Transcript Regional Trade Agreements

Regional trade agreements
Types of regional trade arrangements
 Free trade areas (NAFTA, for example)
 Customs unions (Benelux, CACM)
 Common markets (MERCOSUR,EEC)
 Economic/monetary union (EU)
Carbaugh, Chap. 9
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Regional trade agreements
Effects of regional trade agreements
 Static effects
 Trade creation effect
 consumption effect … buy more from your partner
 production effect … less inefficient domestic production
 Trade diversion effect
 … buy less from efficient, low cost producer
 Dynamic effects
 Economies of scale
 Greater competition
 Investment stimulus
Carbaugh, Chap. 9
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Regional trade agreements
Price ($)
Static effects of a customs union
SL
4.25
4
SG+tariff
SUS+tariff
SG
SUS
3.75
3.5
a
3.25
b
c
3
2.75
DL
2.5
2.25
2
0
5
10
15
20
25
30
Grain (bushels)
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The European Union
Created by the Treaty of Rome (1957)
Original Members: Belgium,France,Germany,
Italy,Luxembourg,Netherlands
Joiners,’73: Denmark,Ireland,UK
Joiners,’80s: Greece, Portugal, Spain
Joiners,’95: Austria,Finland,Sweden
Total Population, GDP, GDP per capita (1996)
EU:
372mil $8.6 tril, $23,200
€-zone: 300mil 7.0 tril,
23,000
USA: 271mil 8.0 tril,
29,300
Carbaugh, Chap. 9
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Regional trade agreements: case studies
The European Union (cont’d)
 Within-region trade to grew much more
quickly than world trade in the 1960s
 Steps to remove remaining barriers (198592) further increased integration
 1987 Delors Report
 Four Freedoms: goods, services, labor, capital
 Maastricht Summit (1991) began process of
economic and monetary union (EMU)
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Regional trade agreements: case studies
EU Economic & Monetary Union (1999)
 National currencies replaced with the euro, 2002
 European Central Bank created to control
monetary and exchange rate policy
 “Convergence criteria” required for membership:
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Price stability … 3.2% inflation
Low long-term interest rates … 7.7%
Stable exchange rates
Sound public finances
 Deficit/GDP … 3%
 Debt/GDP … 60%
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Regional trade agreements: case studies
Other key EU policies
 Common agricultural policy
 Support payments to farmers
 Variable import levies
 Export subsidies
 Government procurement policies
 All EU businesses can bid for larger contracts
in any nation
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Regional trade agreements: case studies
Benefits of EMU
 Europe is not an "optimal currency area"
 Advantages of EMU:
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Lower transaction costs
Price comparisons easier
Exchange rate risk eliminated
Stimulates competition
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Regional trade agreements: case studies
Costs of EMU
Loss of monetary policy and the exchange
rates as economic adjustment tools
 Asymmetric shocks
Use of fiscal policy for adjustment is
constrained
Need wage flexibility and labor mobility,
which are both low in Europe
How to divide seignorage?
Carbaugh, Chap. 9
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US-Canada Free Trade Agmt. (1989)
North American Free Trade Agmt. (1994)
 Gradual and comprehensive elimination of
trade barriers among US, Mexico and
Canada over 15 years:
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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
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Regional trade agreements: case studies
Concerns about NAFTA
 Main US losers from NAFTA: importprotected industries competing with
Mexican producers, and unskilled workers
 US industrial workers worried about lower
pay scale in Mexico and plant relocations
 Concerns Mexico would not enforce
environmental protection measures
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Regional trade agreements: case studies
NAFTA after five years
 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
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