Keep it simple, I leave the docs on a file

1. Free Trade Area (may be easily identified because “FTA” usually appears in the name (CAFTA, NAFTA, EFTA)).

a. Features: (see next page)

1. Free Trade Area (continued)

a. Features

i. No internal tariffs among member countries.

ii. Each member sets its own tariff with non-members.

b. Example – assume an FTA members US, Mexico, Canada, and Germany (non-member)

i. Trade between US, Mexico and Canada; no tariffs imposed.

ii. Trade between US and Germany; US sets 15% tariff

iii. Trade between Mexico and Germany; Mexico sets 10%

iv. Trade between Canada and Germany; Canada sets 5%

a. Features:

i. No internal tariffs among members.

ii. Common external tariff (i.e., each member must use tariff schedule set by the trading bloc when trading with non-members).

b. Example – members are US, Mexico, Canada, and non-member Germany. The bloc has set an external tariff of 20% with non-members.

i. Trade between US, Mexico and Canada – no tariffs imposed.

ii. Trade between US and Germany; US must use 20% tariff

iii. Trade between Mexico and Germany; Mexico must use 20%

iv. Trade between Canada and Germany; Canada must use 20%

3. Common Market (see next page)

3. Common Market

a. Features:

i. No internal tariffs among members.

ii. Common external tariff (i.e., each member must use tariff schedule set by the trading bloc when trading with non-members).

iii. Free factor mobility – factors of production (labor, capital) move across members’ borders without restrictions (no tariffs, no visas required, etc.)

4. Complete Economic Integration (This type is not in the book.)

a. Features

i. No internal tariffs among members.

ii. Common external tariff (i.e. each member must use tariff schedule set by the trading bloc when trading with non-members).

iii. Free factor mobility – factors of production (labor, capital) allowed to move across member borders without restrictions (no tariffs, no visas required, etc.)

iv. Common monetary and fiscal policy (e.g. the euro)

v. Political integration

b. Note: European Union is not yet at complete economic integration mainly due to lack of political integration.

II. Effects of Integration

1. Static effects

a. Trade barriers fall (e.g. when an FTA is formed).

b. Inefficient producers are no longer protected by trade barriers.

Continued

1. Static effects (continued)

c. Due to competition, inefficient producers are replaced by efficient ones.

d. Because the demand for goods made by inefficient producers is replaced by demand for goods by efficient producers, the overall level of demand stays the same (hence the term “static”)

e. Can develop when either trade creation or trade diversion occurs.

2. Dynamic effects

a. Trade barriers fall.

b. Volume of market potential increases (more countries/consumers now available).

c. Production increases resulting in greater economies of scale.

d. There is overall growth in the region.

3. Trade creation

a. Trade barriers fall.

b. Companies now able to export to new markets without additional costs caused by barriers.

c. New products now shipped to these markets.

d. New industries develop as a result of new products entering market.

e. Example: Assume there are no computers in Country A. When Country A joins the FTA, computers from Country B are exported to A. As a result, other industries (computer repair shops, retail outlets, software developers, etc) are created in Country A.

4. Trade diversion

a. Occurs when companies trade with inefficient member countries instead of efficient non-members when trade barriers fall.

b. Example: Assume Mexican producers now trade with efficient producers in Germany. Mexicans must pay high tariffs to Germany. Mexico forms FTA with US but US producers are inefficient. However, Mexican trade is diverted from Germany to US because costs are lower due to absence of trade barriers.

C. THE EUROPEAN UNION

NOTE: Although it is important to know the history of the E.U., only focus on the primary E.U. bodies/institutions and their functions. Some information added from E.U. website (europa.eu)

I. Organizational Structure of the E.U.

1. The European Commission

a. Provides political leadership of the E.U.

b. Roughly similar to Executive Branch/Presidency of the US.

c. Functions

i. Proposes legislation for the E.U. and submits such legislation to the Council of the European Union and the European Parliament.

ii. Acts as Guardian of the treaties (e.g. they make sure members apply the Union’s treaties).

iii. Negotiates, manages and executes the Union’s policies and international trade agreements

2. The European Council/Council of the European Union (formerly The Council of Ministers)

a. Roughly similar to US Senate.

b. Functions – see next page

b. Functions (of Council)

i. Serves as joint decision-makers along with the European Parliament

ii. Approves, amends, or ignores proposals submitted by the Commission.

3. European Parliament

a. Roughly similar to US House of Representatives.

b. Functions

i. Approves, amends, or ignores legislative proposals submitted to it by the European Commission.

ii. Controls and approves E.U. budget and spending (jointly with the Council).

iii. Supervises the executive decisions of the E.U.

iv. Serves as decision-makers (i.e., enacts E.U. laws) along with the Council of the European Union

Decisions made using:

· Co-decision or "ordinary legislative procedure" – decisions made jointly with the Council.

· Assent

· Granted (or declined) by Parliament to the Council before Council’s proposals can be put in place (e.g., allowing other countries to join the E.U.)

· Parliament can’t change the proposal.

· Must be by majority vote in Parliament

· Consultation – Council consults with Parliament on proposals the Council receives from the Commission

I. Organizational Structure of the E.U. (continued)

4. Court of Justice of the European Communities.

a. Interprets and ensures treaties are correctly applied.

b. Primarily involved with economic issues.

c. Acts as appeals court for firms, individuals and organizations fined by the Commission.

II. Monetary Union: The Euro

1. Established by the Treaty of Maastricht (1992)

2. Member countries must meet certain criteria of the European Monetary Union before being able to adopt the euro.

III. Schengen Agreement (1990)

1. Facilitates free movement of people in Europe (i.e., allows crossing borders without going through border checks)

2. Threatened by terrorism and migration

IV. Transatlantic Trade and Investment Partnership (T-TIP) – trade agreement being discussed between the U.S. and the E.U.

V. Brexit – agreement being negotiated formalizing Britain’s exit from the E.U.

D. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

I. Members include US, Mexico, Canada

II. Areas Covered (this is not in the text)

1. Market access – covers topics such as tariff and non-tariff barriers; rules of origin

2. Trade rules – covers anti-dumping legislation, health and safety standards, subsidies

3. Services - provides for the same safeguards for trade in services (consulting, engineering, software development), etc.

Continued

II. Areas Covered by NAFTA (continued)

4. Investments – establishes investment rules governing minority interests, portfolio investments. Protects investments made by any company incorporated in any NAFTA country regardless of the company’s country of origin.

5. Intellectual property – NAFTA members pledge to protect intellectual property rights while ensuring that the enforcement doesn’t itself become a barrier to trade

6. Dispute settlement – provides a process for settling disputes in order to discourage member countries from taking unilateral actions against an offending member (i.e. in case of disputes, member countries must follow the established settlement process and not act on their own).

III. Rules of Origin and Regional Content Rules

1. Rules of Origin require that to be eligible for NAFTA preferential treatment (i.e. reduced or no tariff barriers), goods must “have been the subject of substantial economic activity in the free trade area” (i.e., a significant portion of the cost of production of the item must have been incurred in the region).

2. Regional content rules (a/k/a Regional Value Content Requirement or local content rules) state specific percentages of production costs which must be incurred in the region for the product to be considered North American. (e.g. for most products, at least 50% of the cost/value must be from NAFTA countries).

E. UNITED STATES-MEXICO-CANADA AGREEMENT (USMCA) (2017 to present)

(Not in textbook. Source of information: US Trade Representative (ustr.gov)

I. New FTA proposed to replace/supersede NAFTA. Signed by U.S., Mexico, and Canada

II. Some provisions

1. Gives U.S. greater access to Canadian markets (e.g., dairy products)

2. Increased NAFTA regional content rules on some products (e.g., automobiles from 62.5% to 75%)

Continued

II. Some provisions of USMCA (continued)

3. Requires 30% of work on automobiles manufactured in N. America to be made by factory workers earning US$16 per hour by 2020; increasing to 40% by 2023.

4. Members must review agreement every 6 years. Agreement expires after 16 years but can be renewed for additional 16-year periods.

5. Introduces enhanced protection for “digital trade” (e.g., stronger protection for e-books, online consumer protection, etc.).

F. CENTRAL AMERICAN-DOMINICAN REPUBLIC FREE TRADE AGREEMENT (CAFTA-DR)

Note: This information is not in the text. Source of information: U.S. Dept of Commerce

I. A free trade area among U.S., El Salvador, Guatemala, Honduras, Costa Rica, the Dominican Republic, and Nicaragua.

II. Approved by the US Congress in July 2005 and signed into law (in the US) August 2005

III. Approved by El Salvador (3/1/06), Honduras and Nicaragua (4/1/06), Guatemala (7/1/06), the Dominican Republic (3/1/07)

IV. Passed in Costa Rica (January 1, 2009).

OMIT “IMPACT OF NAFTA” to the end of the chapter.