Carbaugh, Chap. 9 1 Regional trade agreements Types of regional trade arrangements Free trade areas...
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Transcript of Carbaugh, Chap. 9 1 Regional trade agreements Types of regional trade arrangements Free trade areas...
Carbaugh, Chap. 9 1
Regional trade agreements
Types of regional trade arrangements Free trade areas (NAFTA, for example) Customs unions (Benelux, CACM) Common markets (MERCOSUR,EEC) Economic/monetary union (EU)
Carbaugh, Chap. 9 2
Regional trade agreements
Effects of regional trade agreements Static effects
Trade creation effect consumption effect … buy more from your partner production effect … less inefficient domestic production
Trade diversion effect … buy less from efficient, low cost producer
Dynamic effects Economies of scale Greater competition Investment stimulus
Carbaugh, Chap. 9 3
2
2.25
2.5
2.75
3
3.25
3.5
3.75
4
4.25
0 5 10 15 20 25 30
Grain (bushels)
Static effects of a customs unionP
ric
e ($
)
SG
DL
SL
Regional trade agreements
SUS
SUS+tariff
SG+tariff
a bc
Carbaugh, Chap. 9 4
The European UnionCreated by the Treaty of Rome (1957)
Original Members: Belgium,France,Germany, Italy,Luxembourg,Netherlands
Joiners,’73: Denmark,Ireland,UK
Joiners,’80s: Greece, Portugal, Spain
Joiners,’95: Austria,Finland,Sweden
Total Population, GDP, GDP per capita (1996)
EU: 372mil $8.6 tril, $23,200
€-zone: 300mil 7.0 tril, 23,000
USA: 271mil 8.0 tril, 29,300
Carbaugh, Chap. 9 5
Regional trade agreements: case studies
The European Union (cont’d)
Within-region trade to grew much more quickly than world trade in the 1960s
Steps to remove remaining barriers (1985-92) further increased integration 1987 Delors Report Four Freedoms: goods, services, labor, capital
Maastricht Summit (1991) began process of economic and monetary union (EMU)
Carbaugh, Chap. 9 6
Regional trade agreements: case studies
EU Economic & Monetary Union (1999) National currencies replaced with the euro, 2002 European Central Bank created to control
monetary and exchange rate policy “Convergence criteria” required for membership:
Price stability … 3.2% inflation Low long-term interest rates … 7.7% Stable exchange rates Sound public finances
Deficit/GDP … 3% Debt/GDP … 60%
Carbaugh, Chap. 9 7
Regional trade agreements: case studies
Other key EU policies Common agricultural policy
Support payments to farmers Variable import levies Export subsidies
Government procurement policies All EU businesses can bid for larger contracts
in any nation
Carbaugh, Chap. 9 8
Regional trade agreements: case studies
Benefits of EMU Europe is not an "optimal currency area" Advantages of EMU:
Lower transaction costs Price comparisons easier Exchange rate risk eliminated Stimulates competition
Carbaugh, Chap. 9 9
Regional trade agreements: case studies
Costs of EMU
Loss of monetary policy and the exchange rates as economic adjustment tools
Asymmetric shocks
Use of fiscal policy for adjustment is constrained
Need wage flexibility and labor mobility, which are both low in Europe
How to divide seignorage?
Carbaugh, Chap. 9 10
US-Canada Free Trade Agmt. (1989) North American Free Trade Agmt. (1994)
Gradual and comprehensive elimination of trade barriers among US, Mexico and Canada over 15 years: Full, phased elimination of import tariffs Elimination of most NTBs Protection of intellectual property rights Dispute settlement procedures Side agreements on environmental protection
and labor law
Carbaugh, Chap. 9 11
Regional trade agreements: case studies
Concerns about NAFTA Main US losers from NAFTA: import-
protected industries competing with Mexican producers, and unskilled workers
US industrial workers worried about lower pay scale in Mexico and plant relocations
Concerns Mexico would not enforce environmental protection measures
Carbaugh, Chap. 9 12
Regional trade agreements: case studies
NAFTA after five years Trilateral trade increased significantly Some US jobs were lost to Mexico, but the
numbers were small compared to job creation that came with US growth
Changes in investment flows were small (in relation to total US foreign investment)
Closer political ties were built among the three nations