Chapter 12 Trade Policy: Blocs and Blocks

Link to syllabus

Figure 12.1 page 260Types of economic blocs

Asean Countries

(Significant overlap with APEC)

FTAs in Latin America

LAFTA1960s

AndeanPact

Central American Common Market

MercosurArgentina, BrazilParaguay, Uruguay

East Africa Association

Figure12.2 page 263Trade diversion and creation in a trading bloc

Map of Canada

Map of Mexico

Comparative Data

Table 1-1. Comparative Data: Canada, Mexico, and the United States.

Canada Mexico United States

GDP/cap (US$) 19030 2010 20910Population (million) 26 85 249GDP (billion US$) 489 201 5156V.A. Mfg (billion US$) NA 47 866Exports (billion US$) 114 23 347Imports (billion US$) 113 22 492Investment/GDP (percent) 23 17 15Relative Wage (US=100) 103 16 100

Sources: World Bank World Development Report, 1991. Wages (index of hourly compensation costs for production workers in manufacturing) U.S. Statistical Abstract, 1991, Table No. 1468

Data refer to 1989 except for value added in manufacturing, which is1988.

(tabl1/tables)

Ex-Figure 12.3 taken outEstimates of the effects of NAFTA on national incomes

Go Blue!!

Figure 12.3 page 275Effects of an embargo on exports to Iraq

Figure 12.4 page 277Two kinds of economically unsuccessful embargoes

New Europe Map: NYT Oct. 21, 2002

Antecedents

Julius Cesar, Charlemagne, Napoleon, Hitler,

Post WWII: Marshall Plan, ECSC.

Political/economic vision of people such as the Frenchmen R. Schuman, and J. Monnet, and P.H. Spaak of Belgium, for whom the goal was to eliminate conflicts inside Europe.

France and Germany shared primacy forming the core of post-war Europe.

Current institutional structure

Council (one rep. per country), Commission (~civil service: technocrats above national interests, ~20 currently) Parliament, Court of Justice.

European Central Bank – nominally distinct from EU

No army.

Link to Europa on Parliament

http://www.europa.eu.int/institutions/parliament/index_en.htm

Parliament

~730 seats. Shares power with CouncilSeats by Parties (Greens, CDs, Socialists, Free marketers)

The European Council

One per country. Rotates every six months. Chief decision making group. Javier Solano is chief foreign minister. Key responsibilities:To pass European laws – jointly with the European Parliament in any policy areas.To co-ordinate the broad economic policies of the member states.To conclude international agreements between the EU and other countries or international organizations.To approve the EU’s budget, jointly with the European Parliament.To develop the EU’s Common Foreign and Security Policy (CFSP), based on guidelines set by the European Council.To co-ordinate co-operation between the national courts and police forces in criminal matters.

Link to Europa: Commissions

Commissions

http://europa.eu/about-eu/institutions-bodies/european-parliament/index_en.htm

There are ~25 Commissions. Each Commissioner pledges to be non-national in terms of policies. Led by the President – currently Jose Manuel Barroso. A very successful one was Jacques Delors

Tasks:Proposes legislationImplements EU PoliciesEnforces laws (along with the European Court of JusticeRepresents the EU in International contexts (something of a Civil Service

Link to Europa on Enlargement

Link to Europa expansion countries , at

http://ec.europa.eu/enlargement/index_en.htm

Economic Analysis

Tariff reduction, Trade creation vs. trade diversion Tariffs to keep out US products have led to US FDI

CAP, (common agricultural policy) (not-free trade)

Regional development funds.

Free movement of labor (Schengen Accords, 1985-1990)

EMS & the Euro: is monetary unification a good idea – is Europe an ‘optimum currency area?’

Table 5.5 CAP Budget Expenditures. P. 90

Figure 2.1 Population Growth 1960-2050. Page 20

Evaluation of Economic Progress

Growth rates of income, trade, etc., have been quite high compared to historical trends. However, because this has happened elsewhere in industrial nations, it would be questionable to attribute this success to membership in the EU. The weakest economic variable is unemployment, which averages over 10%. Inflation and exchange rates (before the Euro) have been less unstable than in previous periods, although still presenting problems for further integration.

Current problems with debt in Greece, Ireland, Portugal, Spain and Italy threaten the Euro, and ultimately the entire EU arrangement.

Robert Mundell

Born in Kingston, Canada in 1932. Taught at U. of Chicago, now at Columbia.

Nobel prize 1999

Optimum currency areas: Where costs of relocation are minimized. Exports and imports are subject to similar shocks. Example, western US and Canada (raw materials); eastern US and Ontario/eastern Canada (industry/services).

This argument suggests unifying countries with similar macro characteristics: inflation, growth of exports and GDP, technology, deficits.

Neither perspective suggests that the Euroland is an optimal currency area

This treatment consciously avoids political criteria (mt thinks this is the opposite of what the European leaders had in mind initially).

Monetary Integration and the EURO (i)

a. convergence criteria: Similar levels of inflation, growth, interest rates, and government deficits are required for a monetary union. Not all EU members satisfied these criteria by Jan. 1, 1999.b. The transition process to a unified currency presented numerous potential problems, but nothing happened.c. participation in EMU eliminates possibility of domestic monetary policy, and forces countries to try to maintain performance of the leading economies, such as Germany.d) Economic benefits: small benefits to tourists and other consumers, significant benefits to some middle size firms. As normally measured, the aggregate benefits are small. Cost of failure is high.e) tremendous symbolic impact of a single currency to the person on the street in Europe. The ECB may also be seen as a politically acceptable way to disguise German dominance of European monetary matters.

Monetary Integration (ii)

f) Britain, Sweden, and Denmark have opted out. Vision of "two-track" Europe: core countries (Germany, France, Neth., Austria etc.), vs. the Club Med (Italy, Spain, Portugal, Greece), and/or Nordic (Denmark, Sweden, Finland). Fudging compliance would be a dangerous precedent.g) Claim that greater official support for EMU comes from non-core countries, interpreted as a means of further linking their economies to that of “core” Europe, and imposing fiscal conservatism.h) Any central bank inevitably represents concentration of power. It is hard to understand why this is pursued now, when so little consensus exists on concentrating power. US economists thought it was a bad idea; that judgment looks good in late 2011. Note that the ECB does not fulfill the task of ‘lender of last resort.’

Political Evaluation (i)

a) avoid another conflict (Napoleonic wars, Franco-Prussian War, WWI and WWII). Evaluation: complete success. Same for re-unification of Germany inside Europe.b) strengthen traditional European values : Democracy, human rights, individualism, Greco-Roman/Judaeo-Christian heritage, market economy. Evaluation: This factor is inherently long term, difficult to evaluate, fraught with ambiguity, prone to hypocrisy.Scandalous response to Turkish request for inclusionc) speak for a united Europe on other international political issues. Evaluation: weak, most tragically in the former Yugoslavia, less negative in ex-USSRd) provide, within NATO, a bulwark against the Soviet block. Evaluation complete success, and no longer necessarye) help strengthen these traditional European values (both political and economic) in other countries by using membership in EU as part of carrot and stick routine. [continued on next page]

Political Evaluation (ii)

Evaluation: This is evidently true in cases such as Greece, and Spain/Portugal, and arguably also with entrants from the ex-Soviet block. It is evidently false when analyzing entrance of Scandinavian countries. It is unclear if present-day abandonment of socialist ideals is fixed in all the ex-Soviet areas.There is complete befuddlement when looking at the institutional structure of the EU. Although nationalism has been avoided in the Commission (bureaucrats) and in the Parliament, whose members are elected representing pan-European ideological parties (Greens, Christian Democrats, Socialists, Free Marketers), the unwillingness to cede power to elected EU officials means that any change only comes from the bureaucrats (Jacques Delors was outstandingly successful). Inevitably, this paints the EU as an anti-democratic Leviathan, unpalatable to traditional european values, explaining much hostility to it. Some fear the establishment of a logic of bureaucratic momentum. Current buzzword is the democratic deficit.

Jacques Delors

French, born 1925

Leader of the Socialist Party

President of the European Commission 1985-1995. Was able to forge the Maastricht accord, which achieved the formalization of the EU (single market), and started off EMU & Euro.

Three questions:

Can monetary union be achieved before political union?Can there be, as per Roosevelt, Kissinger, and Kohl, primacy of politics over economics?How unified should Europe be?

Thesis: mt argues that the EEC/EU was started by people wishing for a united Europe. Sixty years later that dream may have run out of steam. The evolution of the EU integration reflects a complex leapfrogging of economic and political considerations, attempting economic progress when political progress is stymied. The strictly economic arguments in favor of Euro are weak. However, the political benefits of a unified currency, and the enforcing of convergence criteria on spendthrift countries, may result to be strong.

The political costs of failure of the Euro are both high and visible.

Figure 3.1 Employment in the EUR15, USA and Japan, 1960-1997. P.35

Figure 3.4 Unemployment in the Civilian Labor Force, 1960-1997. Page 38

Figure 3.9 Unions and bargaining power, 1994 p. 51

Table 6.2 Shares of World Exports. page 117

Figure 6.1 Extra-EUR Trade/GDP Page 119

Figure 6.2 Intra and extra-EU Trade. Page 122

Figure 3.2 Employment in Industry, 1960-1997. P. 36

Performance Criteria for Maastricht/EURO.

Source: Hansen European Integration

EYE ON THE GLOBAL ECONOMY

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P. 497

The Sliding Euro

Table 4.2 Determinants of growth of productivity in EUR15 page 60

Table 4.4 GDP per capita, structural funds, and investment p. 73

Table 6.1 Average External Tariff p. 116

Mercosur

ArgentinaBrazilParaguayUruguay