increased significantly
 Some US jobs were lost to Mexico, but the
numbers were small compared to job creation
that came with US growth
 Changes in investment flows were small (in
relation to total US foreign investment)
 Closer political ties were built among the three
nations, and they refrained from building new
trade barriers even during recession
Carbaugh, Chap. 9
17
Regional trade agreements: case studies
Special case: economies in transition
 Nations of eastern Europe and the former
Soviet Union have been making a transition
from a non-market (planned) economy to a
market economy since the early 1990s - which
has been very disruptive
 These nations’ planned economies required
them to be largely isolated from world trade instead, set up their own trading bloc, the
Council for Mutual Economic Assistance
(CMEA) with only limited trade with the West
Carbaugh, Chap. 9
18
Regional trade agreements: case studies
Economies in transition (cont’d)
 Even after the collapse of the central
planning system, the nations remained
tied together because of historical trade
links inside CMEA and their common
legacy as non-market economies
 There is an ongoing debate over the best
pace for economic reform (including
trade and financial liberalization) - “shock
therapy” vs. gradualism
Carbaugh, Chap. 9
19
Regional trade agreements: case studies
Economies in transition (cont’d)
 Barriers to trade with the West used to make
strategies such as countertrade, co-production
agreements, joint R&D agreements, and
contract manufacturing agreements very
common
 Gradual elimination of barriers to foreign
business in most transition countries has
allowed foreign firms to operate in the region
more normally in recent years
Carbaugh, Chap. 9
20