Post on 06-May-2015
Copyright ©2005, Thomson/South-Western
International Economics
Regional Trading Arrangements
Carbaugh, Chap. 8 2
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. 8 3
Regional trade agreements
Reasons for regional trade agreements Economic growth
Larger market creates economies of scale, encourages specialization, attracts foreign investment
Non-economic objectives Helps manage immigration flows, or enhances regional
security, for example
Solidifies domestic economic reforms East European nations have looked to association with
the EU as a way of locking in economic reforms
Carbaugh, Chap. 8 4
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. 8 5
Static effects of a customs union
Regional trade agreements
Carbaugh, Chap. 8 6
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. 8 7
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 (1985-92) 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. 8 8
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. 8 9
Regional trade agreements: case studies
European Union enlargement The EU admitted 10 nations, mostly transition
economies in eastern Europe, to EU membership in 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. 8 10
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. 8 11
CAP: variable levies and export subsidies
Regional trade agreements: case studies
Carbaugh, Chap. 8 12
Opening up government procurement
Regional trade agreements: case studies
Carbaugh, Chap. 8 13
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. 8 14
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. 8 15
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. 8 16
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. 8 17
Regional trade agreements: case studies
Concerns about NAFTA Main US losers from NAFTA would be import-
protected 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. 8 18
Regional trade agreements: case studies
NAFTA’s impact so far Trilateral trade increased significantly
Most of the increase in US trade with Mexico and Canada resulted from trade creation, but Canada-Mexico trade increases came mostly from trade diversion
Some US jobs were lost to Mexico, but the numbers were small compared to job creation that came with US growth Larger effects were felt in sectors more
exposed to intra-NAFTA trade
Carbaugh, Chap. 8 19
Regional trade agreements: case studies
NAFTA’s impact so far (cont’d)
Changes in investment flows were small (in relation to total US foreign investment)
Closer political ties were built among the three nations (especially between the US and Mexico), and they refrained from building new trade barriers even during recession
Carbaugh, Chap. 8 20
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. 8 21
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
Significant structural reform issues remain even in those east European nations which recently joined the EU
Carbaugh, Chap. 8 22
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