International Economics By Robert J. Carbaugh 9th Edition

International EconomicsBy Robert J. Carbaugh9th Edition Chapter 8: Regional Trading Arrangements

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

Regional trade agreements Effects of regional trade agreements • Static effects • Trade creation effect (consumption effect, production effect) • Trade diversion effect • Dynamic effects • Economies of scale • Greater competition • Investment stimulus Carbaugh, Chap. 9

Regional trade agreements Static effects of a customs union Carbaugh, Chap. 9

Regional trade agreements: case studies The European Union • Created by the Treaty of Rome (1957) • Policy aims included: • Abolition of tariffs, quotas and other restrictions • Common external tariff • Free movement of capital, labor and business • Common policies on transport, agriculture, and competition and business conduct • Coordination of monetary and fiscal policies Carbaugh, Chap. 9

Regional trade agreements: case studies The European Union (cont’d) • Lowering of barriers caused within-region trade to grow much more quickly than overall world trade in the 1960s • Steps to remove remaining barriers (1985-92) further increased integration • Maastricht Summit (1991) began process of economic and monetary union (EMU) • EMU came into full effect in 2002 with the introduction of a common currency, the euro Carbaugh, Chap. 9

Regional trade agreements: case studies EU Economic & Monetary Union • Member nations which met economic criteria by 1999 replaced their national currencies with the euro in 2002 • New European Central Bank created to control monetary and exchange rate policy • “Convergence criteria” required for membership: • Price stability • Low long-term interest rates • Stable exchange rates • Sound public finances Carbaugh, Chap. 9

Regional trade agreements: case studies Other key EU policies • Common agricultural policy (CAP) • 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

Regional trade agreements: case studies CAP: variable levies and export subsidies Carbaugh, Chap. 9

Regional trade agreements: case studies Opening up government procurement Carbaugh, Chap. 9

Regional trade agreements: case studies European Union enlargement • The EU is negotiating with 12 applicant nations, mostly transition economies in eastern Europe, for EU membership by 2004 • Candidate members had to demonstrate their fitness by achieving: • Stability of institutions, and guaranteed democracy, rule of law, human rights and protection of minorities • A functioning market economy which is ready to compete in the EU market • Adherence to the EU’s aims of political, economic and monetary union Carbaugh, Chap. 9

Regional trade agreements: case studies Costs & benefits of EMU • Europe does not meet all the requirements of a theoretical “optimal currency area” • Advantages of EMU - real but small: • Lower transaction costs • Price comparisons easier • Exchange rate risk eliminated • Stimulates competition Carbaugh, Chap. 9

Regional trade agreements: case studies Costs & benefits of EMU (cont'd) • Disadvantages of EMU: • Loss of monetary policy and the exchange rates as economic adjustment tools • Use of fiscal policy for adjustment is also constrained • Adjustment to shocks therefore depends on wage flexibility and labor mobility, which are both low in Europe Carbaugh, Chap. 9

Regional trade agreements: case studies 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

Regional trade agreements: case studies NAFTA's benefits • Mexico stood to gain the most, with access to large industrial markets and new inward investment flows • Canada maintained its preferences in the US market and hoped for future access to South American markets • US stood to gain from access to the Mexican market and cheap labor and parts, access to reliable oil supplies, and less immigration pressure; but the benefits were modest Carbaugh, Chap. 9

Regional trade agreements: case studies Concerns about NAFTA • Main US losers from NAFTA would be import-protected industries competing with Mexican producers, and unskilled workers • US industrial workers also worried about lower pay scale in Mexico and plant relocations • Concerns Mexico would not enforce environmental protection measures • Side agreements on environment and labor law were concluded to address those concerns Carbaugh, Chap. 9

Regional trade agreements: case studies NAFTA’s impact so far • 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, and they refrained from building new trade barriers even during recession Carbaugh, Chap. 9

Regional trade agreements: case studies Special case: economies in transition • Nations of eastern Europe and the former Soviet Union have been making a transition from a non-market (planned) economy to a market economy since the early 1990s - which has been very disruptive • These nations’ planned economies required them to be largely isolated from world trade - instead, set up their own trading bloc, the Council for Mutual Economic Assistance (CMEA) with only limited trade with the West Carbaugh, Chap. 9

Regional trade agreements: case studies Economies in transition (cont’d) • Even after the collapse of the central planning system, the nations remained tied together because of historical trade links inside CMEA and their common legacy as non-market economies • There is an ongoing debate over the best pace for economic reform (including trade and financial liberalization) - “shock therapy” vs. gradualism Carbaugh, Chap. 9

Regional trade agreements: case studies Economies in transition (cont’d) • Barriers to trade with the West used to make strategies such as countertrade, co-production agreements, joint R&D agreements, and contract manufacturing agreements very common • Gradual elimination of barriers to foreign business in most transition countries has allowed foreign firms to operate in the region more normally in recent years Carbaugh, Chap. 9

International Economics By Robert J. Carbaugh 9th Edition