chpt8
darkheaven
chapter_8_1.pptxRegional Trading Arrangements
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1
PowerPoint slides prepared by:
Andreea Chiritescu
Eastern Illinois University
Regional Integration vs. Multilateralism
WTO
Promote trade liberalization through worldwide agreements
Trade liberalization by any one nation
Extended to all WTO members, 153 nations
Nondiscriminatory
Regional trading arrangements
Nations reduce trade barriers only for a small group of partner nations
Discriminating against the rest of the world
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Regional Integration vs. Multilateralism
Regional block – stumbling blocs to multilateralism
Members not greatly interested in worldwide liberalization
May not realize additional economies of scale from global trade liberalization
May want to invest their time and energy in establishing strong regional linkages
Rather than investing them in global negotiations
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Regional Integration vs. Multilateralism
Regional block – building blocks to global free trade and investment
When structured according to principles of openness and inclusiveness
May achieve deeper economic interdependence among members
Greater commonality of interests
Simpler negotiating processes
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Regional Integration vs. Multilateralism
Regional block – building blocks to global free trade and investment
Self-reinforcing process
Encourages the partial adjustment of workers
Out of import-competing industries in which the nation’s comparative disadvantage is strong
Into exporting industries in which its comparative advantage is strong
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Types of Regional Trading Arrangements
Economic integration
Process of eliminating restrictions on international trade, payments, and factor mobility
Results in the uniting of two or more national economies in a regional trading arrangement
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Types of Regional Trading Arrangements
Free-trade area
Association of trading nations
Members agree to remove all tariff and nontariff barriers among themselves
Each member maintains its own set of trade restrictions against outsiders
North American Free Trade Agreement (NAFTA)
Canada, Mexico, and the United States
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Types of Regional Trading Arrangements
Customs union
Agreement among two or more trading partners
To remove all tariff and nontariff trade barriers between themselves
Each member nation imposes identical trade restrictions against nonparticipants
Benelux
Belgium, the Netherlands, and Luxembourg
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Types of Regional Trading Arrangements
Common market
Group of trading nations
Free movement of goods and services among member nations
Initiation of common external trade restrictions against nonmembers
Free movement of factors of production across national borders within the economic bloc
European Union (EU), 1992
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Types of Regional Trading Arrangements
Economic union
National, social, taxation, and fiscal policies are harmonized and administered by a supranational institution
Requires an agreement to transfer economic sovereignty to a supranational authority
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Types of Regional Trading Arrangements
Monetary union
Ultimate degree of economic union
Unification of national monetary policies
Acceptance of a common currency administered by a supranational monetary authority
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Types of Regional Trading Arrangements
The United States - Monetary union
Fifty states with a common currency
Federal Reserve
Single central bank for the nation
Free trade among the states
Labor and capital move freely
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Types of Regional Trading Arrangements
The United States - Monetary union
Federal government
Nation’s fiscal policy
National defense
Retirement and health programs
International affairs
States can keep their identity within the union
Police protection and education
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Missing benefits: the United States falls behind on trade liberalization
2009
266 bilateral or regional trade pacts
United States
Had trade deals with only 17 countries
European Union, Japan, and China
Trade alliances ranging from customs unions to large free-trade pacts with a total of 40 countries
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GLOBALIZATION
Missing benefits: the United States falls behind on trade liberalization
Expansion of bilateral and regional trade deals
Countries losing faith in the ongoing Doha Round of multilateral trade talks
Bilateral and regional deals as a method of liberalizing beyond what the Doha Round would achieve
Foster alliances or promote political influence
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GLOBALIZATION
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Examples of trade deals involving countries other than the United States
TABLE 8.1
South Korea-European Union, 2009
Applies to $96 billion in annual trade
Eliminates virtually all tariffs
Decreases Korean regulatory barriers on imports of automobiles
Canada-Colombia, 2008
Applies to $1.2 billion in annual trade
Phases out most Colombian agricultural tariffs
Addresses Colombian food-safety standards that restrict trade
Japan-Association of Southeast Asian Nations, 2008
Applies to $211.4 billion in annual trade
Eliminates Japanese tariffs on 93 percent of import value
Eliminates six countries’ tariffs on 90 percent of Japanese imports
Impetus for Regionalism
Motivations for regional trading arrangements
Prospect of enhanced economic growth
Economies of large-scale production
Foster specialization and learning-by-doing
Attract foreign investment
Foster a variety of noneconomic objectives
Managing immigration flows
Promoting regional security
Enhance & solidify domestic economic reforms
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Effects of a Regional Trading Arrangement
Static effects of economic integration
On productive efficiency
And consumer welfare
Dynamic effects of economic integration
Relate to long-term rates of growth
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Effects of a Regional Trading Arrangement
Static effects
Trade-creation effect
Welfare gain
Some domestic production of one customs-union member
Replaced by another member’s lower-cost imports
Consumption effect
Production effect
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Effects of a Regional Trading Arrangement
Static effects
Trade-diversion effect
Welfare loss
Imports from a low-cost supplier outside the union
Are replaced by purchases from a higher-cost supplier within the union
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The formation of a customs union leads to a welfare-increasing trade creation effect and a welfare-decreasing trade diversion effect. The overall effect of the customs union on the welfare of its members, as well as on the world as a whole, depends on the relative strength of these two opposing forces.
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Static welfare effects of a customs union
FIGURE 8.1
Effects of a Regional Trading Arrangement
United Kingdom (UK)
Entered the European Union in 1973
Turned away cheaper agricultural produce from Australia
Increased farm output
Purchased produce from its more expensive European neighbors
Trade diversion
Produce prices – increased by 25%
Decreased national welfare
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Effects of a Regional Trading Arrangement
United Kingdom (UK)
Purchased cheaper manufactured goods from European neighbors
Trade-creation
Increase national welfare
Trade creation - stronger effect
UK’s overall welfare improved by joining the EU
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Effects of a Regional Trading Arrangement
Dynamic effects
Creation of larger markets
By the move
Dynamic gains
Economies of scale
Greater competition
Stimulus of investment
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The European Union
European Community / European Union
Trade liberalization
Treaty of Rome in 1957
Belgium, France, Italy, Luxembourg, the Netherlands, West Germany
By 1973
The United Kingdom, Ireland, Denmark
1981 – Greece
1987 – Spain, Portugal
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The European Union
European Community / European Union
1995 – Austria, Finland, Sweden
2004 – ten other Central and Eastern European countries
Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia
2007 – a total of 27 countries
Bulgaria and Romania
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The European Union
European Union – customs union
Economic integration to an economic union
1957 – trade liberalization
1968 – free-trade area
1970 – customs union
1985 – detailed program for becoming a common market
Elimination of remaining nontariff trade barriers by 1992
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The European Union
European Union - monetary union
The Maastricht Treaty, 1991
Full-fledged European Monetary Union (EMU) by 2003
Single currency, the euro
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The European Union
Convergence criteria, EMU
Align economic and monetary policy
Price stability
Low long-term interest rates
Stable exchange rates
Sound public finances
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The European Union
European Union - monetary union
The euro - official currency of 16 of the 27 member states of the European Union
The eurozone:
Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain
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The European Union
The euro
Also used in another five European countries
Used daily by some 327 million Europeans
Over 175 million people worldwide
Use currencies that are pegged to the euro
The second largest reserve currency
The second most traded currency in the world
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The European Union
Countries joining the European Union
Obligated to join the EMU
To adopt the euro as their national currency
Must first satisfy the convergence criteria as mandated by the Maastricht Treaty
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The European Union
2004, new constitutional treaty
Changes to the EU’s original governing constitution
Abolish the EU’s rotating presidency
Appoint a single individual as president of the European Council for up to five years
New foreign minister
Increasing the powers of the European Parliament
Simplifying EU voting procedures
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The European Union
French and Dutch voters sidetrack integration
Rejected the new constitution, 2005
Undermine social protections
Express dissatisfaction
Their unpopular national governments
The EU bureaucracy
Turkey’s prospective EU membership
Reduced French influence within the EU
Dutch - EU’s big countries - already too strong
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The European Union
Agricultural policy
Abolished restrictions on agricultural products traded internally
Common agricultural policy
Support of prices received by farmers
Deficiency payments, output controls, and direct income payments
Variable levies
Export subsidies
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The European Union
Variable levies
Levy – determined daily
The difference between the lowest price on the world market and the support price
More restrictive than a fixed tariff
Discourages foreign producers
From absorbing part of the tariff
From cutting prices to maintain export sales
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The common agricultural policy of the EU has used variable levies to protect EU farmers from low-cost foreign competition. During periods of falling world prices, the sliding-scale nature of the variable levy results in automatic increases in the EU’s import tariff.
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Variable levies
FIGURE 8.2
The European Union
Export subsidies
Ensure that any surplus agricultural output will be sold overseas
EU farmers - incentive to increase production
Reduce the domestic supply
Eliminate the need for the government to purchase the excess
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Government support for agriculture, 2007
TABLE 8.2
The European Monetary Union
European Monetary Union (EMU), 1999
Single currency (the euro)
Lower the costs of goods and services
Facilitate a comparison of prices within the EU
Promote more uniform prices
European Central Bank - Frankfurt, Germany
Controls the supply of euros
Sets the short-term euro interest rate
Maintains permanently fixed exchange rates for the member countries
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The European Monetary Union
Optimum currency area
Region in which it is economically preferable to have a single official currency
Rather than multiple official currencies
Gains
More uniform prices
Lower transaction costs
Greater certainty for investors
Enhanced competition
Promote price stability
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The European Monetary Union
Optimum currency area
Costs
If interest-rate changes affect different economies in different ways
Loss of two policy instruments
Independent monetary policy
Option of changing the exchange rate
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The European Monetary Union
Optimum currency area
Various reactions to economic shocks
Mobility of labor
Flexibility of prices and wages
Automatic mechanism for transferring fiscal resources to the affected country
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The European Monetary Union
Optimum currency area
Best chance of success
Similar business cycles and economic structures
Single monetary policy should affect all the participating countries in the same manner
No legal, cultural, or linguistic barriers to labor mobility
Wage flexibility
System of stabilizing transfers
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Advantages and disadvantages of adopting a common currency
TABLE 8.3
| Advantages | Disadvantages |
| The risks associated with exchange fluctuations are eliminated within a common currency area. Costs of currency conversion are lessened. The economies are insulated from monetary disturbances and speculation. Political pressures for trade protection are reduced. | Absence of individual domestic monetary policy to counter macroeconomic shocks. Inability of an individual country to use inflation to reduce public debt in real terms. The transition from individual currencies to a single currency could lead to speculative attacks. |
The European Monetary Union
Europe - suboptimal currency area
Advantages
Improve economic efficiency
Lower transaction costs of exchanging currency
Elimination of exchange-rate risk
Stimulates competition
Facilitates the broadening and deepening of European financial markets
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The European Monetary Union
Europe - suboptimal currency area
Disadvantages
EU countries – cannot use monetary policy and exchange rate as a tool in adjusting to economic disturbances
Use of fiscal policy - limited by the need to keep budget deficits in control
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The European Monetary Union
Challenges for the EMU
Ability of the European Central Bank to focus on price stability over the long term
Operation of monetary policy
Difficulty in reducing budget deficits and debts
Need for structural reform
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The euro, ten years later: how has it performed?
Benefits of the euro
Removed the cost of exchanging currency
Eliminated exchange rate risks
Reduction in cross-border transaction costs
Fostered economic ties
Challenges of the eurozone
Worries about trade imbalances
One-size-fits-all monetary policy has not met the needs of all of its members
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GLOBALIZATION
The European Monetary Union
Does the Eurozone need a bailout fund?
Needs a better mechanism to deal with a financial crisis
Possible interim solution: European Monetary Fund (EMF)
Bailout fund financed out of contributions from member country governments
It would put the eurozone in charge of its own destiny
Eurozone members would have greater powers to punish fiscal abusers
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North American Free Trade Agreement
North American Free Trade Agreement, 1994
NAFTA
Mexico, Canada, and the United States
Provide each member nation better access to the others’ markets, technology, labor, and expertise
Economies of scale
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Winners and losers in the United States under free trade with Mexico
TABLE 8.4
| U.S. Winners | U.S. Losers |
| Higher-skill, higher-tech businesses and their workers benefit from free trade. Labor-intensive businesses that relocate to Mexico benefit by reducing production costs. Domestic businesses that use imports as components in the production process save on production costs. Consumers in the United States benefit from less expensive products due to increased competition with free trade. | Labor-intensive, lower-wage, import—competing businesses lose from reduced tariffs on competing imports. Workers in import-competing businesses lose if their businesses close or relocate. |
North American Free Trade Agreement
NAFTA & Mexico
Benefits
Increase in the production of goods and services – comparative advantage
Rising investment spending
Increase wage incomes and employment, national output, and foreign-exchange earnings
Facilitated the transfer of technology
Costs
Agriculture – 25% of population
Devastated by US competition
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North American Free Trade Agreement
NAFTA & Canada
Benefits / safeguards
Maintenance of its status in international trade
No loss of its current free-trade preferences in U.S.
Equal access to Mexico’s market
Costs
Concerns about Canada’s European-style social welfare model
Uncompetitive practices and policies
Downward pressure on the country’s base of personal and corporate taxes
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North American Free Trade Agreement
NAFTA & the U.S.
Benefits
Expanding trade opportunities
Reducing prices
Increasing competition
Economies of large-scale production
More reliable source of petroleum
Less illegal Mexican immigration
Enhanced Mexican political stability
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North American Free Trade Agreement
NAFTA & the U.S.
Costs
Industries that rely on trade barriers to limit imports of low-priced Mexican goods
Citrus and sugar
Unskilled workers
Fear that U.S. companies will move to Mexico
NO because of different worker productivity
Concern: Mexico’s environmental regulations
Greater trade creation than trade diversion
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Gross domestic product, employment and labor productivity, 2007
TABLE 8.5
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Trade effects of NAFTA: trade creation and trade diversion (thousands of dollars)
TABLE 8.6
North American Free Trade Agreement
NAFTA & trade diversion
Benefited Mexico’s textile industry
Increased market share by late 1990s
The gains could not be sustained
China – low-cost textiles
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North American Free Trade Agreement
U.S. closes its highways to Mexican cargo trucks, 1995
Concern – safety of the trucking system
Additional safety requirements
Only for Mexican truckers
U.S. Teamsters (truckers) union – benefit
NAFTA arbitration panel: U.S. was in violation
2007 - pilot program for Mexican carriers
Bad news for Teamsters union
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North American Free Trade Agreement
U.S. closes its highways to Mexican cargo trucks, 1995
2009, in violation of NAFTA, U.S. terminated the pilot program
Mexico retaliated
89 U.S. products - new tariffs of 10-45%
Mostly agricultural products
Decreased imports from U.S.
American agricultural producers paid a dear price for the protectionism granted the Teamsters union
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North American Free Trade Agreement
Is NAFTA an optimum currency area?
Degree of economic integration
Canada, U.S., Mexico
Similarity of economic structures
Canada, U.S.
Mexico – couldn’t use monetary policy
Canada – concerned about the loss of national sovereignty
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From NAFTA to CAFTA
2005, Central American Free Trade Agreement (CAFTA)
United States
Five nations of Central America
Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua
Caribbean country: the Dominican Republic
Trade liberalization measures
About 80 percent of U.S. exports become duty-free
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TRADE CONFLICTS
Free Trade Area of the Americas
1994, Summit of the Americas
34 nations in North and South America
Except Cuba
Call for the creation of a Free Trade Area of the Americas (FTAA)
If established, FTAA
Largest trading bloc in the world
850 million consumers
Combined income of more than $14 trillion
Level the playing field for U.S. exporters
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Major western hemisphere regional trade agreements
TABLE 8.7
Free Trade Area of the Americas
Obstacles to FTAA
FTAA’s allowance for other trade agreements
Smaller partners - special assistance
Agricultural issues
U.S. refused to lower subsidies and tariffs that protect U.S. farmers
Honoring intellectual property rights
Opening of government contracts to foreign bidders
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Asia-Pacific Economic Cooperation
Asia-Pacific Economic Cooperation (APEC)
1989, the United States
Australia, Brunei, Canada, Chile, China, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore, South Korea, Taiwan, and Thailand
1993, vision of an Asia-Pacific economic community
Eliminate barriers to trade and investment by 2020
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Transition Economies
Transition economies
Transition from a centrally planned economy to a market economy
Economic reforms in Eastern European nations in the 1990s
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GDP per capita* for the transition economies, 2007 (in dollars)
TABLE 8.8
Transition Economies
Market economy
Decisions of independent buyers and sellers
Acting in their own interest
Govern both domestic and international trade
Prices are market-determined
Value alternatives
Allocate scarce resources
Play rationing and signaling roles
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Transition Economies
Nonmarket economy
Centrally planned economy
Less regard for market considerations
State planning and control
Govern foreign and domestic trade
Controls the prices and output
Fixes prices – insulated from foreign-trade influences
Ration arbitrary quantities among buyers
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Economies in transition: 2009 index of economic freedom*
TABLE 8.9
Transition Economies
Motivation for transition
Failure of the economy to generate a high standard of living
No incentives for producers
To efficiently supply the goods and services
That consumers wanted to purchase
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Transition Economies
Motivation for transition
Normal operation of markets – obstructed
Widespread use of price controls
Reliance on inefficient public enterprises
Extensive barriers to competition
Government regulation of production and investment
No incentives for entrepreneurs
Lack of enforceable property rights
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Transition Economies
Motivation for transition
For the communistic countries
Central plans decided production levels
Managers – no incentive to modify their output as long as quotas were realized
Underproduction of consumer goods
Widespread rationing
Absent incentives to innovate
Inefficient state-owned enterprises
Public funds were channeled into favored industries
Weaknesses of the political and economic systems
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From 1993 to 2005, economic growth was strongest for the freer countries of the former Soviet bloc.
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For the former Soviet bloc countries, freer economies grow faster
FIGURE 8.3
Transition Economies
Russia’s WTO accession negotiations
Slow for several reasons
Still in transition
Ongoing challenges
Restructuring its economy
Privatizing government-owned industries
Implementing market-oriented economic reforms
Difficult to reach political consensus on reforms
1998 economic crisis
Rising world oil prices beginning in 2000
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