Ch 9 – Regional Trading Arrangements

1. Ch 9 – Regional Trading Arrangements You’re going to hear a giant sucking sound of jobs being pulled out of this country. H. Ross Perot

2. Ch 9 – RTA’s Regional Trading Arrangement • When member nations agree to impose lower barriers to members within a group than to non-members. • RTA’s are an exception to the non-discrimination agreement in WTO policies. • Types of RTA’s depend on degree of linkage, economic integration.

3. Ch 9 – RTA’s Types of RTA’s • Free Trade Area • Group of nations that agree to remove all barriers to trade between them. • Each member has it’s own set of restrictions to outsiders. • Least demanding arrangement. Ex - NAFTA

4. Ch 9 – RTA’s Types of RTA’s • Customs Union • Same as free trade area, EXCEPT nations have common trade policies with rest of the world. Ex – Benelux (Belgium, Netherlands, Luxembourg) • Common Market • Same as customs union, PLUS free flow of factors of production. Ex – European Union in 1992

5. Ch 9 – RTA’s Types of RTA’s • Economic Union • Same as common market, PLUS supranational agency to manage and administer trade policy, whose decisions are binding among members. • Almost complete unification of economic institutions, but members are still separate political entities. Ex – Belgium and Luxembourg EU before common currency • Monetary Union • Same as economic union, PLUS common currency. Ex – Most of EU, United States

6. Ch 9 – RTA’s • Removal of Barriers • Common Trade Policy w/ Non-members • Free Flow of Factors of Production • Supranational Agency • Common Currency Free Trade Area

7. Ch 9 – RTA’s • Removal of Barriers • Common Trade Policy w/ Non-members • Free Flow of Factors of Production • Supranational Agency • Common Currency FTA Customs Union

8. Ch 9 – RTA’s • Removal of Barriers • Common Trade Policy w/ Non-members • Free Flow of Factors of Production • Supranational Agency • Common Currency FTA Customs Union Common Market

9. Ch 9 – RTA’s • Removal of Barriers • Common Trade Policy w/ Non-members • Free Flow of Factors of Production • Supranational Agency • Common Currency FTA Customs Union Common Market Economic Union

10. Ch 9 – RTA’s • Removal of Barriers • Common Trade Policy w/ Non-members • Free Flow of Factors of Production • Supranational Agency • Common Currency FTA Customs Union Common Market Economic Union Monetary Union

11. Ch 9 – RTA’s Welfare Effects of RTA’s • Static Effects Trade Creation • The union causes a nation to substitute low cost imported goods for domestically produced, protected higher cost goods. • Resources shift to a better use. • Positive welfare effect.

12. Ch 9 – RTA’s Welfare Effects of RTA’s • Static Effects Trade Diversion • The union enables high cost industries to capture markets previously supplied by outsiders at lower cost. • Efficiency diminished. • Negative welfare effect.

13. Ch 9 – RTA’s Welfare Effects of RTA’s • Dynamic Effects • Economies of scale • Markets are larger. • Greater competition • Promotes efficiency, perhaps K investment to increase technology, products, etc. • Stimulus of investment • Stimulates investment from outside union when nonmembers build inside union to avoid barriers.

14. Ch 9 – RTA’s NAFTA (North American Free Trade Agreement, 1994) • Objective: “to eliminate barriers to trade in, and facilitate the cross border movement of, goods and services between the territories of the Parties. . .” • Began as agreement between US and Mexico, then Canada asked to join. • Canada was already in US-Canada Trade Agreement of 1989, wanted to add Mexico to their list of partners. • NAFTA was difficult because it meshed two large advanced nations with one large developing nation. • NAFTA remains controversial because both advocates and opponents exaggerated its impact.

15. Ch 9 – RTA’s NAFTA (North American Free Trade Agreement, 1994) US Concerns • Unskilled workers in US will lose jobs, particularly in agriculture and low-skill manufacturing. • Environmental concerns – Mexico has lower pollution standards. • Trade diversion possible. Congressional side agreements: • Environmental abuses would be investigated. • $8 billion pledged for environmental clean-up. • Labor abuses (child labor, worker safety) would be investigated. • $90 million pledged to retrain workers displaced in first 18 months (time period was extended)

16. Ch 9 – RTA’s NAFTA (North American Free Trade Agreement, 1994) Potential Benefits for Mexico • Produce more labor-intensive manufactured exports. • Bring in more US money that now goes to other low cost nations. • Increases in incomes and employment. • Increase output by 3-10%. Potential Benefits for Canada • Maintain strong international trade with US. • Obtain equal access to growing Mexican market.

17. Ch 9 – RTA’s NAFTA (North American Free Trade Agreement, 1994) Potential Benefits for US • Increase production of K-intensive goods. • Better access to cheaper parts and labor. • More reliable source of petroleum. • Less illegal immigration due to more jobs, better wages in Mexico. • Enhanced Mexican political stability. • Modest economic gains anticipated, increase in output only .1 or .2%.

18. Ch 9 – RTA’s NAFTA (North American Free Trade Agreement, 1994) Actual Effects(Research done by Fed of Dallas) • Trade • Average tariffs down, not yet eliminated. • Trade volume increased by double digit percentages between all three nations. • Employment • Improvement of types of jobs available. • Primary finding – job gains and losses, unemployment, are a function of business cycles, not trade. • Investment • US investment in Mexico did increase. • From 1994 to 2001, $2.2 billion per year (only 1% of US investment). • Political • Created strong political ally • Ended the “boom-bust” economy in Mexico, more stability.