Types of regional trade arrangements

1. Regional trade agreements Types of regional trade arrangements • Free trade areas (NAFTA, for example) • Customs unions (Benelux, CACM) • Common markets (MERCOSUR,EEC) • Economic/monetary union (EU) Carbaugh, Chap. 9

2. Regional trade agreements Effects of regional trade agreements • Static effects • Trade creation effect • consumption effect … buy more from your partner • production effect … less inefficient domestic production • Trade diversion effect • … buy less from efficient, low cost producer • Dynamic effects • Economies of scale • Greater competition • Investment stimulus Carbaugh, Chap. 9

3. Regional trade agreements Static effects of a customs union SL Price ($) SG+tariff SUS+tariff a b SG c SUS DL Carbaugh, Chap. 9

4. The European Union Created by the Treaty of Rome (1957) Original Members: Belgium,France,Germany, Italy,Luxembourg,Netherlands Joiners,’73: Denmark,Ireland,UK Joiners,’80s: Greece, Portugal, Spain Joiners,’95: Austria,Finland,Sweden Total Population, GDP, GDP per capita (1996) EU: 372mil $8.6 tril, $23,200 €-zone: 300mil 7.0 tril, 23,000 USA: 271mil 8.0 tril, 29,300 Carbaugh, Chap. 9

5. Regional trade agreements: case studies The European Union (cont’d) • Within-region trade to grew much more quickly than world trade in the 1960s • Steps to remove remaining barriers (1985-92) further increased integration • 1987 Delors Report • Four Freedoms: goods, services, labor, capital • Maastricht Summit (1991) began process of economic and monetary union (EMU) Carbaugh, Chap. 9

6. Regional trade agreements: case studies EU Economic & Monetary Union (1999) • National currencies replaced with the euro, 2002 • European Central Bank created to control monetary and exchange rate policy • “Convergence criteria” required for membership: • Price stability … 3.2% inflation • Low long-term interest rates … 7.7% • Stable exchange rates • Sound public finances • Deficit/GDP … 3% • Debt/GDP … 60% Carbaugh, Chap. 9

7. Regional trade agreements: case studies Other key EU policies • Common agricultural policy • 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. 9

8. Regional trade agreements: case studies Benefits of EMU • Europe is not an "optimal currency area" • Advantages of EMU: • Lower transaction costs • Price comparisons easier • Exchange rate risk eliminated • Stimulates competition Carbaugh, Chap. 9

9. Regional trade agreements: case studies Costs of EMU Loss of monetary policy and the exchange rates as economic adjustment tools • Asymmetric shocks Use of fiscal policy for adjustment is constrained Need wage flexibility and labor mobility, which are both low in Europe How to divide seignorage? Carbaugh, Chap. 9

10. US-Canada Free Trade Agmt. (1989)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. 9

11. Regional trade agreements: case studies Concerns about NAFTA • Main US losers from NAFTA: import-protected industries competing with Mexican producers, and unskilled workers • US industrial workers worried about lower pay scale in Mexico and plant relocations • Concerns Mexico would not enforce environmental protection measures Carbaugh, Chap. 9

12. Regional trade agreements: case studies NAFTA after five years • Trilateral trade increased significantly • Some US jobs were lost to Mexico, but the numbers were small compared to job creation that came with US growth • Changes in investment flows were small (in relation to total US foreign investment) • Closer political ties were built among the three nations Carbaugh, Chap. 9