chapter 8 - regional trade agreements

trade liberalization

the process of reducing barriers to trade

trade liberalization since WWII

since WWII, advanced nations have significantly lowered their trade restrictions using two approaches

regional trade agreements

member nations agree to impose lower trade barriers to trade within group than with nonmember nations

major purpose of world trade organization (WTO)

major purpose of wto is to promote trade liberalization through global agreements

problem with WTO with trade liberalizations

getting many countries to agree was difficult and by the early 2000s, wto was stumbling

rise of regional agreements

countries increasingly looked towards regional agreements as an alternative to global agreements

number of regional agreement risen

number of regional agreements has risen to 300, covering more than half of international trade

regional trading blocs

agreements made among geographically proximate countries that reduce trade barriers in order to better compete with other regional markets

are regional trading bloc discriminatory?

some regional blocs decrease discretion of member nations to pursue trade with outsiders

regional agreements

- NAFTA, CAFTA, EU, ASEAN, FTAA

- self-reinforcing process is set in place by the establishment of a regional free-trade area

what does regional liberalization encourage?

- partial adjustment of workers

- out of import-competing industries in which the nation's competitive disadvantage is strong

- into exporting industries in which the nation's comparative advantage is strong

economic integration

process of eliminating restrictions on global trade, payments, and factor mobility by uniting 2 or more national economies in regional trading agreement

types of regional trading arrangements

free-trade area, customs union, common market, economic union, monetary union

free-trade area

A group of countries committed to removing all barriers to the free flow of goods and services between each other. However, these countries pursue independent external trade policies. For example, the North American Free Trade Agreement (NAFTA) before its transformation.

customs union

a group of countries that have agreed to charge the same import duties as each other. They also usually to allow free trade between themselves. An example of this would be the European Economic Community (EEC) before the formation of the European Union (EU).

common market

a group of countries that acts as a single market, without trade barriers between member countries. the group of countries go beyond a customs union by allowing the free movement of not just goods but also services, capital, and labor (i.e. European Single Market).

economic union

- Economic unions involve a deeper level of integration, often including a common currency, coordinated economic policies, and harmonized regulations.

- A group of countries are committed to (1) removing all barriers to the free flow of goods, services, and factors of production between each other, (2) the adoption of a common currency, (3) the harmonization of tax rates, and (4) the pursuit of a common external trade policy.

- Ex: Eurozone within the EU

monetary union

a group of countries that use a common currency. member countries also coordinate monetary policies. An example of this would be the Eurozone within the EU.

motivations for regional trading arrangement

- prospect of enhanced economic growth

- variety of non economic objectives

- enhance & solidify domestic economic reforms

static effects of a regional trading arrangement

- welfare increasing trade creation effect

- welfare decreasing trade diversion effect

welfare increasing trade creation effect

- Domestic production of one member in union replaced by another member's lower-cost imports

- Production and consumption effects

welfare decreasing trade diversion effect

imports from low-cost supplier outside union replaced by higher-cost supplier within union

dynamic effects of a regional trade arrangement

- creation of broader markets

- dynamic gains: economies of scale, greater competition, increased investment, accelerated pace of technical advance; increased productivity

economic integration of the european union: 1950s

western europe removed tariff & exchange restrictions as counterproductive

economic integration of the european union: 1957

pursuant to treaty of rome, european community became EU (goal was for trade liberalization)

original member of EU in 1957

belgium, france, italy, luxembourg, netherlands, west germany

economic integration of the european union: 1968

free trade area

economic integration of the european union: 1970

customs union

economic integration of the european union: 1985

announced program to form common market

economic integration of the european union: 1992

elimination of all nontariff trade barriers

economic integration of the european union: 2002

european monetary union (EMU) and single currency (euro)

maastricht treaty

mandated alignment of economic and monetary policies

european monetary union (emu)

A group of countries that have adopted the Euro in 2002 and have their monetary policy controlled by the European Central Bank (ECB).

how many european countries still have the euro as their official currency?

18 of the 28 member nations (the Eurozone)

which european countries have their own currencies?

united kingdom, denmark, and sweden

common agricultural policy (cap)

abolished restrictions on agricultural products traded internally

number of countries in the EU before brexit

28 countries joined

referendum of 2016 brexit

- movement split UK conservative party

- fears about too much power to brussels

- fear about immigration

pros and cons of brexit

- UK contributes more to EU than it gets in return

- weaker economy and security for europe in general

- UK could lose foreign investment

purposes of the eurozone

- lowers costs of goods and services

- facilitates comparison of prices within EU

- promotes more uniform prices

purposes of the european central bank, frankfurt

- controls euro supply

- sets short-term euro interest rate

- maintains permanently fixed exchange rates for member countries

advantages of adopting a common currency

- risks associated with exchange fluctuations are eliminated within a common currency area

- costs of currency conversion are lessened

- the economies are insulated from monetary disturbances and speculation

- political pressures for trade protection are reduced

disadvantage of adopting a common currency

- absence of individual domestic monetary policy to counter macroeconomic shocks

- inability of an individual country to use inflation to reduce public debt in real terms

- the transition from individual currencies to a single currency could lead to speculative attacks

benefits of optimal currency area

- more uniform prices; lower transaction costs

- more certainty for investors; enhanced competition

- greater price stability

costs of optimal currency area

- loss of independent monetary policy

- eliminates flexibility of changing exchange rate

problems of the eurozone as a suboptimal currency area

- some countries did not meet economic entry criteria

- integration of differing economies without adjustment

- difficulties in reducing budget deficits

challenges of the eurozone as a suboptimal currency area

- ability of european central bank to focus on price stability over long term

- operation of monetary policy

- difficulty in reducing budget deficits and debts

- need for structural reform

north american free trade agreement (nafta)

- mexico, canada, & the US providing each member nation better access to the others' market, technology, labor, and expertise

winners in the US under free trade with mexico

- higher skill, higher tech businesses and their workers benefit from free trade

- labor intensive businesses that relocate to mexico benefit by reducing production costs

- domestic businesses that use imports as components in the production process save on production costs

losers in the US under free trade with mexico

- labor intensive, lower wage, import competing businesses lose from reduced tariffs on competing imports

- workers in importing-competing businesses lose if their businesses close or relocate

nafta benefits for mexico

- their economies are much larger than of the US and Canada

- increase in production of goods and services in which mexico has comparative advantage

nafta costs for mexico

producers of rice, beef, pork & poultry devastated by nafta as they cannot compete with us products

nafta benefits for canada

- mostly in form of safeguards

- maintenance of its status in international trade

- no loss of current free trade preferences in the US market

- equal access to mexico's market

nafta costs for canada

- major concern that closer integration with US economy would threaten Canada's social welfare model

nafta benefit for the US

•Expanding trade opportunities

•Reducing prices

•Increasing competition

•Enhancing ability of U.S. firms to attain economies of large-scale production

•Providing reliable source of petroleum

•Decreasing illegal immigration

•Enhancing political stability in Mexico as country becomes wealthier

nafta costs for the US

•Citrus & sugar industries that rely on trade barriers to limit imports of low-priced Mexican goods

•Unskilled workers, e.g., in apparel industry, who now face competition with low-wage workers abroad, leading to job losses

•Prediction of mass relocation of U.S. firms to Mexico proved unfounded

•U.S. workers more productive, so could be paid higher wage at no loss to company

modernizing nafta

•Critics say NAFTA unfair and "jobs destroyer"

•Proponents maintain that trade agreement fosters increased trade & investment

•President Trump-2017 negotiations with Canada and Mexico arguing that original NAFTA deal of the early 1990s ill-suited for 2017

•Issues under discussion: digital trade, energy, dispute settlement