Immigration

+b

Tr;r'-$* ffi3

i1,': ., iii:riii. ,rt Lriiurli'ici; I l)ill tt il'iir'ii

3

'Tl"ade Blocs eild "E d

Kq "s_a_L,'

l h;t;'rfr:i's ii thi'oLrgli ili lcokerJ nr rrii;rl-o!.11.)fi'lirJlii-y iriri;cri lui'riei's. or:es tli:rt 1ax- ol IL:sifiat ell irripo|ts rciiiixll!:ssi 01'c0tritlLv t:i'or.isjri. i:4rri srulii: iiirl;r-lr^t Lrai.r.ji:rs rij.rt ntilf];lj l0 iiiscrittlntle, lhc'r, liir goocls. sct'r,jci:s. Ot.its".ltlrl jl.cnr i;cnre cuirirlr.ii:; lrl;rc illirr th*:.* iittitii.llhct ctttiitities. ilte ittulvsis ol'{,'liairtel's s thlotrgir l0 carr rrou,iti.: rniliii ii':ii ro ex1;'1:iiri the eficcr.s r,;i'todav"i; ti'ixie rlisu.inriiiaiioir.

1.:rlg lirol.. ;i1 1\\'o kjnii,s rrl'tratlt: Lr::l.i*i.s riial are riesigtrcrl fr: iiiscr.iminliie:

; r. i:licir rr:etnbct crlrilltt=r' ear: iilipi:r't li:ont olhr,'i' rnetiriic| c$Lrir{r.iLrs iti 1i-'tlit chi-'litl',,'. r."'ltiii: ititi'rrtsil{i blin jet'$ lrgirirrst iniliilr"ls 1}iir-i iiirtsirJr. i'ltc i'',rtlo;trltr Litrir-'rr (i:Lj) itac tioiti th;rt. ltlluiying ii"*r ti.itclt i:e]ri,r:cn

lr'hile lc:;1rir:iiirg iririti.;rfs ij'ortr otir*. criiintric:;. l. t:t' r+'ititi titc cirai;tel' tiiL. eiills "tluric iriociis.'" Sorrts: coLrilii'ii-:s

{.ii;.eriici;tai'.: lg:tirtsl ceiiitii; oiher cluriti'ics. rrsuirll;; i:r.^aLrsr-: oi-a p*1ie.r' iiispuie.jiti'r'i.ieitv tlir': t;it{Jlriii.'tii'gr:oiis. sfl'1,iccr. rlr- irs}cls io l l,rllt'ltcLil:trlcclritlt.-r, riliile a1i0r"'iltg i.:rixlfl l0 iliiirt:r'corttillir's. oi ilisr-:r'iittinl.lt: agailul iirrpolis jl.{.r1tt ih,-.iar, ir()1r(i f{)urltr'','. iir trlcch trix}r r:rpolis lo lnr{i iinitgr.ls fii;n {ji,,r titi.g,:-rt.

:r{rrii. irtidrniriii,-rrti rllcrillirr{s diser'irninat* iir irirrlc aiorrc^ rihilc oihcrs r.iis,-:r-iriiina{..: iliritrlilli ittsiilt:i':; itit(1 oui-';ieicr-s uti ail ii'orit:;. i'rccilrrrirrit lrlruo:;1 lik,: rruij'i.ril ;uii6rrs. Iit t-ll'itsir rtltlit is llirpllcrti;tg in i:rrli:pr:. l'.qori{r Anr*rjcii. iir:li t:isctviirjtc" trrts-} slroiilii i.ir.sl riistingLtisit illlitli!rI tlir: lnirirr tvprrs ol'et:oiri'rnrit bli-rcs. irig.rile lf . i irnrl tlrc joligrr.,irrg lie i'iriiiiurrs :huri, ilri: 1irri!:r.,rssii;ri tll r-cr:nlln jc blcr:s lori.ar"d jrlcrf,asiilr iirtegr.:rtir:n;

l' :\ r' :i ;::, , '' . itt ti'ltirit trtciitbi-:l-s t'etIlg\,{r tuiiit i:itlri*r-\ int$trg fit.Jnt- :.r.lYilii iliti liccir iheii'sr'lt:i1'[]i,,: nalioiuil i;tlricrs tguitrst lt'ltiic t,.riir tlrr: or.ii,-iilt nr,.lr.lrl. i'r'1il:i 1t'iiilit blocs r.rlictaliiiu lorlav iiri: Jllc-iririle ar'cl:;. (inc r:xlltiiili.: ii; ilic Nor.ilr 'r',ili':l'icilit ljrtttr 'l'i'l'tdr:.,\rca (\'Jfi111,r\). rviricit iiililallv b,.r!lan ii1 iltc star.'L rti' j{)()4.'". r1 : '-':: " : ' iti rt&iclr Jttfmbefs r'eil.lol'f bailier- I,o it-ttdu' iillloilu ilii'titsiili,:: ;tirrl ;iilcili lt |()illllr(tir Sr'i oJ- t.ilcritai l--at'l'i*l'g. 'l lte i:tr|ttpr.itir i,,-lrItintic

274 : lnternational Economics - Vol. l

;::,ir Part Two Trrrilr Ir,rlicr

i. .

Types of Ecouomic Blocs

Free Trade

rype or Broc X[ffi"t:" Free-trade area ,/ Customs union ,/ Common markei ,/ [conomic union ,/

Fe3:urg1 cf ltq Free Harmonieation*Common Mcvement of All EconomicExternat of Factors of p"li.i* iiir."l.Tariffs production ,"**)V,.".1

+ I f i lte ilolicies ltr c ttol jrtst ltlrtttotrizecl Lrv separntl .613r'r)rne*[s. brrr nctx1l11' decirred br.. a urri l.jerr r]o\ cr,rl]c,rJ;,lllt,illli;:y,l,i',',,'li,'iril,iu ,..",i-i,. ,i"" ,u.. ,,o. ..,,,;;;;;,;;;;..i"i,n,,. natio'hood sorne aurrrsrrs

cotnrnuttity (EEC) lronr 1957 to 1gg2 includecr a customs urio' arong ivith s.nreother agreernenrs, The Southerrr'Cin,n,on Market {fuIERCOSUR). fornrecl byArsenrina' Brazir, paraguav. ;;Jt;,,;,'uv i" reei. i;;;;; a cusr.rns ,'io'.3' A lr::::r*:r"r* ri:i+rk*r. in r.l4ric-h ,'r.rro..r'"rrr", *ii'"n*oom of factor florvs(nri-sration or tatr-o11d "upitutj

;;;; tn.rn**iu.r-in #irion ro having a cusromsunion' Despite rr: l1uT,^rn. E;.d;;;,comnron-Mr.r"'ilEc. wrrici became rheEuropeair conimunity Ec, ancr ir riotr'trr..r";";;r;;ir,r*,,,-.'rur

rrus 'ot a coff1nor1

marker up rhrough trre rqsos i;r;,t rcrii,ol-ruur,o",iir barriers ro the inrerna_ :lJ:i,Til:'ff:,"?ll,it.],..',r;;;;;i rr,, ei.r r,";;;;;;;- common miirker. a*d

4' Fuli *{**rJril;{ i':l=i*cl. in which member cormtries unify ali f}reir economic pol-icjes' incruding monetary. fiscar, unJ**t4.. p"u.*'rr"..-rr as poricies t'ward hadeand factor migration' rrrost natio's 0.. ,rouo,nic unions. Belgir-rm and Luxerubourotrave had such a union since iqlllrrr- ru is on ;;;;;ffi econ.mic riniry. g

l'he first trl/o fypes of econornic bl rem oved rrad e b; r;;;r' *i *, * ir, *" ;;; # ;rrlJ ?--j,,1?,. Tii:Jrt T:,1::;,ff 1 lil:of iabor and capital ane tneir.nar**il1"il and monetary uurono*y). Trude blocshal'e pro'ed easier to- form utu'"o,,,rr.on'rarkets or fuil-u.i.'s a'rorig sovereigrrnatiors. anri rhey are the subjeci"rri*'"rrrpt*r. n...,roniori-i.ro. flol.vs within a brlcis toucheri on onlv t,r_,_.ty h;;;**;,;#n'ro it in cl;;;. i!. rr,.= rno'erary side *furlton enrers in part III. LrraF,rur .rr.

I 'i- : .*:.,,.,t-:-i:: i.-i:., i;I-ii;il i].q * 3i:..

In 201a nead-v half of q"orld fade occurred \rithitr hrnctioning tracle blocs. incl,cling:' The 27 coLrntries ol.the EL]. The 4 r.enraining countries of the E,uropean Free Trade Area (EFl,4).

[,l,Trfi::?#i #il-il::,ffJu'; that the EU has rvith morc than 2aofher counhies

fTa4qd i* Chapter 12 l'r,r.ir i'Jl,,r'.i ,rrrri 'lr,ril' JJltclrs

' I'ire 3 counlries of NAI:IA. J'he tracic .tgl'eelnents that il4exi*rr hirs u'itli thr' IiU. L.Fl,{. Japan. ('hile. lsrael. Costa Rica, t-.1 Salvador. Ciuirternala. Ilondr:ras. Colourbia. and Nicalagita. ill addi- tion to its nrernbership in NAIr-L{. l'ire 7 couutrics of tlte Central Ameriean Fjree'l'rarje Area ({-Ai;lA-DR). The fi'ee-trade areas thal the L,lniterl Stat';s has rvitlt Australia. Bahrain. Chile. Israei. Jorcian. fulorocco. Ouran. Peru. and Singapor"e, in ailditictr to its trietnhcl- ships in NAF1A arrd CAF-IA-DR.r 'i-he 4 coLriitries of lv{EiiCOS{lR irvith a i'itth cour}try. Vcr.rE:ztiela. itt tlte process o1 acceding to full nienrbership,y anil its trarle agt'eentetits rvitlt {'hile. [Jolivia^ I]*ru' flolornbia. and Ecuarior. 'l'he trade agreenleilts that Tulkey has with the EU. EFlA. and 15 otlter cottntries.

As of earl;' 201 l. tlierc were more than 200 pref'erentral tt'acte agreettlcttts itt lbLce in thc ri,orlcJ. ancl over halir:1'thenr hacl bc:gun opcraiirig since ZfXX). Onlrv one \VTL) nier-nber. fulongolia, was ltot a tletttber of sotne trade Lrloc.

11s1y good or ht-rrv bad is all this tratle ciiscrjntinaticln'l It deperrds. l'it'st. oll u'hitt yt)rt collltr)are it to. Compared t* a 1r'ee-trade policv. ptlttil'tg tip lte\v barriers discriltlinating tgainst iu.lpol'ts 1i'om sonre cr')untries is generally bacL like ihe sirr4;le tarilTof Chapters 3 +hroirgh 10. But the issue o1'tt'ade cliscrir"nitratiolt ttsttaii-,v collles to t-ts frotri a diiGrcnt arrgle: Reginning y,itlr turit'l.t trnd nonturiff'butriet',s tltett uplsl.t: etprull.t'rt.gtttzll<:'r'v tsf'the

.\.otft.t,tt t.t)unlr), o'f tlte inryt\r'Ls, u,ha,t are ihe gains and losses fi:clttt rentovitig barriers

otrly betneen certain couutries'.)'l'hat is. u4tat ltapperts il'hen a trilde bloc like the f:U

or NAF-IA gets fonneci'/ T\l'o oppositrg icleas come to rninri. One instinct is that fbrrning fl cLlstolrls ttttiort ot'

li'ee-tlacle ftrea ntusr be goocl because it is a tnor,e tos'at"cl free tracle. Iii-vou start fiolil an eqtrally applied set of frade barlie'rs in eaclr uation. har,ing a gr{'}ttp of fhell-r relilo\rc tracle barriers aulong thernselr,es clearly nl-ans lou'el tt'ade barriers itt stlitrc- aYernge sense. Since that iclea is cioser to fi'ee trade. and Chaptcrs I throLrgh l 1 tbrrnd {'r'r:e trade tre'tter rvittr opir/ careiiilly limitecl erceptious. it seenrs feasonable that fblining a tracle bloc allorvs rriore tracle ancl t1tises g,orld rvelfare. Afier all. tbnling a llatior] otlt ol srnaller regiolts brings ecottotttic gairts. cloesrr't it'?

On the other hand. \\ie catl think of reasons rvlt-v tbrrnirtg a fiec-traclittg bloc catr bt: trad, eve'n starting liom eclLrally appliecl barriers to all ittterttational tracle. First. fbrnt- ing the ti'acie bloc l1ay erlcourage people io buy liorl higher-fosl partner sLrppliet's. l-he bloc t'ould ellccl{rage c{'}stly prodilction rvithin the bloc if it kept a high larill'on goods tronr the cheapest source outside the bloc and no tarifT on goods fi'oltt a muc costly surrrr:e r.r,ithin the bloc. By contrast. a unitbrtl tarliTon all rnrpctrts has the i'ir- trre that cristoltlers tvoukl still rto their inrprirting ti'om the ktrr,-cost sollrce. Secotrtl the x,hole idea of trade clisclinrination smacks of the l:rlatet'alistn of the 1930s. rvllen scparatc rieals rvith inciiviclual naticns desti'ci;'ec1 uruch of the gains filnl glrtiral tt'aclt'. 'flte list at tlre $eginling of this sectiotr inclicates tltat ri'e agaitr have qLtite n tanglt:d

'Tirr. Uniteri Siale:. h;ci aiso sigrreC free-lrarie agreemetlJ'.'iiih {cic;';-rbia. Souiit Korer, anii Parr;inrr, l-rlti,

as oi r..rilv 201.1 , tiresc lraci not yel been app|cverl bV ihe I,i.:-, Lortgrcss or implemerttr:d

276 lnternational Economics -Vol. 1

Part Trn./o Iritlr I'rilir

Trade cliscrilltittation can indeed be either good ot'baci. !\ie.can give an exarnl:)le oi'this and. itr tlte process. discover u4tat courlitiorrs seiralatc: the good ll'r.rrl the barl cuscs. lt lnay seeln l:at'trd$xica1 that tlte fbrmation of a trade bloc cau either raise or lurver rvell- beir:g, since temoving barriers amorl-q n:ember nations looks like a step torvarci fiee trade. Yet thc atraiysis ol a tlade' bloc is another r-x:iurple of the irol-so-silnple theor-y o1'the second be-st. u'hicir n'c discussed in Lthal:ter 10.

'l"hc n'cifat'e e{ltcts of elirninatirrg trade barriers beflveen parttlers are illrrslratetl in Iiigtirc: 12.2. u,hicir is paitcrneclaftc:r Rritain\ ently iitto the Efi (nou'the t-:U).'fo sirl- plilv tire ci.iagrarn greatlv. all export supplli cLirves ale as-*nmed to Lrs pcrl'ect1_v l'lnt. We consider t$'o cases. In txre, fbnning tiie' fi'arle bloc is cristly becaus* too rrirrch trarie is ciii'ertecl f-t"otti krlvet-cost to higher-eost suppliers. in rhe otiter. f-*r'ining rhe tracle bloc is Lrenel-icial Lrecause it creates rnole lou'-cosi trade.

Irt FigLrre 1?-.2A, tire Br:itish could bLry.Tapancse cils at t5,000 if thele werg lto tarifT. Thc'tlext cheapest altertrirlir,,c is to bur. Lieruran cars cltlijvelccl at {-5.50Li. {lthr:re wcrt' fi'ee tlacle" :rt point C" Brititrn rvouicl impolt onl_v- Japanerie ciirs aud noue liorn (,ienitanv.

Belble its etttrv intri the tracle blcc, horvel'er. Br:itain clid not har.'e l'ree trarle in auto- lltobiles, It harl a uniiorm farif}. irragined here. to be f l.fi00 per car'. rvhich rriarks up tlte cost ot intported.li4ranese cars il'onr S-5,f)0ll to 16.000 in t;igLrre 1.2.2. No Lh'itons brry the iclentical {;L:nnan cars l-:t:cause thev rvouicl cost {6,5{}0 (ecJrial to tli* Ji5,5(l{) pr"ice chiirg'^rl Lry the fiet"tttan ploclilcers plr"rs the li,U00 tarifl';.'T.hc stiu'tiug puint 1'or: uur discussion is thrrs the larifl-ridden pcinf l. with the Biitish goyernnlent collecf!ng ({l.{}00 tintes 10.0C0 : f l0 ntillion} in tarilTrevenues.

g'eb oi discrittlittatory agleelttcrtts. 'Ihild" fbrrning blocs rlay carise iulernalir-xral 1l-ic- tion siinpll,'becnuse letting solneone into the bloi rvill shut srthers ort.

For all these reasolts. lVorld Trarle Organization iwTO) rules are opposerl to tra4t' disc|iminatiotl iIt principle. A basic Wl-O principle is that tr:acle barriers shoulcl be lorvet'eci eqLraily attd ri'itltout cliscr:irnination fbl all ibleign tr.acling llilttners.

-l-5at is, tlrr.

IYTO cspolises tlie most tavorerl nation (MI.N; principle.'ftris principb.. dating back to {he ntid- I9lh-centttt',r/ \\/ave of fl'ee tracli: Ieci bv Britain. stiirLriates ihat a1}, .i,,,..,,- siotr given to ally lirreign natiolt rnust be gir.en to all naiions lravirrg l\4Flr{ staius. IVTO rLrles say that all contmctins parties are entitieci to tirat status.

Horvei'er. other parts of W'I'O nrles perrnit deviations lrorn MFN 6nr1er spgcif)c cottt'litions. One cleviatir-trr is spr.:cial fi'eatltelt 1br iier,eloping coutrtries. Deyelapirrg cctrtlttries ltaYe the right to excitan-ee pref'erences anrong tlteutsclvr:s and receii,e lrrel:- ereutial access fo rnarkets in the indLrstrializecl countries.

Arlother rlevialion pertnits trarle biocs invo!ving indusri-ializeci cttu:ttries if the tracle bloc rettroves tarifls artd other tracie restrjctions on rnost of the tratie am*ng rts rnelr- Lrers- and if its trade barriers against nonrnembers do not increase orl fl\.erage. In l-act. the !V'fO" and rhe GAT'I' bi_.fore it. has applic:<i thc rLries loosel1,. No trade bloc lias e.ver. been rulecl irr violation.

282 lnternational Economics - Vol' 1

Part ]wo Tr'rJ.' I'liici

.. .-:..::.:-.,.. ::. :,t1.:1 1.: .a: l'. :-: .-;'r-:r':;-l.i,ir , - .-1 . ,;=ilL''l-;l :

. : '

..1. -]

195t1*1 952: Foliowing the Scirurrtan Plar:, "the six" (Belgiunt, F:ranca, West Germarty, italy; the Netherlarrds, and Luxernbourg) set up the furopean Coal and Steel Community. Mean,u.rhile, tsenelux is forrned by Belgium, the Netireriarrds. arid Luxembourg- Both formations provide instructive early exantples of integration.

1L]57-1958: lite six sign the Treaty of Ronle 5etiing uP the EuroPean Economic Comniunity (EEC, r:r "Common Market"). l$port rJuties amc;ng them are dismantled ansl their exte rnal barriers are unified in

_ staqes between the end of 1958 and' mirj-1968. Trade preferences are given

ta a fiost of developinq co(lntries, most of them fcrrner colonie: of EFC members.

1960: The Stockholm Convention createt the

furo5:ean Free Trade Area {EFTA) arnong seven nations: Auslria, Denmark, Nor!x'ly, Portugai, Sweclen, Switzerlancl, artd the

Urrited Kingdonr. tlarriers arrong tiiese nat;{ins are removed in :tages, 1960*1 966. Finlancl joins EFTA as an agsociate member in 196.i. iceland becomes a memtrer in 1970, Finland becorne: a fuil member in 1986, and Lichtenstein becontes a nlenlller in 1991.

1967: lhe Iuropean Cornn-runity (FC) is formetJ by the merger of the F[C, the [uro;:ean Atornic Fnergy Cotrntission, and tlte European Ccal and Steel Community"

1972-1973: Denmark, irelancl, anci the United Kingdom join the EC, convertinq the six into nine. Denntark and the United Kingciom leavet EFTA, I'he lJnited Kingcloitt agretrs to abandon many of ils Cornmonvvealth trade preferences. Also. OrJe to ioy fr*ln Beetiroven's Nirrth Symphony is chasen as the EC's anthem'

1973*1977: Trade barriers ate removed in

steges, boih among ttre nine EC members and betr,,,reen them and the remairrirrg Ei'-lli natir:ns. Meanrvhile, the FC reaches irade preference agreeinents wi tir rnost nonni enber Medlterranean countries along the lines of earlier aqreements with Greece (1961). Turkey

{1964), 5pain {i970), and Malta {1970)'

19/!: furopean Monetary Systeitt begins to operate basecl on the European currency Unit. l-he IL]ropean Pariiament is first elecled by ciireci PoPular vote"

1981: Greece joins the EC as its 1Oth member'

1986: The admission oi Portugal anci Spain irrings the nurnber of members in the E( to

-i 2'

suppliers. {)verlll. u,e think ilte gairrs iire lal'get'trhatt the lossi:s }'-siiniates ol tlre ccorromjc clltcts 0f this eulargerricnt indicate that the ttat" lligltthers sL'c it llt.'t 1:'ltin i' u,ell-bei*g of 2 ro S lierce'f of tlei' GDP. *'ith a stnall gai' lb. tite otlter l5 I'ilj c0t"lntlies.

lhc i..U sitccessi'rtlly grew Dvel'titne l'Lotrt 6lnetirbeLs to 2J itr 200'i .'t'he orttlooi'' irl| iill.ther expansion ls'less ciear.

-I'lte courttl'ies cf the Balkarrs lYallt lo -ioin' trut' tYiih ihe exception of cr.oatirr- the oihers {se|bia. Motttenegro. Rosttili. iv',lacccloitiri.

lncl r\lbarlilt} are far. liorrr clLralitying. Ptlssible L-ntr},- ()1. sttC}r cortttlril,.s irs Ukr.ainr.

Mr:iclr.r'a. unr,l {ieorgia. }raster.n F:uropean courrtries thaf rvere part olthr: SoYitlt LJttitlti"

is even molc clislant. il1.rrkcr, is eagei to.jorri. birt thr': Irrl-i corttintles 1o bc skr:ptir':a1 0f

-lirrkrl,,'s rviililgness tci niaie the ueci:ssary politiclll.atrel ect'inottrit: pillicy cll*ngcs'

,nrl ir is crlcctle{i aborri iis own abilitv ta gainiirily inlegrate suelt a laige anri i:oot' c0ilnir)'.

9fr3 Chapter 12 l-;,rJr lll,,r.i,rtt.l l',

198{i-1987: Mernber governments approve and eltact the Singte European A(t, calllng for a fuily unified market by 1992.

i 989*1 990: The eollaps* cf the East Gernran llovernrnent brings a sudden expansion of {ierrnany and lherefore of th* EC. East Gerrnans are given generous eniitlements to ihc social progranr5 cf Germany and tlre EC.

'i 991*i 995: Terr countries from Ceniral and Iasienr turope establislr free-trade agreerxeilts with tire EU. All become EU mer:bers in 2004 and 2007.

End of 1!:92: The Singie European Act tak€s effect, integratinq iabor and capital rnarkets throughout the EC.

1993:-1-he Maastcicht Treaty is approved, making the EC into tire Iuropean Union {El.l), which calls for unification of foreign policy, for ccoperaiion in fighting crime, and for m{]lretary Union.

1994: l'he European Eronomic A,rea is formecj, bringing the tFTA ccuntries (exceprt Sinitzerland) irrto the EU's 5ingle European Market.

1995: Follou;irig votes v:iith majority appro,ial in each r,ountry. ,A,r-rstria, Sweden, and

Finiand join the IU, bringirtg the nufi]bui" to 15. As it hacl done in 1972, Norway relecis membership in ;t5 1994 voie.

1996: l'he IU forms a tustoms union with Turkey.

1999: Fleven EU countries estfiblish the er:ro as a common curren(y, initially existing along uritit each (ountry's own currency. Greece becotnes the 't2th memiier of the euro area in 2001.

2002; The euro replaces the national currencies of the 12 countrier.

2004: Ten couritries iEstonia, Lilhu,:nia, Latvia, Poland, Czech Republic, Slovakia. Hungary, 5lr:venia, Malta, and Cyprus) jcirr the IU, bringing the total number to 25.

2007: Romania and Bulgaria join the EU, bringing the totai number t0 27. 5lovenia joins the euro area^

20t)8: Cyprus and Malta join the euro a.ea.

2009: Slovakia jcins the euro area.

2011: Estonia joins the euro area, bringing the total nuilrtler of IU courrtries using the euro as lheir cltrrency tc I 7.

l-1rc Nriltlr.:\nrerican ljlce ll-aeic;1rca u'eli {i'orn irnpossibility io lealitv in r feq, }'ears durirrg the iatc 198{is and carl_!' lt}!X}.'s.'j ire filsf. steir rvas the l'anacia 1;.S. Fret-'ll'acle Arc'a (CUSFTA). an ieiea tlut l:ari becn clelrated since t]re 19tlt centLrly. As laie as 1986. t'hen tht: t*o countries hail a rnirrol trad* tvar clr.er llrmbel and corir plrrs artoiher ti11- ovel Alctic navicational rights. tlrere seetrcr{ tc; [rr: iittlc chance ol fbrming a tladc hloc. \'tt thc uroocl suruug quickll'. anci negotiatirlu-s that began in i986 lerl to a fiec- tr:rcle at'ea tltat clnre inio frrrcr't)tt.Ianlialy l. 1989.-firc secorrcl step ,.r'us blingirrg Vlexico it"rto tirc 1-rictr.rre. Stalting in 1985, tiie l'4crican govelrlrltellt becarne- irrcleasingly deterrnirted trr break dou.rt its o*'tt bitt't'iers to it tl'ccr. rntlr'c I,rri\'ailizL'(l more e'flicient i\4cricait euononry. A sslies ol't'e lirt'ttts clelcg- rrlllc'r1 busirress lud r'"-direeci lilrriels to irnports o1-goods. fulexieoi tali{it h*cl bccrr higlr anil u'ele raisetl e'\ill l.lisirer atirtr tire 1c)82 debt crisis lbrceci i\iit--xico to tightc'n

368 lnternational Economics - Vol. i

Part lwo lr.r,i.. j-,,];it

Our discussion in the text slresses that multinationals sur_ceed b,y using their firrn- 5pecific advantages throughout iheir qlobal operations. We have also noted that most foreign direct investments are made by {irms based in the industriallzed countries. This is the story of CEMEX, a firm that rapidly has become nrulti- national since 1990. The reasons for its multina- tiontl success fit very well with the advantages stresred in llre eclectic approar:h. What makes the firm unusual is that it is hased fn Mexico. CEMEX is an example of a growing qroup of multination- als hrased in developing countries.

CEMEX iiegan business in 1906. For most of its life this {ement cornpany focused on selling in the Mexican market. Cenlent is a product that is expensive to ship, especially overland, so cement plants ihip mostly to customers within 300 miles of a plant. Shipment by water is moderately (but not prohibitively) expensive. Most cement producers in the 1980s were local producers rryith traditional business practi.es. New manag- ers et CFMEX Lrroke !.rith tradition by introduc- ing exiensive use of automation, information technology, anri a satelliie-ba:ed communica- tion netr,rrork into CEMEX operations. They Ltsed ihe technology to improve quality control and to provide detailed information on production, sales, and distribution to top manaqers in real tinre. Delivery of ready-mix e oncrete is particularly challenging in cities. Traditionaliy, cement firnrs coulcl ensure delivery only within a time period cf about tlrree hours. Cf MEX pioneered the use of conrpuiers and a global positioning systen to guarantee delivery to construction sites within a 20-rninute window. 'fhese innovatiorrs becarne the conpany's firm-specific aclvantages,

Also in the 1980s CFMEX began to expoft more aggressively to the United States r-rsing sea trans- port, and it rrras increasing{y successful. Horrve,rer, competing U.5, cement producers conrpiained to the U.S. governrnent, and in 1990 CffllEX exports to ihe United States were hit by a 58 Dercent antidumping duty. With exporting to the United States iimited by ihe antidumping order, CEir4EX looked for other fcreign opportr-rnities.

ln 1991, it tiegan exporting to Spain, and in 1992 it made its first foreign direct investrneni by acquiring two Spanish centent producers. CEMEX rninimized its inherent disadvantages by investing first in a foreign country i,vith the sanre language as the firm's horne country and a limi- lar cullure. ln addition. CEMEX used ils expansion into [urope as a competitive response to the pre- vious move by the Sr.viss-based firrn Holcirir irito the Mexicayi cemerlt indusiry.

The managentent team sent iiy CEMEX to reorganize the acquired companies was amazed to find conrpanies that kept handwritten records and useci almost no personal tomputers. They upgraded the Spanish affiliates to CEMEX technoiogy and manage ment pra{t;ces. The improvenrent in affiliate operations frorn this internal transfer CIf CEMEXS intangible assets was remarkable-profit margins irnproved from 7 percent tc ?4 percent in two years.

5ince then. CEMEX has made a series of {or- eign direct investments by acquiring cement producers in Latin America (including Venezuela, Panama, the Dominican Republic, Coionrbia, and Costa -Rica), the Unit?cj States, Britain, the Philippines, lndonesia, and Egypt. CEMEX used the same tyoe of process that it used in Spain to bring its technology and managernent practices into its new foreign affiliates, and generaliy achieved similarly irnpressive irnprovements in performance.

By 2000, CFMEX was the third largest cemeni producer in the world. behind Lafarge of France and Holcim. More than 60 percent of its physieal astets were in its foreign effiliates. lt uvas also ihe largest exporter of cement in the world {a fact consirtent with the proposition discussed in the text that FDI and trade are often complenlen- tary). C[MEX is considered one of the best net- worked companies globally by computer industry experts, rvell ahead of its rivals. lt i5 also highly profitable, with a profit rate on sales thai was 10 to 15 percentage points higher than its rivais in the'late 1990s. Its investments in developing and enhaneing ils firm-specific advantages have been paying off qlotrally.

ffi3 ffi,V14

Chapter 15 1::r..i:ri tl; jt:tittl,rti,,tl,tl Jiiiarl' lvlrtt'.;tt,'ttfr

OLir analvsis of the latrol malket jhou's ll:at thr seitdiirir cotlllti,v., loses ecotiotrtic rvell-

being because o1'emigration. Entpli1,ei-( i;.,.;rC cLutiitt.t'tei's oi the prodLrcts producerl tr-v tirese f irms) lose uiore than tlie rem*iuing u'oikirs gain. llelbre cleciding that this lneaus that the sending counli'ies shauirl irr,ir; r'c'strict L)ut-ttligration. it is ilnportalit ttl look ai several other irtrportant costs and hcneiits of ertrigraticti fot'thr: sending colinlrv.

First. ieti look at the cfttcts olt rh* goven.unerli bridget. "fhe senciing-coulltry go\,ernnent loses the firture tax pavntenis thirl tlte euttglants rvorikl have ttlade (ancl

ltt-rhaps alsLr their rnilitar,v serr,,icr.). r\t t[e sarne 1inie. ihose u,[io etnigrate tio lt;nger l'equit'e go\jefnlllellt goocls. SL-rvices. and pubiic assislance' so governlllettt sirr:nding also goes elos,u. iJorvever. inanv public-ex1:endirule itetns are lrue "public gttcids" irt

th* econornic sense that orrc pe|soir's r'njo,vntent does tiot itltrt'ease if ihel'e are ftl\\'er other users. l'hat is. to providc' tl:e saure ler,cl of Lrenef its to the peoplt rdtc; tlo ttot etli- urate. the governltlent liirs to coutinLre spending tlte sante atltouit of trlone-v. L'xarnples of true public goods include national clefeuse anri llood-cctntrol le\rerls.

Ilecause solue govenrment spending is f"or true ptr[:lic goods. tlrc {ts:;s d t'iffut't lrit (.ontt'i|>uti{)tt.t i,y lil;elj, ttt ht !trrg;t:t' thun tht retltrt:titttt ist /itlure golt't'ltttt(ttt ,uTtcttditt14 ri;; peoltlt'tnigtute.fiorn tlte senrlhtg{'oturtt'..'. The iikc'iihood ol'a nel liscal cirain fi"ottl enigration is raised by'the life-c_vc1c pattet'n of migratiott. I'eople tclld ti) tttisrate itr

ear ly adulttroocl. This treirlts that eil]igrai-Its are concettit'ated itt ttte age groilp thfll has

.jusi rcceii'eci soine- public schooling llnderl by the goverllltlr'Ilt, ),et the itiiglants t'ill ruot be arounr1 to pay taxes on their adult earuittgs. Fix tltis age group. tlte trct los-s to tlre sending corultry is likely to be laigest for highl.v skilled t:rlligranls* tbe lti'ttitt tlrziiit.'1'trc.v have Leceived substantial etlucation at public expeilsc. and the1, t'oulelpa1' substantial raxes on thcir abor.e-ilycrage earnings if tirel' starred. For exatlple , irr sotttc snrali rleveloping countries. iuchiding tiit,v-ana, i{aiii. iarriaica. Senegal. Mozaltlbiqtte. anelTrinirlacl and Tolrago. over iiaif oL the college-edttr,rated people ltave eurigrateci.

'llere is one liotletai'1, beneiil to the sending colrntrv that is not capture(l in tlte exanrination o1' the labor nrarkct eflects of nrigratioti. Those ti,lto entigr.lle ollelt sent! r,oiuntary rr:mittauces back to relafives and fi'iends itr their honle cotttltry. Otle estii:rate is that global1y einr-rrants send home at least S,125 billion itr rcrnittatrces per yeai'. lterliitarlces adtl over 20 percent to the uational itrcotues of srtch coutttries as lJaiti. Le-hanoii. n-icaragLra, Nepal. TeJikistan. attd 'fottga. Senrlin,g t'rttrtlt'it'.t tlutt rkt ttol t'(t'eit,e uutt'lt itt tltt: vctt' ol'r'trttitruttt'r.t' ltruhahlt' ktsc x'ell-lteing, lntf tlto'tt tltut re rv i t' u't' u lt't lr t t t t i u I re n i I f tt n t' a s pt rc h u b l.t' gr t i t r *'e I l' h e i t r g'

What cgulcl the senrlirrg cotuttl'y do to try to restrict emigratiort or its uegirtivr: et-fecrs'l it cou.lcl srmply block departlres. Holvever. this rvor,tlcl lrrolralriy l'equilc se\iere restrictions on ally fbreign travel. rvith all of the losses that suclt travel restric- tions rvoulcl irnpose on lhe businesses ancl people of the cottlttrv. A tlore delensible polic-v rvould be a tax on elrrigratrts that is roughly equal to llte net conlrjbtrtions the countrv has rnacle to thcm throu-eh public sclrooling ancl the like. An alternative polic}, apploach is to eucoiirage return after tlre ernigrartt lias bectt .qotte fot' a u&ilc, b-v-. appealing ro natioiral pr:ide. ollbling good ernployutenl. and so t'ortir. I'airvan and Soutii Koreil have encouraged the return of tlieir scietttists and engitteers tr.r i,vcrk ilt their rapidlv cleveloping high-tech itrciustries.

384 lnternational Economics - Vol. I

Part Two liirrlr 1irlt.,'

ouI analysis of the Iahor nlarket sltou's that the receiving countrv gains econorriciveil-beilrg becartse olirnmigration. even if u'e ignore the g'ains to the nrigrants t6enr- selves, Etnplo5,r:rs (ancl consurrrers ol tlre prrrriircts prodircecl by {6cse: f.ir,,s1 gri,r 1]lorc thall tlt* ttafiVc rvorkers lose. Be1'ote rlecicling tliat rhis nre.urs that t5e receiying cotintries shoLtlcl not l'esh"ict in-ntil:ration^ nc shor-rlel look ar r*r,.-*t .irt.ri,:r,,.rp,,,:tr,rl cosis a:rd benefirs *r'inrmigntio* ri:r fhe receir.irig r:r:untr1,.

Effects on the Government Budget I'hc eifbcts ht-'l'il rrc syttltllett'ical to thrlse notecl fol the sencling countr),'. ininrigi.iipts paY tAxcs irt {hcit' ll(]11r country. anci thev use so\.ei'rilnent goocls ancl ser.r,icc.s. Sc;nrc o1'tlte.gtlvet'nlncllf goocls anclservices are purL'1;irblic good*r. so u,t-. btrgin ryit6 ir pre- sritrprion that the' tax pavillents a:'e latger than the *"frrlt,,u*,rrnienr speirdurg i-cquirecl to sel"vL' the irttitiigt'ants. Hotl,ever^ there is a conccln ininan;,receir.ing couirtrics that ittttttigrants tlse golel'nnlent social scrvices clisprtiporticunt.lu. 1'his suipicion g,as the hasi,s ,ro;';: 1996 Il.S. Jall'lhal,'nad.'cren ,le'g:ai rnrrnigrnnrs i,.,.cl,.grbl": fi;,'$iiirir filrriis o1'public assisiance.

Tlte tt'rte f'iscnl efli:cts of irnnrigrarlts are hard to Incasure. as clisr:usserl in tire 5gx "Ate lmtl]igrallts a !'iscal llurcien'.)" !:or irntligration into the Unit*d States trel,ore i 980 ol so" therr: is t-:Onsenstrs thal irrunigrants generallt lyere major.uel ta.\paycrs. l)ot a fiscal drain.-fliere is also colrsensus tliat the f iscal effects of an inrniigr:anirlcpend on tlte skill lcYel of the imtnigranf. fulore-cciucatecl rnore-skrllecl inrnrigrants lar,e Itiglre| earniitgs. pay larger taxes. and are less-iikely to use public assisraricre. For.the I,Jnited Siates since 1970. the f iscal bahncc is shifiing ior,r,ard illrnigrants being r 1,is- cal brtrrletr^ becatrse tlre average ski1l level of irltligralts is eiecllling relative ta that o1-natives. BLtt fhele is tto consensus that the ntix hal; shified u-nolrgh il, result in a net rlegative eilect on the govertrrrri-'nt budget fi'orl current innrigration into thrr LJnited Stitfc:s.

External eosts and Benefits Other' Ptlssible eftects ol rr-iiuration elucle both labirr-narket anal_vris alcl fiscal accotttltittg. N4igration lllay generate external cosls and belrefits outside priyate and public-f iscal marketplaces. l-hlec kirrc{s of possible externaiities rnerit nrerition: l. Ktttttr' e<lgt bertefit.t'. People carr-v kiiorvicclge rr,ith them, tltcl much of thai krrou,i-

eclge liils ccottoutic valtre. be it tricks of the trade. l'oricJ recipcs" arlistic talent. tat'rnint ill'actices. cr advancerl teclurology, Arnericarr exaurples inclucie ntigrants Andt'er,r'{-"arnegie. Aibert Einstein. artd ttran.r virtucsi oiciassical music. f}ftcn i;n11,- part oltlie ecotromic benej'its of this knowleclge accrlies to the nriglalits and ihcis* to rvltott't the ntigrants selis ilieir services. Part often spills ovcr to others. especially iifhr:rs in tlte sume coLllttrv. Migrrrtiou rriay iirus lranslbr extenlal burr:i'its Lri'knorvl- edge ii'otn the seniling to the receiyitrg countrr'.

2. Oott,qt'.s'tiotl (:Qsfs. Itlrtnigt'ation^ iike any olher sr>urce ol itclpuiatir:rn grou.llt. nta1, bring e-xrenial cosls associaterl rvith crnwelitlg: exti" lroise, corrf'lici. atrd crinre. if so. ihen fhi.s is a parri*l ofl-\et to tire gains of the receiv'ng counrry.

3rb* zY?

Chapter .i 5 \iiritiii,itiirnuls riilri \li,{rirta{ir1: I:ttl'itr;li|it,ri iri1.l()i l1i}i.'nlLrlll\

3. S*clal .fi.ir:ti(}fi. ltntnigrirrrts a1'e oiten gleeted \i'ith bigoll:i atlrl harassnlelli-'--eYi:11

l.rom native gfoups ttr"at rvoultt be[efit li'oil ilie ilrimigration' Lorlg-lastirtg restric-

tious on the tt'eedorn ta migmte. sitch as Americatr cliscrirninatiotl ag:rinst Asiatl

inr'rigra*ts ir..gl,,uing in thJiiltr' 19th ce'tlrr-v" the sweepirtg. t'estrictiotts tigi'ing tilr-'

.,rerl scilre"' oltlte cariy lg2t)s itr rire unitecl Siatc:s. al]d Britairt's r*\iot]t11ion o1'ttllttt--v

florntrionrvealth passpo|f priviicges siuce the 19{rtls' itave been nt''rtivated largell'

by si*rple rlislike fr-rr the ir,-ntigrating nationalilics. Aithough thc Lllost appt'opt'iittt'

forrn of social response to this kirrcl 3f prejLrcllcc rs !o u'ofk on chiritging tlre prer;ril-

ing attitucies thetlseli,es, irolicyttlaket's mirst also $'eiglt the frictions in tirt- balalice

*4ren juciging horv ur.,.h inuiligrntion ancl *'hat knrd ol ilrmigration to allotv'

l-here is at least inclireci support for the irlea that ac|nitting imllrigt'atrts gracltraliY

u,oulcl gcl lar to retroving |iniiul tiirtions atril corlgestion cosis' The ljnitecl Stafcs

cxperierrcecl lis wo1st srirle ol iinti-imnrigrani f-eeling rn tlie earl-V l!)20s' rl4ten. iltc

iruruigrirtiot] rate \Yas i*c,r6asing io*'rlrd fhe pcnk "t* tt l.tutl reachecl just Sefore-\\br'ld

\\,:rr l. The imrnigration ratc' *,is higher tlei, jrist beforc ancl a{ter World W:ir i' tltatr il ts ioday, er,en il rve adcl reasonaiile estim;rtes of'the nutnber of ltttrecolrled illegal

irnilrigrants. il,r,eu ihough soille cl the historic reas0!1s ibr thc attti-itrttrti;lt'atlt sr.ltli-

'rent ol.that tine (e.g."ilie Ilolshe'jk Revolutiort)transcend econotlics. the higlt

ratc

of imrnigration itseli rnust havc cgrrtribute<l to the lears ai'tci lescntlnellls Of thOst:

Ainericans u4rose families hacl migriited eatlier'

What Policies to Select lmmigrants? 'fhc. nrajor inciustrialized countries liave policres to limitlile rais 0f ittttrtig|aticn' 11'a

.ount,.ri'is going to lirnit imnrigratiort, on rvirat basis should it sclect thc'itruriigranls

that tt arcepts'J Out econotnii arialysis otfeLs sotle irrsights' 'hl'tl f'eatut'es of the

analysis are proninent. First. the types o{'ii:tntigra;rt rvol'kels arinlitteil u'ill affect

$,hich grolrps r.vilhin the native popiriation rvin arid t4rich gl'olrps iose 1s. a re.sttlt of

rhe irnmigration. For instance. ilirelatir,ely less-eciucllted and less-skillc'd irnrnigrallts

are aclntitted. these inrnrigrant l{olkers wiil conrpete ibr jo$s against l*ss-skiliecl

'ative *,orkers. {trrtlier rJr,r-i,tg therr ah'ead.r- loiv earnings' Secorld fhe typi's C{'

imiaig,rants adinitted rvrli ai{ecr the net fiscal benefit or burden o1-itilnliglaliou 'fr-r

gain lreare' fiscal benei'its. the coun6y shoriid arlt'rit ycrntg arluils rvilo irave st-;me

college erl,.tcatiott. lrt adclilion. admitting highly educatecl and skilii'rel inimigratlts is

likellillv euhattce the exlernal krio*'lecige trenefits "\e just trtentirltre'd'

ALrsfl.alian policies to\\,atd iurnrigraiiol see111 io ilrarv fl'.nr fliese (:ctxtottric ies-

S0ris. Arrstl'atlia ltas iiseil a poiiii systerll to scleetl applicants' lbcusirig on tlicse

rvhose agL. and skills are likel1' to be beneficial fo thc. Airstraiian econotlt\'' NctY

ZealancJ tlses a sirllilar poini s1'stent' atrel Britain began otie itt 2008' ['anada also

IrSeS a pOifit Systeln to screen some of its applicants' b-ut about tltree-fottrths o1'

iui*rigrants intr: Calad:t ertrter baseil on iittrrill, iinkt ot relirl:ee stilttis.{' lttitnigraticit

into fle Unrred States is el,eil rnore heavily skex'erl toli/artJ lamilY and refttgees. rl'ith

itlloLlt one-1euth etrtering baseci i.rtr their rr,'ct'kc'r skills. For botlt the LJnitert Statt:s attci

I g g

$:

F

I

i t*s B,

F

lO:er,,irct','yol.l sco.€ t:il ihe Iarlai-ii.iil f]olni sl*!ie*'r, !jc L(l

388 lnternational Economics - Vol. 1

Part lwo liiLlrI'ulrar

Summary

a "{

i

Canada. the lesults of these policies are ttrat the average skill levels of tlieir immi- grants irave been declining.

Economic analysis cau make a strong c:rse for a corllltr), Iike the United States or Canada to tilr its immigration policies torvard encouraging and selecting more- skilled immigrants while reducin-e the number of less-skilled immigrants that it admits. Of course. econonric objectives are not the only national goals. A shift to'uvarri pursning national economic gain wonld come at a cost of achieving less toward other worthy goals, including promoting f'aruily reunification and providing hunranitalian assistance to refugees. And the shift towiild pursuing econornic oLiec- tives rvsuld urake the brain drain worse anrl leave mote people in the test of the world rvitl: lor.ler income levels.

d :rr, r: . :, r ', :,, :;r.ii"ii-: is a l'irrn that owns alrd conlrols operatiotts irt more thau one country. Multinatiorrals usuaily send a burrdle of {'inaucial capital and i*angible assets like tecitnology, rnanagerial capabilities, and rnatketing skills to their i:l:i1:iijit : ;i:,1ri:lrir:a;, i.:,.:i;jt' ,:rtr'.'. i ;tiv.':?l*1.r.'*'r if:tiii iS any flou'r:f lending tO, Of purchase.of orvnersl-rip in, a foreign firrn that is largely owned by residents of the invest- ing, or home. cotrntry.

FDI grerv rapidiy fbr severai decades after World \Var II. rvith the Uttited States being the largest soltrce countr). FDI grew more slor.vly fi'om the micl-1970s to the rnid-1980s. but since the n'rid-t980s, FDI has gl'owrl rapidly. From the mid-1970s to the early 1990s. direct investment florvs into developing countries slorved but these florvs then increased substantially. Norietheless. most direct investment is from one inclustrialized country into auother industrialized country. In the 1980s. the Uniled States became an irlportant host country. leaving Japan as the only tnajor irotrle coutr- ffv that is not also a rnajor host to clirect investment,

Explaining why multinational enterprises exist reqriires ns to go beyond a simple competitive rnodel. Multinationals can overcome the ii:i'rijii'.:1.;; ,l.ii:'i:li.';.:;;:l-;1,';;r1 3f being fbreign by using their ir r'lri -:;,rii ! ,iir- ,:t! riri'!i..:',.?{...r'. Still " there are at least two alternatives to direct investment. The firm could export from its honte country, but i.:;1 ,:tii:t:lrj i.,;i, j.i.!!'',, oflen fbvor lbreign production. The firtns coulct rent or sell their acivairtages to tbreign firrns using licenses. Multitratiotlals see,, i ' . r"r'

,? j',,,,;:;1 .ri;i;::, to fuli control of tire ftrreign use of their f it'm-specific advatttages, especially their intangible assets like proprietary technology. rnarketing capabiii- ties. brand names. and managefilent practices. Negotiating ii:."riJF-" .' rvitlt indepen- dent foreign finns for them to use these assets would be costly and risky. Large multinatiorrals are often involved in oligopoli,:;tit: (:oilryetiliott amollg thetnselves. For instance^ orre mnltinational attempts to gain an advautage by entering a lbreign collntry first, and the others I'ol1orv quickly to try to lleutralize any aclvantage to the first firrn.

The profits ol tbreign affiiiates are taxed by the host-country governntent. but gen- erally not taxed or taxetl little br- the home-courttry governtnent. Whetr multinationals shop around the globe for the iou.est-cost sites, tltey favol lou'lax l'ates. Part of decid- ing rvhich countty to invesr in involr,'es the desire to keep taxes dort'n. in addition. 'l'jrrls can LlS€ i: ,:,:,i," ,:, ir :, ,, lo shifl sonre reported profits to lolr'-tax cottntries.