CH9 Flashcards
Economists believe…
free trade agreements produce gains from trade for all member countries.
Levels of Economic Integration:
- Free Trade Area
- Customs Union
- Common Market
- Economic Union
- Political Market
Free Trade Area
Eliminates all barriers to the trade of goods and services among member countries.
- Each country is allowed to determine its own trade policies with regard to nonmembers.
- European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, Switzerland
- North American Free Trade Agreement (NAFTA) - U.S., Canada, Mexico
Customs Union
An agreement between two or more countries to remove trade barriers and lower or eliminate tariffs.
- Eliminates trade barriers between member countries and adopts a common external trade policy.
- The EU began as a customs union
- Andean Community (formerly the Andean Pact) (Bolivia, Colombia, Ecuador, Peru)
Common Market
- No restrictions on immigration, emigration, or cross-border flows of capital among member countries.
- Requires harmony and cooperation on fiscal, monetary, and employment policies.
- Mercosur (Argentina, Brazil, Paraguay, Uruguay) is hoping to establish a common market
Venezuela accepted for membership but awaiting ratification by Paraguay.
Economic Union
Requires a high degree of integration, a coordinating bureaucracy, and the sacrifice of national sovereignty to the bureaucracy.
- European Union (EU)
Political Union
EU headed toward at least partial political union, and the U.S. is an even closer example of political union.
Economic Case for Integration
- All countries gain from free trade and investment
- Assumes an absence of barriers
- Motivated by desire to exploit gains from free trade and investment.
Political Case for Integration
- Linking countries together, making them more dependent on each other, promotes political cooperation
- Reduces the likelihood of violent conflict
- Gives countries greater political clout when dealing with other nations.
Impediments for Integration
While a nation as a whole may benefit from a regional free trade agreement, certain groups may lose.
- It implies a loss of national sovereignty.
Regional economic integration is onluy beneficial if…
the amount of trade it creates exceeds the amount it diverts.
Trade Creation
Related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union.
Trade Diversion
Related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
WTO rules shure ensure that…
a free trade agreement does not result in trade diversion, but they do not cover some nontariff barriers.
Europe has 2 trade blocks:
- European Union (EU) - 28 members
- European Free Trade Area (EFTA) - 4 members
The Euopean Union was a product of 2 political factors:
- The devastation of western Europe during two world wars and the desire for a lasting peace.
- The European nations’ desire to hold their own on the world’s political and economic stage.
Political Structure of the European Union:
1- European Commission
Run by commissioners appointed by member countries and approved by the European parliament.
2- European Council
The ultimate controlling authority within the EU
One representative from the government of each member state.
3. European Parliament
751 members elected by the member states
Debates legislation proposed by the commission and forwarded to it by the council.
- Treaty of Lisbon increased power of the parliament
4. Court of Justice
Single European Act of 1987 Objectives:
- Remove all frontier controls among EC countries
- Apply the principle of “mutual recognition” to product standards
- Institute open public procurement to nonnational suppliers
- Lift barriers to competition in the retail banking and insurance businesses
- Remove all restrictions on foreign exchange transactions between member countries by the end of 1992
- Abolish restrictions on cabotage by the end of 1992
Maastricht Treaty
Agreed to in 1992, but not ratified until January 1, 1994, that committed the 12 member states of the European Community to a closer economic and political union.
Benefits of the Euro
Savings from having to handle one currency, rather than many
Makes it easier to compare prices across Europe
Producers forced to look for ways to reduce production costs
Boosts development of highly liquid pan-European capital market
Will open investment options
Cons of the Euro
- Loss of control over national monetary policy
- EU is not an optimal currency area
Optimal currency area
Region in which similarities in economic activity make a single currency and exchange rate feasible instruments of macroeconomic policy.
Enlargemnet of the European Union
Expansion into eastern Europe
13 countries applied by end of the 1990s
Had to establish stable democratic governments
Show respect for human rights
New members had to wait to adopt euro
Eastern European countries only account for 5 percent of the GDP of current EU members
Turkey has been denied entry because of human rights concerns
North American Free Trade Agreement (NAFTA)
-Abolished tariffs on 99% of the goods traded between members
-Removed barriers on the cross-border flow of services
-Protects intellectual property rights
-Removes most restrictions on FDI between members
-Allows each country to apply environmental standards
-Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
NAFTA benefits for Mexico:
Increased jobs as low cost production moves south and will see more rapid economic growth as a result.
NAFTA benefits for the US and Canada:
Access to a large and increasingly prosperous market
The lower prices for consumers from goods produced in Mexico
Low cost labor and ability to be competitive in world markets
Increased imports by Mexico
Cons of NAFTA
- Jobs would be lost and wage levels would decline in the U.S. and Canada
- Pollution would increase due to Mexico’s more lax standards
- Mexico would lose its sovereignty
Andean Community
A 1969 agreement among Bolivia, Chile, Ecuador, Colombia, and Peru to establish a customs union.
Formed in 1969 using the EU model
Had more or less failed by the mid-1980s
Was re-launched in 1990, and now operates as a customs union
Renamed the Andean Community in 1997
Signed an agreement in 2003 with Mercosur to restart negotiations towards the creation of a free trade area
Mercosur
Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area.
Originated in 1988 as a free trade pact between Brazil and Argentina
Expanded in 1990 to include Paraguay and Uruguay and in 2005 with the addition of Venezuela
May be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis
Efforts stalled on reducing trade barriers between member states
Central Amercian Common Market
A trade pact among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua which began in the early 1960s but collapsed in 1969 due to war.
Central Amercia Free Trade Agreement (CAFTA)
The agreement of member states of the Central American Common Market joined by the Dominican Republic to trade freely with the United States.
CARICOM
An association of English-speaking Caribbean states that are attempting to establish a customs union.
Caribbean Single Market and Economy (CSME)
The six CARICOM members that agreed to lower trade barriers and harmonize macroeconomic and monetary policies.
Assosiation of South East Asian Nations (ASEAN)
Formed in 1967
Currently includes Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia
Foster freer trade between member countries and to achieve cooperation in their industrial policies
ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in 2003
ASEAN and AFTA are moving towards establishing a free trade zone.
Regional Trade Blocks in Africa
17 trade blocs on the African continent
Since many countries support the use of trade barriers to protect their economies from foreign competition, meaningful progress is slow
The East African Community (EAC) re-launched in 2001
Established a common market in 2010 and is moving toward goal of monetary union
Plan for Tripartite Free Trade Area (TFTA) began in 2015.
Regional Economis Integration Agreements Opportunities
-Opens new markets
-Allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal.
Regional Economic Integration Agrrements Risks
- Business environment becomes competitive
- There is a risk of being shut out of the single market by the creation of a “trade fortress”
- Growing opposition to free trade areas.
