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ECON5335 - International Economics

ECON5335 - International Economics. Chapter 7 Regional Integration. Regional integration background. Regional integration allowed under GATT article XXIV

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ECON5335 - International Economics

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  1. ECON5335 - International Economics Chapter 7 Regional Integration

  2. Regional integration background • Regional integration allowed under GATT article XXIV • States that “The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.” • What is a customs union? • What is a free trade area?

  3. Regional integration background • para 5 of section XXIV states “Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area”

  4. Balassa’s steps of regional economic integration • Bela Belassa (1963) first came up with steps for countries to be more economically integrated • Steps are as follows: • Free trade • Customs union • Common market • Economic union • Monetary union • Fiscal union • Political union • What’s the difference between a free trade area and a customs union? • Do countries wanting more regional integration have to follow in the order above?

  5. Examples of different stages of integration

  6. Examples of different stages of integration

  7. Integration in practice Many examples of regional economic integration around the world: North America – CUFTA and NAFTA Europe – EU, EFTA, BAFTA, CEFTA Caribbean – CARICOM Central and South America – Mercosur, SELA, CAN Africa – AU, SACU, COMESA, WAEMU Asia – ASEAN, AFTA Australasia – ANZFTA - see http://www.wto.org/english/tratop_e/region_e/region_e.htm for more

  8. Welfare effects of FTA vsCU (from Robson chapter)

  9. NAFTA • Grew out of CUFTA – idea was to extend to Mexico, but whole new agreement happened • Basically a free trade area, but with side agreements on labor standards, environment, and migration of professionals • “Rules of origin” allow for duty free trade as long as 62.5% of value added within NAFTA • Environmental commission set up in Montreal to oversee complaints about environmental degradation • “Snap-back” provision allows for tariffs to be restored if surge of imports threatens domestic industry • Trade dispute mechanism consists of 3 experts – usually resolves disputes amicably – exceptions though (e.g. softwood lumber)

  10. NAFTA • Maquiladora program • US boom of the 90s benefited maquiladoras, but China’s entry into the WTO has eroded competitiveness of plants, with many closing • Critics say that although trade has increased, Mexican real wages in manufacturing have fallen, and also environmental degradation evident • Difficult to say if NAFTA has had large effects, as phased in over 10 years, and also lots of other events happening • Impact clearly much greater on Canada and Mexico than on the US

  11. EU Yellow = EU members Grey = Candidate countries Cream = Non-members

  12. EU • Originally formed as a customs union for steel and coal (Treaty of Rome 1958) • Grew into EEC – customs union • Then EC – common market (Single Market 1992) • Then EU – economic union and some political pooling of sovereignty (European Parliament) • Now EMU, which also involves monetary union (euro) (Treaty of Maastricht, 1991) • Big debate in 90s surrounded widening vs deepening • Now 27 member states, with EMU adopted by only 13 member states • Switzerland and Norway do not want to join, and France has effectively stopped Turkey from joining

  13. EU • Trade creation significant • Trade diversion also present, although size differs depending on study • EMU is thought to have increased trade significantly, although estimates vary widely • Growth and Stability pact has “coordinated” fiscal policy • Commission acts as civil service but can also impose fines • European Council decides on major issues

  14. EMU timeline • ERM of the EMS (79) • Delors report (89) • Treaty of Maastricht (91) • Currency crisis (92-93) • Euro introduced and exchange rates fixed (99) • Money euro introduced (02) • Greece added (04) • Slovenia added (07) • Cyprus and Malta added (08) • Slovakia added (09) • Estonia added (11)

  15. The euro and the crisis • Euro also used by other countries – sometimes outside Europe • ECB runs monetary policy but no centralized fiscal policy • Hence SGP (Dublin 1996) • No exit clause for EMU in Maastricht • Major cause of problems for Greece • Now austerity packages for all PIIGS • “One size fits all” monetary policy means fiscal policy takes all the strain

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