Chapter 9

1. Chapter 9 Preferential Trade Arrangements

2. NAFTA • January 1, 1994 NAFTA came into force • Schedule for tariff reductions for NAFTA-origin goods by year 2004 for most manufactured goods and by 2008 for agricultural products • Economic policy of Mexico for the last 50 years was import substitution • By mid-70s problems of high inflation and overvalued local currency

3. NAFTA • In 1980s three events hit Mexican economy: worldwide recession, tight money policy in the U.S., and a fall in the value of the Mexican peso • By 1982 Mexican debt to foreign countries was $86 billion • Reforms by Mexican government • More major liberalization reforms by new president Carlos Salinas in 1988

4. Details of NAFTA • Rules of origin (goods not only must be assembled in the member countries but also must be built partly or entirely from North American component parts) • A Japanese-owned automobile factory in the United States will qualify to be duty free if at least 62.5% of the parts used in this factory come from NAFTA countries

5. Basic agreements • Tariffs will be reduced and eliminated depending on a product over 5, 10, or 15 years • Safeguards protection • Investment protection (Mexico is allowed to retain ban on foreign ownership of oil and natural gas reserves) • Health and safety standards • Services (American banks were allowed to capture 25% of the Mexican market by 2004, all remaining limits will disappear by 2007) • Intellectual property protection

6. The Side Agreements • Agreement on Environmental Cooperation • NAFTA maintains all existing US health, safety, and environmental standards and allows local governments to enact a tougher standards • North American Commission on Environmental Cooperation ($8 billion to clean up air and water pollution, and toxic waste dumps along US-Mexico border) • Agreement on Labor Cooperation

7. NAFTA and US economy • Twelve years later NAFTA remains controversial • Differences in standards of living (2001 data)

8. NAFTA and US economy • Difference in productivity levels • Effects of NAFTA have been small • US exports to Mexico were $47 billion in 1993 and $123 billion in 2005 • US imports from Mexico increased $45 billion to $187 billion over the same time period • 37,000 US jobs per year are at risk due to Mexican imports • 57,000 US jobs per year are at risk due to Canadian imports • US trade barriers are low on most goods • Mexican economy is small relative to that of the United States • Given current state of Mexican economy and its productive capacity effects of NAFTA on US economy will not change

9. European Union • Includes 27 countries with population of 500 million people is the world’s largest CU, Bulgaria and Romania were the last ones to join in 2007 • EU generates 31% of the world’s GDP • In mid-80s EU enacted the Single European Act • To develop a uniform system of product standards • To remove a range of physical, technical, and fiscal barriers

10. The EU Government • January 1, 1999 launched a common currency • Headquarters in Brussels, four main institutions • The European Commission • The Council of the European Union • The Court of Justice • The European Parliament

11. The European Government • The European Commission • Drafts and enforces EU laws • 32 members, 2 each from Germany, France, Italy, UK, and Spain, and 1 each from the other EU countries for 4 year term • The Council of the EU • Makes decisions about ECommission Proposals and issues directives and regulations • Each country has one representative • President of the council holds an office for 6 months from each country in alphabetical order

12. The European Government • The European Court of Justice • Decides on the legality of council or commission actions • The European Parliament • Legislative body and acts as representative of the people in the process of setting a policy • 626 members for five-year term • 1986-92 Single European Act to remove NTBs (potential gains $255 billion or $810 per resident) • 1991 Maastricht Act to form an economic and monetary union with a single currency

13. Regionalism vs. Multilateralism • Difference between regional trade liberalization and multilateral liberalization • After WWII US was an advocate for multilateral trade liberalization • In mid-80s US started supporting regional agreements • Regionalism encourages trade diversion • US position: formation of regional agreements complements multilateral liberalization

14. Other Preferential Trade Arrangements • Africa • The Economic and Customs Union of Central Africa (UDEAC), CU, 1964, includes Cameroon, Central African Republic, Chad, Congo, Guinea, and Gabon • The Economic Community of West African States (ECOWAS), CU, 1975, 15 West African countries • The Economic Community of Central African States (CEEAC), CU, 1981, 11 central states • The Arab Maghreb Union (AMU), CU, 1989, Algeria, Libya, Mauritania, Morocco, and Tunisia

15. Asia • The Association of Southeast Asian Nations (ASEAN), FTA, 1967, Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand • The Australia – New Zealand Closer Economic Relations Trade Agreement (ANZCERT), FTA,1983

16. Europe • The European Free Trade Association (EFTA), FTA, 1960, Iceland, Leichtenstein, Norway, and Switzerland • The Central European Free Trade Agreement (CEFTA), 1993, Czech Republic, Hungary, Poland, and Slovak Republic, Slovenia, Bulgaria, Romania

17. Latin America • The Central American Common Market (CACM), CU, 1960, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama • The Andean Pact, CU, 1991, Bolivia, Columbia, Ecuador, and Venezuela • The Southern Cone Common Market (MERCOSUR), CU, 1991, Argentina, Brazil, Paraguay, and Uruguay