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Regional trade arrangements: EU, NAFTA Economic integration  economies of scale

Multilateral trade arrangements [GATT  WTO] Nondiscrimination: bilateral liberalization extended to all members. “Most favored nation” BUT Complex negotiations: 150+ nations at the table. Regional trade arrangements: EU, NAFTA Economic integration  economies of scale

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Regional trade arrangements: EU, NAFTA Economic integration  economies of scale

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  1. Multilateral trade arrangements [GATT  WTO]Nondiscrimination: bilateral liberalization extended to all members. “Most favored nation”BUT Complex negotiations: 150+ nations at the table Regional trade arrangements: EU, NAFTA Economic integration  economies of scale Basis for enlargement As integration proceeds, costs of staying out increase As labor deploys to competitive sectors, benefits (and political support) spreads. BUT trade diversion vis a vis non-members

  2. Regional trade agreements Types of regional trade arrangements • Free trade areas (NAFTA, for example) • Customs unions (Benelux, CACM) • Common markets (MERCOSUR,EEC) • Economic union (EU) • Economic and monetary union (USA, EMU)

  3. 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 producers not in the club • Dynamic effects • Economies of scale • Greater competition • Investment stimulus

  4. European Union / European Monetary 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 Joiners, ‘00s: Transition economies: Slovenia, Poland, Czech Republic, Slovakia, Hungary, Estonia, Latvia, Lithuania, Bulgaria, Romania + Cyprus, Malta Total Population, GDP, GDP per capita (PPP, 2008) EU: 500mil $15.2tril $30,500 €-zone: 326mil 10.6 tril 32,500 USA: 306mil 14.3 tril 46,900

  5. European Union • Within-region trade 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)

  6. 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%

  7. Other key EU policies • Common agricultural policy (CAP) • Support payments to farmers  surpluses • Export subsidies  devastates LDC agriculture • Variable import levies: when world price down, EU tariff up  stable prices within EU • Germans supported French farmers • Now support Polish/Hungarian/Baltic farmers • Government procurement policies • All EU businesses can bid for large contracts in any nation

  8. Benefits of EMU • Lower transaction costs • Price comparisons easier • Exchange rate risk eliminated • Stimulates competition Costs of EMU • Europe is not an "optimal currency area" • Loss of monetary policy and the exchange rates as economic adjustment tools • Response to Asymmetric shocks • Use of fiscal policy for adjustment is constrained • Need wage flexibility and labor mobility • both low in Europe

  9. 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

  10. Concerns about NAFTA • Main US losers from NAFTA: import-protected industries competing with Mexican producers, and unskilled workers • Trade diversion from low-cost Asian producers • US industrial workers worried about lower pay scale in Mexico and plant relocations • Concerns Mexico would not enforce environmental protection measures • Concern now shifted to China and India

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