International Economics




     Regional Trading Arrangements




           Copyright ©2005, Thomson/South-Western
Regional trade agreements


 Types of regional trade arrangements
  Free trade areas (NAFTA, for example)
  Customs unio...
Regional trade agreements


 Reasons for regional trade agreements
  Economic growth
       Larger market creates econom...
Regional trade agreements


 Effects of regional trade agreements
  Static effects
       Trade creation effect (consump...
Regional trade agreements

 Static effects of a customs union




Carbaugh, Chap. 8                    5
Regional trade agreements: case studies


 The European Union
  Created by the Treaty of Rome (1957)
  Policy aims inclu...
Regional trade agreements: case studies


 The European Union (cont’d)
  Lowering of barriers caused within-region
   tra...
Regional trade agreements: case studies


 EU Economic & Monetary Union
  Member nations which met economic criteria by
 ...
Regional trade agreements: case studies


 European Union enlargement
  The EU admitted 10 nations, mostly transition
   ...
Regional trade agreements: case studies


 Other key EU policies
  Common agricultural policy (CAP)
       Support payme...
Regional trade agreements: case studies

CAP: variable levies and export subsidies




Carbaugh, Chap. 8                  ...
Regional trade agreements: case studies

 Opening up government procurement




Carbaugh, Chap. 8                         ...
Regional trade agreements: case studies


 Costs & benefits of EMU
  Europe does not meet all the requirements
   of a th...
Regional trade agreements: case studies


 Costs & benefits of EMU (cont'd)
  Disadvantages of EMU:
       Loss of monet...
Regional trade agreements: case studies


 North American Free Trade Agmt. (1994)
  Gradual and comprehensive elimination...
Regional trade agreements: case studies


 NAFTA's benefits
  Mexico stood to gain the most, with access to
   large indu...
Regional trade agreements: case studies


 Concerns about NAFTA
  Main US losers from NAFTA would be import-
   protected...
Regional trade agreements: case studies


 NAFTA’s impact so far
  Trilateral trade increased significantly
       Most ...
Regional trade agreements: case studies


 NAFTA’s impact so far (cont’d)
  Changes in investment flows were small (in
  ...
Regional trade agreements: case studies


 Special case: economies in transition
  Nations of eastern Europe and the form...
Regional trade agreements: case studies


 Economies in transition (cont’d)
  Even after the collapse of the central plan...
Regional trade agreements: case studies


 Economies in transition (cont’d)
  Barriers to trade with the West used to mak...
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Carbaugh10e Ch08

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Carbaugh10e Ch08

  1. 1. International Economics Regional Trading Arrangements Copyright ©2005, Thomson/South-Western
  2. 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 2
  3. 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 3
  4. 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 4
  5. 5. Regional trade agreements Static effects of a customs union Carbaugh, Chap. 8 5
  6. 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 6
  7. 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 7
  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 8
  9. 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 9
  10. 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 10
  11. 11. Regional trade agreements: case studies CAP: variable levies and export subsidies Carbaugh, Chap. 8 11
  12. 12. Regional trade agreements: case studies Opening up government procurement Carbaugh, Chap. 8 12
  13. 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 13
  14. 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 14
  15. 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 15
  16. 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 16
  17. 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 17
  18. 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 18
  19. 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 19
  20. 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 20
  21. 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 21
  22. 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 Carbaugh, Chap. 8 22

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