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Regional Trade Agreements

Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122. Regional Trade Agreements. Fall 2005. Regional Trade Agreements (RTA). RTA: actions by governments to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions

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Regional Trade Agreements

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  1. Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 Regional Trade Agreements Fall 2005

  2. Regional Trade Agreements (RTA) • RTA: actions by governments to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions • Numerous and increasing • only 3 WTO members not party to a RTA • 2003 – 265 notified to the WTO • 138 since creation of WTO in 1995 • 190 in force • 90 operational but not notified

  3. Regional Agreements: Goals and Forms Diverse Goals • Specific goals – developing eco-tourism along the Mekong river • Overarching goals – economic and political union Free Trade Area: NAFTA • Free trade for goods and services • Members set tariffs for outside FTA • Rules of origin important

  4. RTAs: Goals and Forms • Customs area: external, common tariffs • no need for border inspections, customs fees due to unified policies • still may impose some health and safety regulations • Economic Union: four freedoms • freedom of movement for goods, services, capital and people • Static and dynamic efficiency gains, but…

  5. Economic Arguments a Small Part • Economic benefits used to entice countries to work though political differences • Worries about a democratic deficit • governing bodies: members not elected • Nation state important (security) but unable to deal with many problems that transcend boundaries and overwhelm the nation state • middle ground between the state and the multilateral system • Different motivations explain their importance

  6. European Regionalism: Diverse Motivations • US: wanted an anti-communist ally. Marshall plan ($12 billion – current $90 billion) conditional on cooperation in use • Europeans: solution to the “German problem” how to live with Germany without being dwarfed • Kant (1724-1804): desire to move away from incessant European war • France: “United States of Europe” enhancing sovereignty/stature of member nations • Political economist, Jean Monnet, saw economic benefits as providing the impetus

  7. Trade Diversion and Creation Trade Diversion: When a FTA is formed, members lower barriers to trade with each other compared to barriers to trade with other nations. Imports may be reduced (or cease) from a more efficient producer outside of the FTA, and increase from a member of the FTA due to the advantage the FTA member has in terms of trade barriers – not due to a comparative advantage. Trade Creation: When a FTA is formed, trade may increase between members as each party adjusts their production and trade in line with comparative advantage.

  8. WTO and RTAs • Article 24: Exceptions to equal treatment for all trading partners (MFN treatment) • Criteria: help trade flow more freely among members without raising barriers to the rest of the world • Duties and other trade barriers should be reduced or removed on substantially all sectors of trade – and non members should not find trade more restrictive than before • GATS (services agreement) also allows for economic integration • WTO committee to monitor complimentarity versus competition of RTAs

  9. RTAs in force as of February 2005by year of entry into force (left-hand scale)and cumulative (right-hand scale) No. of RTAs Goods Accessions Cumulative Services Notified RTAs to the GATT/WTO (1948-2005) by Entry into Force Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 1, p. 2.

  10. Notified RTAs in Force, as of February 2005,by Type of Agreement Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 2, p. 3.

  11. RTAs’ Configuration, as of February 2005 Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 4, p. 5.

  12. r Cross-Regional RTAs’, as a Percentage of Total RTAs, as of February 2005 Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 5, p. 6.

  13. European RTA Network Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Map 1, p. 9.

  14. Western Hemisphere RTA Network NAFTA Andean Community Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Map 2, p. 11.

  15. Participations in RTAs, as of January 2005 Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Map I, p. 20.

  16. Interpretations of Regionalism Liberal Realist Historical Structuralist

  17. Rewards for Good Behavior “ Let me be clear. I’ll use my position as chairman of the Senate Finance Committee, which has jurisdiction over international trade policy in the US Senate, to carefully scrutinize the positions take by many WTO members during this Ministerial. The United States evaluates potential partners for free trade agreements on an on-going basis. I’ll take note of those nations that played a constructive role in Cancun, and those nations that didn’t.” Grassley 2003 Source: Actionaid International, 2003, Divide and Rule: The EU and US Response to Developing Country Alliances at the WTO.

  18. Rewards (con’t) • Costa Rica, El Salvador and Guatemala – expanded export quotas if they abandon the G-20 (El Salvador left during the Ministerial) • Guatemala, Peru, Colombia and Costa Rica all left the G-20 in weeks after the Ministerial “You want to negotiate with us? Then get out of the G-20!” • Since Cancun, US signed a FTA with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua, CAFTA-DR • EU with Merocsur

  19. CAFTA: US & Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua • Bush: notified Congress of intent to negotiate January 2003 • Included Dominican Republic so CAFTA-DR • Converts non-reciprocal, discretionary benefits from GSP and CBI into permanent and reciprocal benefits • Covers all trade – agriculture important, services too • Will improvement US access to these markets • tariffs vary from Honduras agriculture averaging 35% and Nicaragua averaging 60% • Impact for CAFTA-DR small – already had access to US market from GSP/CBI Source; Paggi, Mechel, et al. Regional Free Trade Agreements and Implications for US Agriculture: The Case of CAFTA-DR. Choices, 2nd Quarter 2005

  20. Trade Flows • US exports wheat, soybeans, tobacco, animal fats, poultry meat, dairy and other intermediate goods • US imports: bananas and other fresh fruit, coffee, sugar, vegetables and seafood • Agreement puts CATFA-DR access on par with Mexico with the exception of sugar • For the US – preferential access to some extent – depends on CAFTA-DR current other FTAS • 2001: 70% of Costa Rica’s fresh grapes from the US, 27% from Chile – then an agreement between Chile and Central America – US exports declined – now expected to rebound

  21. Adjustment • CAFTA-DR a small market – some increased exports, but not much for the US • Little adjustment pressure in US from increased imports • CAFTA countries already had preferential access • Burden of adjustment in those countries • Exception for US is sugar – increased imports to affect US domestic prices and also cost of sugar program • Increase by 109,000 mt to 153,000 over 15 years • US may provide compensation instead of more access to sugar

  22. European Community 1957-1967 1951: European Coal and Steel Community • Belgium, West Germany, Luxembourg, France, Italy and the Netherlands 1957: Treaties of Rome • Creating the European Atomic Energy Community (EURATOM) and • The European Economic Community (EEC) • customs market with Italy, France, Belgium, Luxembourg, the Netherlands and Germany • members removed trade barriers and formed a "common market“

  23. Common Agricultural Policy Address food security, farm income and political opposition to the common market High price supports; tariffs against imports

  24. 1967: Now Named the European Community Beyond economic union Bicycle theory of ever greater union Institutions merged – single Commission, Council of Ministers, European Parliament Tensions over new members, larger costs

  25. The Treaty of Maastricht (1992) European Union (EU) • Lead to creation of the Euro • Introduced a three-pillar structure • community pillar – economic and trade issues • traditional areas of responsibilities • common foreign and security policy pillar – foreign policy and military matters • disagreement over extent of cooperation • intergovernmental, not surpanational • justice and home affairs pillar – criminal matters • law enforcement, criminal justice, civil judicial, asylum and immigration

  26. Timeline of the Treaties and EU Constitution “Three Pillars” – European Communities (ECSC, EC, Euratom), Common Foreign and Security Policy (CFSP), Justice and Home Affairs Source: Wikipedia – the free encyclopedia (http://en.wikipedia.org/wiki/Maastricht_Treaty)

  27. Membership • 1952: Belgium, France, West Germany, Italy, Luxembourg, The Netherlands (founding members) • 1973: Denmark, Ireland, United Kingdom • 1981: Greece • 1986: Portugal, Spain • 1990: East Germany reunites with West Germany and becomes part of the EU • 1995: Austria, Finland, Sweden • 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia

  28. EU Monetary System (EMS) • 1979: eight countries, mutually fixed ERs, the European Monetary System • ECUs- European Currency Units – a basket of member currencies • Each country “fixed” in terms of parity to the ECU – allowed to float within bands +/- 2.25% • If French franc depreciates relative to DM, it must sell DMs • If misaligned, then currency realigned • Capital controls until 1987 – private citizens could not trade foreign currencies, no speculative attacks

  29. Crisis with German Reunification • Economic reunification in 1990 • East Germans – traded East German currency for DM; huge rush for consumer goods • large fiscal expenditures on the East • need to rebuild infrastructure • Fear of “overheating,” i.e., inflation • Cut the money supply

  30. But Germany is within an Exchange Rate Band • Other EMS countries cut money supply too • They had no output/expansionary boom • With cut in money supply, output fell and unemployment rose • Speculators entered the market – anticipated revision of central parities (bands) • Pressure on the Lira, devalued • September 16, Black Wednesday • Lira and British pound out of the EMS system • other currencies devalued • larger bands for currencies in the system

  31. European Monetary Union Why – given previous experience? Jan 1, 2002 – 12 countries monetary union • central bank in Frankfurt • must agree on common monetary policy

  32. Gains from Monetary Union • Lower transaction costs of cross border trade – What if all traders bringing goods into Montana had to convert currency? • Lower uncertainty – for transactions across borders in the future • Lower investment risk – payoff time longer, more uncertainty • With the EMS, risk of speculative attack due to POSSIBILITY that currencies would be realigned • Remember – get a loan in depreciating currency, buy the currency you think will appreciate relative to the one in the loan • borrow Francs (1000) and buy DM 500 (2FF=1DM) • value of FF falls now 3 FF-1 DM • now sell DM 500 and get 1,500 francs • pay back loan, profit 500 FF

  33. Costs of Monetary Union • Cannot use independent monetary policy • Spain ALONE has a recession – high unemployment and falling output • Before: use monetary policy to increase money supply to have lower interest rates, cheaper to build a factory or buy a car, stimulate demand for investment projects and consumption, more demand, factory hires more workers, raise GDP and lower unemployment • Now it can’t act independently – central bank decides on monetary policy

  34. How Costly is this Loss of Independence? • If all EMU countries have the same shock, such as fall in demand for European goods, then not a big problem, use monetary policy to increase money supply and work towards full employment • but if Spain is the only one? • shocks more symmetric, when economies similar • Factor markets integrated? • if so, then unemployed in Spain can move to Denmark • Fiscal federalism? If Spain hurt by a shock, then income transferred from Denmark to Spain, cover cost of unemployment – federal taxes and unemployment compensation • In sum – countries benefit that are highly integrated, similar; that allow flows of labor, and perhaps integrated fiscal management (benefits > costs)

  35. EMU versus the United States • Extent of trade – European countries trade 10-20% of GDP with each other • less than trade between US regions/states • Some asymmetry due to differences in economies • Northern Europe – more production intensive in capital and skilled labor • some asymmetry in the US – California recession due to cutback in defense • Some labor mobility in Europe – but less than US • Not much fiscal federalism in Europe

  36. Benefits of the EMU • Joint decision making – next step to political integration • Prevent political opposition to free trade • European economy – more efficient, sell us goods cheaper, and be richer and buy more of ours • Easier for our firms to conduct business there • Euro to compete with the dollar as an international currency reserve

  37. NAFTA: Ethyl’s Challenge under NAFTA Ethyl is a U.S. firm Investor to state dispute settlement procedures – NAFTA Chapter 11 Canadian parliament banned inter-provincial trade in gasoline additive methylcyclopentadienyl manganese tricarbonyl (MMT) by prohibiting provincial trade • could pose a health risk • would have to modify automobiles/could damage sensors • not enough evidence to ban it altogether • ban problematic for Ethyl Linda Young, POLS 400, International Political Economy

  38. Ethyl Challenged this Decision Under NAFTA Chapter 11 Ruling considered tantamount to an expropriation and Ethyl wanted compensation Canada agreed to pay damages and the case was dropped Linda Young, POLS 400, International Political Economy

  39. Rights of Investors vis-à-vis Governments New doctrine towards “takings”? (All governments havethe right to seize property.) Favorable to owners of assets whose value might be diminished – U.S. negotiators wanted that for U.S. investors Seems to grant international investors a privileged position (more protection than in OECD national law) Intent to prevent governments from using pretexts to force the exit of MNC from a market (i.e., price regulation used previously) Linda Young, POLS 400, International Political Economy

  40. Would NAFTA Have Worked? Tension between upholding domestic environmental regulations and providing assurances to international investors on the security of their investment NAFTA says “Article IV.2.1 will not apply to any measure taken to protect public health or safety; to ensure the preservation of a species of plant or animal, or to safeguard the physical environment, provided that the measure is applied in a manner that does not discriminate against any individual or class of investment in order to achieve a benefit for some other individual or class of investment.” Linda Young, POLS 400, International Political Economy

  41. Ethyl Dispute Key in Defeating the Multilateral Agreement on Investment (MAI) • Similar to NAFTA investment protection provisions • NAFTA on steroids • MAI – under the OECD 1995-2000 (wrong venue?) • Proposed • national treatment (pre and post establishment) • standards for investor protection • forbid requirements including use of local suppliers, minimum export levels, export requirements, joint ventures • dispute settlement Linda Young, POLS 400, International Political Economy

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