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Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
Carbaugh10e Ch08
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Carbaugh10e Ch08

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  • 1. International Economics Regional Trading Arrangements Copyright ©2005, Thomson/South-Western
  • 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. 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. 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. Regional trade agreements Static effects of a customs union Carbaugh, Chap. 8 5
  • 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. 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. 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. 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. 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. Regional trade agreements: case studies CAP: variable levies and export subsidies Carbaugh, Chap. 8 11
  • 12. Regional trade agreements: case studies Opening up government procurement Carbaugh, Chap. 8 12
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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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