8.3: The Case Against Regional Integration Flashcards
What is the main economic concern with regional trade agreements according to some economists?
Some economists are concerned that the benefits of regional trade agreements are oversold and the costs are often ignored.
They highlight the need to consider trade creation versus trade diversion when evaluating these agreements.
What is trade creation?
Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area, or when higher-cost external producers are replaced by lower-cost external producers within the free trade area.
What is trade diversion?
Trade diversion happens when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area.
Under what condition does a regional free trade agreement benefit the world?
A regional free trade agreement benefits the world only if the amount of trade it creates exceeds the amount it diverts.
What is the implication of the United States and Mexico creating a free trade area while maintaining tariffs on imports from the rest of the world?
If the United States and Mexico produce goods at a higher cost than other countries from which they were importing (like Costa Rica), setting up a free trade area and imposing tariffs on the rest of the world could result in trade diversion, which is typically seen as detrimental.
What is the World Trade Organization’s (WTO) rule on free trade agreements?
WTO rules should ensure that a free trade agreement does not result in trade diversion.
This means that the free trade areas should only be formed if the members set tariffs that are not higher or more restrictive to outsiders than the ones previously in effect.
What is a limitation of the WTO rules concerning regional trade agreements?
The WTO does not cover some non-tariff barriers, which means regional trade blocs could be protected from outside competition by high non-tariff barriers, potentially leading to trade diversion.
How has NAFTA (now USMCA) impacted Canadian business according to the text?
NAFTA has had a mix of criticism and support.
Critics point to job losses and environmental concerns, while proponents highlight increased trade, job creation, and business success stories, such as that of Baultar Inc.
What role did the NAFTA play in Canadian labor productivity compared to the U.S.?
While Canadian employment levels rose and the economy grew after NAFTA’s implementation, concerns remained about the “productivity gap” between Canadian and U.S. economies, with U.S. labor productivity outpacing Canada’s since NAFTA was put in place.
What is the success story of Baultar Inc. in relation to NAFTA?
Baultar Inc., a Canadian company, successfully partnered with a Mexican company to land a major contract and expanded its market reach, demonstrating the ability of businesses to adapt and thrive under NAFTA.
