NAME :SUPRIYA S HEGDE
What is a trade bloc?
• Member states
• Future membership
• Objectives of European Union
• Organizational Structure
• Evolution of European Union as trade bloc
• Factors that European Union must consider
South Asian Association for Regional Cooperation (SAARC)
• Member States:
• Future membership
• SAARC: Formation and objectives
• Areas of Cooperation
• Political issues
• Free trade agreement
• The EU and South Asian Association for Regional Co-operation
Latin American Free Trade Association (LAFTA)
• The LAFTA agreement has important limitations
North American Free Trade Agreement (NAFTA)
• History of implementation
• Economic Relationship among NAFTA Nations
• Effects on NAFTA nations
• NAFTA Trade Policies
What is a trade bloc?
A trade bloc is type of intergovernmental agreement, often part of a regional
intergovernmental organization, where regional barriers to trade (tariffs and non-
tariff barriers) are reduced or eliminated among the participating states. Surges of
trade bloc formation were seen in the 1960s and 1970s, as well as in the 1990s after
the collapse of Communism. By 1997, more than 50% of all world commerce was
conducted under the auspices of regional trade blocs. Trade blocs can be stand-
alone agreements between several states (such as NAFTA) or part of a regional
organization (such as the European Union). Depending on the level of economic
integration, trade blocs can fall into different categories, such as:
• Preferential trading areas
• Free trade areas
• Customs unions
• Common markets
• Economic and monetary unions
Advocates of worldwide free trade are generally opposed to trading blocs, which,
they argue, encourage regional as opposed to global free trade. Scholars and
economists continue to debate whether regional trade blocs are leading to a more
fragmented world economy or encouraging the extension of the existing global
multilateral trading system.
Advantages/ benefits of Joining a Trading Blocs
• Access to larger markets leads to internal economies of scale.
• External economies of scale due to improved infrastructure (e.g. transport
and telecoms links).
• Greater international bargaining power.
• Increased competition between members.
• More rapid spread of technology
Disadvantages /risks of Joining a Trading Blocs
• Country may lose resources to more efficient members, or to geographical
centre, and become depressed region.
• Firms may co-operate, collude and merge, leading to greater monopoly
• Diseconomies of scale if firms become very large.
• High administrative costs of trading bloc.
The European Union or EU is an international organisation of European states,
established by the Treaty on European Union (the Maastricht treaty). The European
Union is the most powerful regional organisation in existence, in some ways it
resembling a state. The European Union (EU) is a political and economic union of
27 member states, located primarily in Europe. It was established by the Treaty of
Maastricht in 1993 upon the foundations of the pre-existing European Economic
Community. With almost 500 million citizens, the EU combined generates an
estimated 30% share of the world's nominal gross domestic product (US$16.8
trillion in 2007).
The European Union is composed of 27 independent sovereign countries which are
known as member states: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.
There are three official candidate countries, Croatia, the Former Yugoslav Republic
of Macedonia, and Turkey. The western Balkan countries of Albania, Bosnia and
Herzegovina, Montenegro, and Serbia are officially recognised as potential
candidates. Kosovo is also listed by the European Commission as a potential
candidate but the Commission does not list it as an independent country because not
all member states recognise it as an independent country, separate from Serbia.
To join the EU, a country must meet the Copenhagen criteria, defined at the 1993
Copenhagen European Council. These require a stable democracy which respects
human rights and the rule of law; a functioning market economy capable of
competition within the EU; and the acceptance of the obligations of membership,
including EU law. Evaluation of a country's fulfillment of the criteria is the
responsibility of the European Council. The current framework does not specify
how a country could exit the Union (although Greenland, a Territory of Denmark,
withdrew in 1985), but the proposed Treaty of Lisbon contains a formal procedure
Four Western European countries that have chosen not to join the EU have partly
committed to the EU's economy and regulations: Iceland, Liechtenstein, and
Norway are a part of the single market through the European Economic Area, and
Switzerland has similar ties through bilateral treaties.The relationships of the
European microstates Andorra, Monaco, San Marino, and Vatican City include the
use of the euro and other co-operation.
Objectives of European Union
Economic integration is a mechanism through which a group of countries try to
improve their level of welfare through higher growth. A single market arrangement,
the highest form of regional cooperation (as adopted by the European Union),
requires that all residents (producers and consumers) should be governed by exactly
the same rules. This form of integration implies that all participants must be treated
equally in all parts of the market. The guiding principle behind economic
integration/economic union is the concept of convergence in per capita income
and/or per worker income among participating nations.
The EU has developed a single market through a standardised system of laws which
apply in all member states, guaranteeing the freedom of movement of people, goods,
services and capital. It maintains a common trade policy, agricultural and fisheries
policies, and a regional development policy.
Fifteen member states have adopted a common currency, the euro. It has developed
a role in foreign policy, representing its members in the World Trade Organisation,
at G8 summits and at the United Nations. Twenty-one EU countries are members of
NATO. It has developed a role in justice and home affairs, including the abolition of
passport control between many member states under the Schengen Agreement.
According to the neo-classical models of economic growth, “the technology is such
that, all things equal, poor countries/regions in terms of GDP per capita and/or per
worker, grow faster than rich ones. If poor and rich countries differ only by their
initial level of per capita GDP and they face identical technology and preferences,
then, inequality eventually disappears in the long-run. If countries differ in other
aspects too, then convergence takes the form of the stabilization of the distribution
of relative income per capita across territories European Union was created with
this basic principle in mind.
The EU operates through a hybrid system of intergovernmentalism and
supranationalism. In certain areas it depends upon agreement between the member
states. However, it also has supranational bodies, able to make decisions without
unanimity between all national governments. Important institutions and bodies of
the EU include the European Commission, the European Parliament, the Council of
the European Union, the European Council, the European Court of Justice and the
European Central Bank. EU citizens elect the Parliament every five years.
The EU traces its origins to the European Coal and Steel Community formed among
six countries in 1951 and the Treaty of Rome in 1957. Since then the union has
grown in size through the accession of new countries, and new policy areas have
been added to the remit of the EU institutions
By making conditions equal across Europe, EU will be able to bridge the gap
between the rich and poorer nations. Over the last twelve years, EU has tried to
create equal opportunities for the poorer nations and we try to find out if it helped
poorer nations get richer and closer to rich nations in terms of GDP per capita as
well as in terms of absolute amount of GDP.
The study evaluates if EU delivered growth to member nations by creating equal
conditions in terms of lower inflation through monetary policy coordination and
lower budgetary deficits, lower currency volatility through single currency,
promotion of democratic institutions through respect for human rights and peace on
borders of the participating nations.
The EC, which is the core of the EU, originally referred to the group of Western
European nations that belonged to each of three treaty organizations—the
European Coal and Steel Community (ECSC), the European Economic Community
(EEC), and the European Atomic Energy Community (Euratom). In 1967 these
organizations were consolidated under a comprehensive governing body composed
of representatives from the member nations and divided into four main branches—
the European Commission (formerly the Commission of the European
the Council of the European Union (formerly the Council of Ministers of the
the European Parliament,
and the European Court of Justice.
Although the EU has no single seat of government, many of its most important
offices are in Brussels, Belgium. The European Commission, which has executive
and some legislative functions, is headquartered there, as is the Council of the
European Union; it is also where the various committees of the European
Parliament generally meet to prepare for the monthly sessions in Strasbourg,
In addition to the four main branches of the EU's governing body, there are the
Court of Auditors, which oversees EU expenditures; the Economic and Social
Committee, a consultative body representing the interests of labor, employers,
farmers, consumers, and other groups; and the European Council, a consultative
but highly influential body composed primarily of the president of the Commission
and the heads of government of the EU nations and their foreign ministers
Evolution of European Union as trade bloc
The history of the EU began shortly after World War II, when there developed in
Europe a strong revulsion against national rivalries and parochial loyalties. While
postwar recovery was stimulated by the Marshall Plan, the idea of a united Europe
was held up as the basis for European strength and security and the best way of
preventing another European war. In 1950 Robert Schuman, France's foreign
minister, proposed that the coal and steel industries of France and West Germany
be coordinated under a single supranational authority. France and West Germany
were soon joined by four other countries—Belgium, Luxembourg, the Netherlands,
and Italy—in forming (1952) the ECSC. The EEC (until the late 1980s it was known
informally as the Common Market) and Euratom were established by the Treaty of
Rome in 1958. The EEC, working on a large scale to promote the convergence of
national economies into a single European economy, soon emerged as the most
significant of the three treaty organizations.
The Brussels Treaty (1965) provided for the merger of the organizations into what
came to be known as the EC and later the EU. Under Charles de Gaulle, France
vetoed (1963) Britain's initial application for membership in the Common Market,
five years after vetoing a British proposal that the Common Market be expanded
sinto a transatlantic free-trade area. In the interim, Britain had engineered the
formation (1959) of the European Free Trade Association. In 1973 the EC
expanded, as Great Britain, Ireland, and Denmark joined. Greece joined in 1981,
and Spain and Portugal in 1986. With German reunification in 1990, the former
East Germany also was absorbed into the Community.
The Single European Act (1987) amended the EC's treaties so as to strengthen the
organization's ability to create a single internal market. The Treaty of European
Union, signed in Maastricht, the Netherlands, in 1992 and ratified in 1993, provided
for a central banking system, a common currency to replace the national currencies
(the euro, see European Monetary System), a legal definition of the EU, and a
framework for expanding the EU's political role, particularly in the area of foreign
and security policy. The member countries completed their move toward a single
market in 1993 and agreed to participate in a larger common market, the European
Economic Area (est. 1994), with most of the European Free Trade Association
(EFTA) nations. In 1995, Austria, Finland, and Sweden, all former EFTA members,
joined the EU, but Norway did not, having rejected membership for the second time
A crisis within the EU was precipitated in 1996 when sales of British beef were
banned because of “mad cow disease”. Britain retaliated by vowing to paralyze EU
business until the ban was lifted, but that crisis eased when a British plan for
eradicating the disease was approved. The ban was lifted in 1999, but French refusal
to permit the sale of British beef resulted in new strains within the EU. In 1998, as a
prelude to their 1999 adoption of the euro, 11 EU nations established the European
Central Bank. The euro was introduced into circulation in 2002 by 12 EU nations;
additional EU nations have since adopted it.
The EU was rocked by charges of corruption and mismanagement in its executive
body, the European Commission (EC), in 1999. In response the EC's executive
commission including its president, Jacques Santer, resigned, and a new group of
commissioners headed by Romano Prodi was soon installed. In actions taken later
that year the EU agreed to absorb the functions of the Western European Union, a
comparatively dormant European defense alliance, thus moving toward making the
EU a military power with defensive and peacekeeping capabilities.
The installation in Feb., 2000, of a conservative Austrian government that included
the right-wing Freedom party, whose leaders had made xenophobic, racist, and
anti-Semitic pronouncements, led the other EU members to impose a number of
sanctions on Austria that limited high-level contacts with the Austrian government.
Enthusiasm for the sanctions soon waned, however, among smaller EU nations, and
the issue threatened to divide the EU. A face-saving fact-finding commission
recommended ending the sanctions, stating that the Austrian government had
worked to protect human rights, and the sanctions were ended in September.
In 2003 the EU and ten non-EU European nations (Estonia, Latvia, Lithuania,
Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Cyprus, and Malta)
signed treaties that resulted in the largest expansion of the EU the following year,
increasing the its population by 20% and its land area by 23%. Most of the newer
members are significantly poorer than the largely W European older members. The
old and new member nations at first failed to agree on a constitution for the
organization; the main stumbling block concerned voting, with Spain and Poland
reluctant to give up a weighted system of voting scheduled for 2006 that would give
them a disproportionate influence in the EU relative to their populations. In Oct.,
2004, however, EU nations signed a constitution with a provision requiring a
supermajority of nations to pass legislation. The constitution, which needed to be
ratified by all members to come into effect, was rejected by voters in France and the
Netherlands in 2005, leading EU leaders to pause in their push for its ratification.
Meanwhile, in 2003 the EU embarked, in minor ways, on its first official military
missions when EU peacekeeping forces replaced the NATO force in Macedonia and
were sent by the United Nations to Congo (Kinshasa); the following year the EU
assumed responsibility for overseeing the peacekeepers in Bosnia. EU members also
took steps toward developing a common defense strategy independent of NATO,
and agreed in 2004 to admit Bulgaria and Romania in 2007. José Manuel Barroso
succeeded Prodi as president of the European Commission late in 2004. Accession
talks with Turkey were partially suspended in Dec., 2006, over the issue of Turkish
relations with Cyprus because Turkey was unwilling to open its ports to Cypriot
trade unless the EU eased its trade restrictions on North Cyprus.
The EU opted for incremental reforms over a new constitution in 2007, when
member nations signed the Lisbon Treaty. The treaty, slated to come into force in
2009 after ratification by all EU nations, would reorganize the European Council,
establish a single EU foreign policy official, and reform the EU's system of voting,
among other changes. (The reforms would be phased in through 2017.) In June,
2008, however, Irish voters—the only national electorate given the opportunity to
ratify the treaty—rejected it in a referendum, a potentially fatal setback.
Factors that European Union must consider
Globalization is here to stay and it has changed everything with extremely harsh
consequences for some participants. Globalization has resulted in migration of jobs
to new cheap locations in China and India, resulting in complaints about
outsourcing and delocalization. The creation of the single market and enlargement
of the European Union has further intensified the pain to the existing residents of
the Eurozone by displacing many people out their existing jobs. Also, open internal
borders have attracted criminals and illegal immigrants that are threatening to
erode the social fabric of the European society and their existing way of life.
Therefore, residents of the Eurozone feel left out of the promises of higher
competitiveness, more jobs, and better living standards.
If the European Union is to survive and expand, the member nations, especially the
original 15 founder nations must listen to their citizens and deliver on the promise
of better economic life for them; otherwise the very survival of the EU may be at
risk. European Union was founded with a promise of higher growth, lower inflation,
and higher job creation. Some of the policy initiatives that the European Union
should implement include:
� European Union must promote economic growth. With exchange rate stability,
single currency, and low interest rates, participating nations need to introduce
necessary flexibility in the labor markets so that economic growth in the Eurozone
can be regenerated5. With low interest rates, corporations can borrow easily, hire
labor at favorable terms across the Eurozone, and bring economic growth all over
� European Union must enforce fiscal discipline among its participating nations by
strictly adhering to budgetary deficit not exceeding 3 percent of the GDP. Countries
that borrow beyond the limit must be penalized to keep public borrowing and,
consequent, inflation under control.
� European Union should encourage the member nations to do fundamental
reforms in the form of removal of subsidies, tax reforms, and labor market reforms
that will encourage competitiveness, increase output, and create jobs instead of
public borrowing to solve their problems.
� Make European Union more democratic and open to the citizens so that they do
not believe that this is a just a project of the politicians without any regard for the
ordinary citizen. Residents of the Eurozone must be made to participate and their
opinions and voices must be incorporated in the decisions of the European Union
instead of leaving the decision making in the hands of a few bureaucrats and
politicians, which can be blamed for any pain their citizens are going through. This
only undermines the credibility of the union.
� Last, but not the least, European Union should not rush into expansion of the
union. Larger the number of member nations in the union, more difficult it will be
to implement desperately fundamental reforms on a consensus basis.
South Asian Association for Regional Cooperation
The South Asian Association for Regional Cooperation (SAARC) is an economic
and political organization of eight countries in Southern Asia. In terms of
population, its sphere of influence is the largest of any regional organization: almost
1.5 billion people, the combined population of its member states. It was established
on December 8, 1985 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives
and Bhutan. In April 2007, at the Association's 14th summit, Afghanistan became
its eighth member.
In the late 1970s, Bangladeshi president Ziaur Rahman first mooted the idea in the
1970's for creation of a trade bloc, consisting of South Asian countries. The idea of
regional cooperation in South Asia was again mooted in May 1980. The Foreign
Secretaries of the seven countries met for the first time in Colombo in April 1981.
The Committee of the Whole, which met in Colombo in August 1981, identified five
broad areas for regional cooperation. New areas of cooperation were added in the
The Declaration on South Asian Regional Cooperation was adopted by the Foreign
Ministers in 1983 in New Delhi. The South Asian Association for Regional
Cooperation was established, when its Charter was formally adopted on December 8
India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan form the
principle Member States of the association.
Afghanistan was added to the regional grouping at the behest of India on November
13, 2005, and became a member on April 3, 2007. With the addition of Afghanistan,
the total number of member states were raised to eight.
Future membership & Observers
In April 2006, the United States of America and South Korea made formal requests
to be granted observer status. The European Union also indicated interest in being
given observer status, and made a formal request for the same to the SAARC
Council of Ministers meeting in July 2006.
On August 2, 2006 the foreign ministers of the SAARC countries agreed in principle
to grant observer status to the US, South Korea and the European Union. Other
observers areAustralia,China,Iran ,Japan,Mauritius ,Myanmar (Burma)
The People's Republic of China has shown its interest in joining SAARC. While
Pakistan and Bangladesh support China's candidature, India is more reluctant
about the prospect of Chinese membership, while Bhutan does not even have
diplomatic relations with China. However, during the 2005 Dhaka summit, India
agreed on granting observer status to the PRC along with Japan. During the 14th
summit, Nepal along with Pakistan and Bangladesh, announced their support for
the membership of China. China seeks greater involvement in SAARC, however,
finds it too early to apply for full membership.
The Islamic Republic of Iran, a state with borders to two SAARC members, has
traditionally enjoyed strong cultural, economic and political relationships with
Afghanistan, Pakistan, India and Bangladesh and has expressed its desire to become
a member of the South Asian organization. On 22 February 2005, the Foreign
Minister of Iran, Kamal Kharrazi, indicated Iran's interest in joining SAARC by
saying that his country could provide the region with "East-West connectivity".On
3 March 2007, Iran asked to join the SAARC as an observer. SAARC Secretary-
General Lyonpo Chenkyab Dorji responded by saying that Iran's request for
observer status would be taken up during a meeting of ministers of foreign affairs of
SAARC member countries in the 3 April summit in New Delhi.
The Russian Federation intends to become an observer as well, and is supported by
India. Union of Myanmar has expressed an interest in joining as a full member. If
done so, Myanmar will become the ninth member in the group. India is currently
backing Myanmar. The Republic of South Africa has participated in meetings.
SAARC: Formation and objectives
To promote the welfare of the peoples of South Asia and to improve their quality of
To accelerate economic growth, social progress and cultural development in the
region and to provide all individuals the opportunity to live in dignity and to realize
their full potential;
To promote and strengthen collective self-reliance among the countries of South
To contribute to mutual trust, understand and appreciation of one another's
To promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields;
To strengthen cooperation with other developing countries;
To strengthen cooperation among themselves in international forums on matters of
common interest; and
To cooperate with international and regional organisations with similar aims and
The Declaration on South Asian Regional Cooperation was adopted by the Foreign
Ministers in 1983 in New Delhi. During the meeting, the Ministers also launched the
Integrated Programme of Action (IPA) in nine agreed areas, namely, Agriculture;
Rural Development; Telecommunications; Meteorology; Health and Population
Activities; Transport; Postal Services; Science and Technology; and Sports, Arts
and Culture. The South Asian Association for Regional Cooperation (SAARC) was
established when its Charter was formally adopted on 8 December 1985 by the
Heads of State or Government of Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.
Afghanistan was added to the regional grouping at the behest of India on November
13, 2005,and became a member on April 3, 2007. With the addition of Afghanistan,
the total number of member states were raised to eight (8). In April 2006, the United
States of America and South Korea made formal requests to be granted observer
status. The European Union has also indicated interest in being given observer
status, and made a formal request for the same to the SAARC Council of Ministers
meeting in July 2006. On August 2, 2006 the foreign ministers of the SAARC
countries agreed in principle to grant observer status to the US, South Korea and
the European Union. On 4 March 2007, Iran requested observer status. Followed
shortly by the entrance of Mauritius
Areas of Cooperation:
At the inception of the Association, the Integrated Programme of Action (IPA)
consisting of a number of Technical Committees (TCs) was identified as the core
areas of cooperation.
The current areas of cooperation under the reconstituted Regional Integrated
Programme of Action covers the following areas:
Agriculture and Rural Development
Women, Youth and Children
Environment and Forestry
Science and Technology and Meteorology
Human Resources Development
High level Working Groups have also been established to strengthen cooperation in
the areas of Information and Communications Technology, Biotechnology,
Intellectual Property Rights, Tourism, and Energy.
The SAARC Secretariat was established in Kathmandu on 16 January 1987 and
was inaugurated by Late King Birendra Bir Bikram Shah of Nepal.
It is headed by a Secretary General appointed by the Council of Ministers from
Member Countries in alphabetical order for a three-year term. He is assisted by the
Professional and the General Services Staff, and also an appropriate number of
functional units called Divisions assigned to Directors on deputation from Member
States. The Secretariat coordinates and monitors implementation of activities,
prepares for and services meetings, and serves as a channel of communication
between the Association and its Member States as well as other regional
The Memorandum of Understanding on the establishment of the Secretariat which
was signed by Foreign Ministers of member countries on 17 November 1986 at
Bangalore, India contains various clauses concerning the role, structure and
administration of the SAARC Secretariat as well as the powers of the Secretary-
In several recent meetings the heads of state or government of member states of
SAARC have taken some important decisions and bold initiatives to strengthen the
organisation and to widen and deepen regional co-operation.
The SAARC Secretariat and Member States observe 8 December as the SAARC
SAARC's inability to play a crucial role in integrating South Asia is often credited
to the political and military rivalry between India and Pakistan. It is due to these
economic, political, and territorial disputes that South Asian nations have not been
able to harness the benefits of a unified economy. Over the years, SAARC's role in
South Asia has been greatly diminished and is now used as a mere platform for
annual talks and meetings between its members.
SAARC has intentionally laid more stress on "core issues" mentioned above rather
than more decisive political issues like the Kashmir dispute and the Sri Lankan civil
war. However, political dialogue is often conducted on the margins of SAARC
meetings. SAARC has also refrained itself from interfering in the internal matters
of its member states. During the 12th and 13th SAARC summits, extreme emphasis
was laid upon greater cooperation between the SAARC members to fight terrorism.
Free trade agreement
Over the years, the SAARC members have expressed their unwillingness on signing
a free trade agreement. Though India has several trade pacts with Maldives, Nepal,
Bhutan and Sri Lanka, similar trade agreements with Pakistan and Bangladesh
have been stalled due to political and economic concerns on both sides. India has
been constructing a barrier across its borders with Bangladesh and Pakistan. In
1993, SAARC countries signed an agreement to gradually lower tariffs within the
region, in Dhaka. Eleven years later, at the 12th SAARC Summit at Islamabad,
SAARC countries devised the South Asia Free Trade Agreement which created a
framework for the establishment of a free trade area covering 1.4 billion people.
This agreement went into force on January 1, 2006. Under this agreement, SAARC
members will bring their duties down to 20 per cent by 2007.
Areas of Cooperation:SAARC is an economic and political regional
organisation of countries in South Asia set up in 1985. It aims to accelerate the
process of economic and social development in its member states through increased
intra-regional cooperation. It has eight member countries (Afghanistan,
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri-Lanka) and seven
observer status countries (China, the European Union, Iran, Japan, Korea,
Mauritius and the United States of America).
The EU has observer status since 2006, and greatly values co-operation and regional
integration in South Asia.
The EU believes that it can help consolidate the ongoing integration process through
its economic influence in the region, its own historical experience of economic and
trade integration and of dealing with diversity, and its interest in crisis prevention.
It is convinced that SAARC could play a useful role in regional co-operation and
Cooperation between the EUropean Commission and SAARC should notably seek
to promote the harmonisation of standards; facilitate trade; raise awareness about
the benefits of regional cooperation; and promote business networking in the
1996: European Commission and SAARC Secretariat sign Memorandum of
Understanding on Cooperation which has provided the background for technical
assistance on trade matters.
1999: EU and SAARC agree to cooperate on improving market access for SAARC
products into EU, working towards a cumulation of rules of origin for SAARC
products for exports to the EU, giving a Technical support for the establishment of
the South Asian Free Trade Agreement and supporting the harmonisation of
Latin American Free Trade Association
The Latin American Free Trade Association, LAFTA, (later transformed into the
Latin American Integration Association or Asociación Latinoamericana de
Integración) was created in 1960 in the 1960 Treaty of Montevideo by Argentina,
Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay.
The signatories hoped to create a common market in Latin America and offered
tariff rebates among member nations. In 1980, LAFTA reorganized into the Latin
American Integration Association (ALADI) which now has 12 members: Argentine
Republic, Republic of Bolivia, Federative Republic of Brazil, Republic of Chile,
Republic of Colombia, Republic of Cuba, Republic of Ecuador, United Mexican
States, Republic of Paraguay, Republic of Peru, Eastern Republic of Uruguay and
Bolivarian Republic of Venezuela.
The main objective of the association is to build up a common market for South
American countries and thereby to bring about a gradual reduction in trade barriers
among member countries. LAFTA as a trade bloc wants to stimulate intra-Latin
American trade and also to increase Latin American’s declining share in world
The Latin American Free Trade Association was one which came into effect on
January 2, 1962. When the trade association commenced it had seven members and
its main goal was to eliminate all duties and restrictions on the majority of their
trade within a twelve year period. By the late 1960’s the area of LAFTA had a
population of 220 million and produced about $90 billion of goods and services
annually. By the same time it had an average per capita gross national product of
By 1970, LAFTA expanded to include four more Latin American nations which
were Bolivia, Colombia, Ecuador, and Venezuela. It now consisted of eleven nations.
In 1980, LAFTA reorganized into the Latin American Integration Association
(Asociación Latinoamericana de Integración, ALADI)
The membership of ALADI had remained unchanged until Cuba joined in 1999.
The goal of the LAFTA is the creation of a free trade zone in Latin America. It
should foster mutual regional trade among the member states, as well as with the
U.S. and the European Union.
To achieve these goals, several institutions are foreseen:
• the council of foreign ministers
• a conference of all participating countries
• a permanent council
LAFTA brought many new positive changes to Latin America. With LAFTA in
place existing productive capacity could be used more fully to supply regional needs,
industries could reduce costs as a result of potential economies through expanded
output and regional specialization, and attraction to new investment occurred as a
result of the regional market area. Although LAFTA has brought many constructive
results, it has also brought problems to individual nations as well as to Latin
America as a whole.
The ALADI promotes the creation of an area of economic preferences in the region,
aiming at a Latin American common market, through three mechanisms:
• Regional tariff preference granted to products originating in the member
countries, based on the tariffs in force for third countries
• Regional scope agreement, among member countries
• Partial scope agreements, between two or more countries of the area
Either regional or partial scope agreements may cover tariff relief and trade
promotion; economic complementation; agricultural trade; financial, fiscal, customs
and health cooperation; environmental conservation; scientific and technological
cooperation; tourism promotion; technical standards and many other fields. As the
Montevideo Treaty is a "framework treaty", by subscribing to it, the governments
of the member countries authorize their representatives to legislate through
agreements on the economic issues of greatest importance to each country.
A system of preferences — which consists of market opening lists, special
cooperation programs (business rounds, preinvestment, financing, technological
support) and countervailing measures on behalf of the landlocked countries — has
been granted to the countries deemed to be less developed (Bolivia, Ecuador and
Paraguay), to favour their full participation in the integration process. As the
institutional and normative "umbrella" of regional integration that shelters these
agreements as well as the subregional ones (Andean Community, MERCOSUR, G-3
Free Trade Agreement, Bolivarian Alternative for the Americas, etc.) it is the aim of
the Association to support and favour every effort in order to create a common
The LAFTA agreement has important limitations
It only refers to goods, not to services, and it does not include a coordination of
policies. Compared e.g. to the European Union the political and economic
integration is very limited.
Some of the problems which the individual countries face are the way they are
grouped together by their economic strengths according to LAFTA. The grouping
was originally Argentina, Brazil, and Argentina in one group, Colombia, Chile,
Peru, Uruguay, and Venezuela in the second group, and the last group which
included Bolivia, Ecuador, and Paraguay.There is a problem in these classifications
because these countries are very different economically as well as in other aspects
which the classification does not take into account.
However, LAFTA could not emerge as a powerful economic union due to non-
cooperation among the member countries. The member countries have been
competing among themselves for promoting their exports. Political instability
among the member countries is another cause responsible for making this union
weak and ineffective. Due to lack of understanding and mutual trust, the integration
among the member countries is not effective.
ALADI is now the largest Latin-American group of integration. It covers more than
20 million sq kilometres and more than 493 million people. It is responsible for
regulations on foreign trade which includes regulations on technical measures,
sanitary regulations, environment protection measures, quality control measures,
automatic licensing measures, price control measures, monopolistic measures, as
well as other measures. These regulations are put into place in order for trade to be
even handed amongst members of ALADI..
In recent years, the Latin American debt crisis has eroded some of the industrial
progress that the countries had made and has forced them to rely on primary
product exports to patch up their debt. In 1989, Andean countries made a renewed
effort to revive regional co-operation with new measures. LAFTA was replaced
(renamed) by the Latin American Integration Association (LAIA) with the signing
of the Montevideo Treaty of 1980. The achievements of LAIA are also moderate.
An 'advising bank' is a correspondent of a bank which issues a letter of credit, and,
on behalf of the issuing bank, the advising bank notifies the beneficiary of the terms
of the credit, without engagement on its part to pay or guarantee the credit.
Problems which Latin America faced as a whole had to deal with many of the
nations in the continent being underdeveloped. The Free Trade Agreement was seen
as a way of the countries having greater economic interactions amongst each other
and thus improving the economic state of the poorer nations.
1994 – North American Free Trade Agreement
(NAFTA): Creating the World’s Largest Free Trade
The North American Free Trade Agreement (NAFTA) (Spanish: Tratado de Libre
Comercio de América del Norte [TLCAN], French: Accord de libre-échange nord-
américain [ALENA]) is a trilateral trade bloc in North America created by the
governments of the United States, Canada, and Mexico. The agreements were signed
in December 8, 1993 by the leaders of the three countries — Brian Mulroney of
Canada, Carlos Salinas de Gortari of Mexico, and Bill Clinton of the United States
when Jean Chrétien was in office in Canada. In terms of combined purchasing
power parity GDP of its members, as of 2007 the trade bloc is the largest in the
world and second largest by nominal GDP comparison. It also is one of the most
powerful, wide-reaching treaties in the world.
The North American Free Trade Agreement (NAFTA) has two supplements, the
North American Agreement on Environmental Cooperation (NAAEC) and the
North American Agreement on Labour Cooperation (NAALC).
HISTORY OF IMPLEMENTATION
NAFTA was initially promoted by politicians in the United States and Canada
supportive of free trade, led by Canadian Prime Minister Brian Mulroney, U.S.
President George H. W. Bush, and Mexican President Carlos Salinas de Gortari.
The agreement was pursued by business interests in all three countriesand opposed
by labor, environmental, and other business interests, in all three countries. An
agreement in principle was reached in August 1992 and the agreement was signed
by the chief negotiators of each country in October 1992. The heads of government
of all three countries signed NAFTA in December 1992, subject to ratification by the
legislatures of the three countries. The supplemental agreements on labour and the
environment were signed in September 1993. NAFTA and the supplemental
agreement came into effect on January 1, 1994.
In the United States, NAFTA was able to secure passage after Bill Clinton made its
passage a major legislative priority in 1993. Clinton's Trade Representative, Mickey
Kantor, was a strong advocate of the treaty. Since the agreement had been signed by
Bush under his fast-track prerogative, Clinton did not alter the original agreement,
but complemented it with the aforementioned NAAEC and NAALC. After intense
political debate and the negotiation of these side agreements, the U.S. House of
Representatives passed NAFTA on November 17, 1993, by 234-200 vote (132
Republicans and 102 Democrats voting in favor; 43 Republicans, 156 Democrats,
and 1 independent against), and the U.S. Senate passed it on the last day of its 1993
session, November 20, 1993, by 61-38 vote (34 Republicans and 27 Democrats voting
in favor; 10 Republicans and 28 Democrats against, with 1 Democrat opponent not
voting -- Sen. Byron Dorgan (D-ND), an ardent foe of NAFTA, missed the vote
because of an illness in his family).
In Canada the divisive debate during the 1988 election over the Canada-US Free
Trade Agreement (FTA) was not repeated for NAFTA. By this time the formerly
anti-FTA Liberal party had moderated its stance. New Liberal leader Jean Chretien
had expressed doubts over NAFTA and threatened to abrogate the treaty if changes
were not made. But after being elected in 1993, the Liberals duly passed the treaty
and its supplemental agreementson Tariffs and Trade, hereby establish a free trade
1. The objectives of this Agreement, as elaborated more specifically through its
principles and rules, including national treatment, most-favored-nation treatment
and transparency, are to:
a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods
and services between the territories of the Parties;
b) promote conditions of fair competition in the free trade area;
c) increase substantially investment opportunities in the territories of the Parties;
d) provide adequate and effective protection and enforcement of intellectual
property rights in each Party's territory;
e) create effective procedures for the implementation and application of this
Agreement, for its joint administration and for the resolution of disputes; and
f) establish a framework for further trilateral, regional and multilateral cooperation
to expand and enhance the benefits of this Agreement.
2. The Parties shall interpret and apply the provisions of this Agreement in the light
of its objectives set out in paragraph 1 and in accordance with applicable rules of
Economic Relationship among NAFTA Nations
The North American Free Trade Agreement, popularly known as NAFTA, is an
ideal display of how the outward-looking nations, which resort to trade
liberalization policies, experience the benefits of trade in the form of greater
competitiveness and increased wealth. Trade benefits the manufacturers, laborers,
and farmers through simplification of discriminatory and restrictive trade practices.
The consumers on the other hand, get the benefits of trade in the form of lower
Since its formation on 1st January, 1994, the North American Free Trade
Agreement has played a pivotal role in deepening the economic relationship among
Mexico, Canada, and the US. The NAFTA attempted to promote multilateral trade
agreements among the member nations. It represents the biggest trade block of the
world measured in terms of collective purchasing power parity GDP of the member
Effects among NAFTA nations
The effects of NAFTA, both positive and negative, have been quantified by several
economists, whose findings have been reported in publications such as the World
Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's
Impact on North America, and NAFTA Revisited by the Institute for International
Some argue that NAFTA has been positive for Mexico, which has seen its poverty
rates fall and real income rise (in the form of lower prices, especially food), even
after accounting for the 1994–1995 economic crisis. Others argue that NAFTA has
been beneficial to business owners and elites in all three countries, but has had
negative impacts on farmers in Mexico who saw food prices fall based on cheap
imports from U.S. agribusiness, and negative impacts on U.S. workers in
manufacturing and assembly industries who lost jobs. Critics also argue that
NAFTA has contributed to the rising levels of inequality in both the U.S. and
Some economists believe that NAFTA has not been enough (or worked fast enough)
to produce an economic convergence, nor to substantially reduce poverty rates.
Some have suggested that in order to fully benefit from the agreement, Mexico must
invest more in education and promote innovation in infrastructure and agriculture.
Maquiladoras (Mexican factories which take in imported raw materials and
produce goods for export) have become the landmark of trade in Mexico. These are
plants that moved to this region from the United States, hence the debate over the
loss of American jobs. Hufbauer's (2005) book shows that income in the
maquiladora sector has increased 15.5% since the implementation of NAFTA in
1994. Other sectors now benefit from the free trade agreement, and the share of
exports from non-border states has increased in the last five years while the share of
exports from maquiladora-border states has decreased.
This phenomenon has allowed for the rapid growth of non-border metropolitan
areas, such as Toluca, León and Puebla; all three larger in population than Tijuana,
Ciudad Juárez, and Reynosa. The main non-maquiladora industry that has
benefited from NAFTA is the automobile industry..
Securing US congressional approval for NAFTA would have been impossible
without addressing public concerns about NAFTA’s environmental impact. The
Clinton Administration negotiated a side agreement on the environment with
Canada and Mexico, the North American Agreement on Environmental
Cooperation, NAAEC, which led to the creation of the Commission for
Environmental Cooperation in 1994. To alleviate concerns that NAFTA, the first
regional trade agreement between a developing country and two developed
countries, would have negative environmental impacts, the CEC was given a
mandate to conduct ongoing ex post environmental assessment of NAFTA.
In response to this mandate, the CEC created a framework for conducting
environmental analysis of NAFTA, one of the first ex post frameworks for the
environmental assessment of trade liberalization. The framework was designed to
produce a focused and systematic body of evidence with respect to the initial
hypotheses about NAFTA and the environment, such as the concern that NAFTA
would create a “race to the bottom” in environmental regulation among the three
countries, or the hope that NAFTA would pressure governments to increase their
environmental protection mechanisms. The CEC has held four symposia using this
framework to evaluate the environmental impacts of NAFTA and has commissioned
47 papers on this subject. In keeping with the CEC’s overall strategy of
transparency and public involvement, the CEC commissioned these papers from
leading independent experts.
Overall, none of the initial hypotheses were confirmed. NAFTA did not inherently
present a systemic threat to the North American environment, as was originally
feared, but NAFTA-related environmental threats instead occurred in specific areas
where government environmental policy, infrastructure, or mechanisms, were
unprepared for the increasing scale of production under trade liberalization. In
some cases, environmental policy was neglected in the wake of trade liberalization;
in other cases, NAFTA’s measures for investment protection, such as Chapter 11,
and measures against non-tariff trade barriers, threatened to discourage more
vigorous environmental policy. The most serious overall increases in pollution due
to NAFTA were found in the base metals sector, the Mexican petroleum sector, and
the transportation equipment sector in the United States and Mexico, but not in
From the earliest negotiation, agriculture was (and still remains) a controversial
topic within NAFTA, as it has been with almost all free trade agreements that have
been signed within the WTO framework. Agriculture is the only section that was
not negotiated trilaterally; instead, three separate agreements were signed between
each pair of parties. The Canada-U.S. agreement contains significant restrictions
and tariff quotas on agricultural products (mainly sugar, dairy, and poultry
products), whereas the Mexico-U.S. pact allows for a wider liberalization within a
framework of phase-out periods (It was the first North-South FTA on agriculture to
The overall effect of the Mexico-U.S. agricultural agreement is a matter of dispute.
Mexico did not invest in the infrastructure necessary for competition, such as
efficient railroads and highways, creating more difficult living conditions for the
country's poor. Still, the causes of rural poverty cannot be directly attributed to
NAFTA; in fact, Mexico's agricultural exports increased 9.4 percent annually
between 1994 and 2001, while imports increased by only 6.9 percent a year during
the same period.
Production of corn in Mexico has increased since NAFTA's implementation.
However, internal corn demand has increased beyond Mexico's sufficiency, and
imports have become necessary, far beyond the quotas Mexico had originally
negotiated. Zahniser & Coyle have also pointed out that corn prices in Mexico,
adjusted for international prices, have drastically decreased, yet through a program
of direct income transfer (a subsidy) expanded by former president Vicente Fox,
production has remained stable since 2000.
The logical result of a lower commodity price is that more use of it is made
downstream. Unfortunately, many of the same rural people who would have been
likely to produce higher-margin value-added products in Mexico have instead
emigrated. The rise in corn prices due to increased ethanol demand may improve
the situation of corn farmers in Mexico.
In a study published in the August 2008 issue of the American Journal of
Agricultural Economics, NAFTA has increased U.S. agricultural exports to Mexico
and Canada even though most of this increase occurred a decade after its
ratification. The study focused on the effects that gradual "phase-in" periods in
regional trade agreements, including NAFTA, have on trade flows. Most of the
increase in members’ agricultural trade, which was only recently brought under the
purview of the World Trade Organization, was due to very high trade barriers
before NAFTA or other regional trade agreements
Mobility of persons
According to the Department of Homeland Security Yearbook of Immigration
Statistics, during fiscal year 2006 (i.e., October 2005 through September 2006),
74,098 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted
into the United States for temporary employment under NAFTA (i.e., in the TN
status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904
Mexicans, as well as a number of third-country nationals married to Canadians and
Mexicans) entered the U.S. in the treaty national's dependent (TD) status. Because
DHS counts the number of the new I-94 arrival records filled at the border, and the
TN-1 admission is valid for one year, the number of non-immigrants in TN status
present in the U.S. at the end of the fiscal year is approximately equal to the number
of admissions during the year. (A discrepancy may be caused by some TN entrants
leaving the country or changing status before their one-year admission period
expired, while other aliens admitted earlier may change their status to TN or TD, or
extend earlier granted TN status).
Canadian authorities estimated that, as of December 1, 2006, the total of 24,830 U.S.
citizens and 15,219 Mexican citizens were present in Canada as "foreign workers".
These numbers include both entrants under the NAFTA agreement and those who
have entered under other provisions of the Canadian immigration law. New entries
of foreign workers in 2006 were 16,841 (U.S. citizens) and 13,933 (Mexicans).
NAFTA Trade Policies
According to Isaac (2005), overall, NAFTA has not caused trade diversion, aside
from a few select industries such as textiles and apparel, in which rules of origin
negotiated in the agreement were specifically designed to make U.S. firms prefer
Mexican manufacturers. The World Bank also showed that the collected NAFTA
imports' percentage growth was accompanied by an almost similar increase of non-
The North American Free Trade Agreement has taken a number of policy measures
to strengthen the rules of trade followed by the North American nations. The
flexibility in the economic infrastructure initiated by the NAFTA has resulted in
substantial increase in investment and trading activities across the NAFTA nations.
Canada has recorded an increase in export by 87% to the other members of
NAFTA. Exports from Mexico to US registered a substantial increase by 234%.
American exports to Mexico and China have also shown considerable growth since
the formation of the NAFTA.
The new trade rules initiated by the North American Free Trade Agreement has
helped Mexico and Canada to boost up their respective shares of exports to US. The
NAFTA has also has also been able to generate a number of new sources trading
and investment options among the member nations of North America.
The NAFTA has taken the necessary initiative to increase competitiveness in the
international market. With its effective trade rules and other policy measures,
NAFTA has emerged as one of the most dynamic trade blocs in the world. The
NAFTA nations contribute around 25% of the global imports and 19% of the total
exports of the world. The Agreement has brought about an environment of financial
stability necessary to facilitate free flow of goods and services and investments
across the NAFTA nations. Aided by its stable economic environment, North
America has been able to draw huge amount of FDI. North America shares 23.9%
of the international inward foreign direct investment. As far as the global outward
foreign direct investment is concerned, the contribution of North America happens
to be around 25%.
With their favorable economic infrastructure and trade policies, the economic
relationship among the NAFTA nations is bound to be stronger in the years to come.