Transcript Regional Trade Agreements

Multilateral trade arrangements [GATT  WTO]
Nondiscrimination: bilateral liberalization extended to all
members.
“Most favored nation”
BUT Complex negotiations: 150+ nations at the table
Regional trade arrangements: EU, NAFTA
Economic integration  economies of scale
Basis for enlargement
As integration proceeds, costs of staying out increase
As labor deploys to competitive sectors, benefits (and
political support) spreads.
BUT trade diversion vis a vis non-members
Regional trade agreements
Types of regional trade arrangements
 Free trade areas (NAFTA, for example)
 Customs unions (Benelux, CACM)
 Common markets (MERCOSUR,EEC)
 Economic union (EU)
 Economic and monetary union (USA, EMU)
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 producers not in
the club
 Dynamic effects
 Economies of scale
 Greater competition
 Investment stimulus
European Union / European Monetary 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
Joiners, ‘00s: Transition economies: Slovenia, Poland, Czech
Republic, Slovakia, Hungary, Estonia, Latvia, Lithuania,
Bulgaria, Romania + Cyprus, Malta
Total Population, GDP, GDP per capita (PPP, 2008)
EU:
500mil $15.2tril $30,500
€-zone: 326mil 10.6 tril 32,500
USA:
306mil 14.3 tril 46,900
European Union
 Within-region trade grew much more
quickly than world trade in the 1960s
 Steps to remove remaining barriers
(1985-92) further increased integration
 1987 Delors Report
 Four Freedoms: goods, services, labor, capital
 Maastricht Summit (1991)
 began process of economic and monetary
union (EMU)
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%
Other key EU policies
 Common agricultural policy (CAP)
 Support payments to farmers  surpluses
 Export subsidies  devastates LDC agriculture
 Variable import levies: when world price down,
EU tariff up  stable prices within EU
 Germans supported French farmers
 Now support Polish/Hungarian/Baltic farmers
 Government procurement policies
 All EU businesses can bid for large contracts in any
nation
Benefits of EMU
 Lower transaction costs
 Price comparisons easier
 Exchange rate risk eliminated
 Stimulates competition
Costs of EMU
Europe is not an "optimal currency area"
•Loss of monetary policy and the exchange rates
as economic adjustment tools
Response to Asymmetric shocks
•Use of fiscal policy for adjustment is constrained
•Need wage flexibility and labor mobility
•both low in Europe
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
Concerns about NAFTA
 Main US losers from NAFTA: import-protected
industries competing with Mexican producers, and
unskilled workers
 Trade diversion from low-cost Asian producers
 US industrial workers worried about lower pay
scale in Mexico and plant relocations
 Concerns Mexico would not enforce
environmental protection measures
 Concern now shifted to China and India