Preferential Trade Arrangements

1
Chapter 9

• Preferential Trade Arrangements

2
NAFTA

• January 1, 1994 NAFTA came into force
• Schedule for tariff reductions for NAFTA-origin
  goods by year 2004 for most manufactured goods
  and by 2008 for agricultural products
• Economic policy of Mexico for the last 50 years
  was import substitution
• By mid-70s problems of high inflation and
  overvalued local currency

3
NAFTA

• In 1980s three events hit Mexican economy
  worldwide recession, tight money policy in the
  U.S., and a fall in the value of the Mexican peso
• By 1982 Mexican debt to foreign countries was 86
  billion
• Reforms by Mexican government
• More major liberalization reforms by new
  president Carlos Salinas in 1988

4
Details of NAFTA

• Rules of origin (goods not only must be assembled
  in the member countries but also must be built
  partly or entirely from North American component
  parts)
• A Japanese-owned automobile factory in the United
  States will qualify to be duty free if at least
  62.5 of the parts used in this factory come from
  NAFTA countries

5
Basic agreements

• Tariffs will be reduced and eliminated depending
  on a product over 5, 10, or 15 years
• Safeguards protection
• Investment protection (Mexico is allowed to
  retain ban on foreign ownership of oil and
  natural gas reserves)
• Health and safety standards
• Services (American banks were allowed to capture
  25 of the Mexican market by 2004, all remaining
  limits will disappear by 2007)
• Intellectual property protection

6
The Side Agreements

• Agreement on Environmental Cooperation
• NAFTA maintains all existing US health, safety,
  and environmental standards and allows local
  governments to enact a tougher standards
• North American Commission on Environmental
  Cooperation (8 billion to clean up air and water
  pollution, and toxic waste dumps along US-Mexico
  border)
• Agreement on Labor Cooperation

7
NAFTA and US economy

• Twelve years later NAFTA remains controversial
• Differences in standards of living (2001 data)

Country Population (in millions) GDP (billions of PPP) Exports to US (billions of US) Imports from US (billions US) Wages (US per hour)
Canada Mexico United States 32 103 281 875 920 10.082 235 141 - 176 115 - 15.64 2.34 20.32
8
NAFTA and US economy

• Difference in productivity levels
• Effects of NAFTA have been small
• US exports to Mexico were 47 billion in 1993 and
  123 billion in 2005
• US imports from Mexico increased 45 billion to
  187 billion over the same time period
• 37,000 US jobs per year are at risk due to
  Mexican imports
• 57,000 US jobs per year are at risk due to
  Canadian imports
• US trade barriers are low on most goods
• Mexican economy is small relative to that of the
  United States
• Given current state of Mexican economy and its
  productive capacity effects of NAFTA on US
  economy will not change

9
European Union

• Includes 27 countries with population of 500
  million people is the worlds largest CU,
  Bulgaria and Romania were the last ones to join
  in 2007
• EU generates 31 of the worlds GDP
• In mid-80s EU enacted the Single European Act
• To develop a uniform system of product standards
• To remove a range of physical, technical, and
  fiscal barriers

10
The EU Government

• January 1, 1999 launched a common currency
• Headquarters in Brussels, four main institutions
• The European Commission
• The Council of the European Union
• The Court of Justice
• The European Parliament

11
The European Government

• The European Commission
• Drafts and enforces EU laws
• 32 members, 2 each from Germany, France, Italy,
  UK, and Spain, and 1 each from the other EU
  countries for 4 year term
• The Council of the EU
• Makes decisions about ECommission Proposals and
  issues directives and regulations
• Each country has one representative
• President of the council holds an office for 6
  months from each country in alphabetical order

12
The European Government

• The European Court of Justice
• Decides on the legality of council or commission
  actions
• The European Parliament
• Legislative body and acts as representative of
  the people in the process of setting a policy
• 626 members for five-year term
• 1986-92 Single European Act to remove NTBs
  (potential gains 255 billion or 810 per
  resident)
• 1991 Maastricht Act to form an economic and
  monetary union with a single currency

13
Regionalism vs. Multilateralism

• Difference between regional trade liberalization
  and multilateral liberalization
• After WWII US was an advocate for multilateral
  trade liberalization
• In mid-80s US started supporting regional
  agreements
• Regionalism encourages trade diversion
• US position formation of regional agreements
  complements multilateral liberalization

14
Other Preferential Trade Arrangements

• Africa
• The Economic and Customs Union of Central Africa
  (UDEAC), CU, 1964, includes Cameroon, Central
  African Republic, Chad, Congo, Guinea, and Gabon
• The Economic Community of West African States
  (ECOWAS), CU, 1975, 15 West African countries
• The Economic Community of Central African States
  (CEEAC), CU, 1981, 11 central states
• The Arab Maghreb Union (AMU), CU, 1989, Algeria,
  Libya, Mauritania, Morocco, and Tunisia

15
Asia

• The Association of Southeast Asian Nations
  (ASEAN), FTA, 1967, Brunei, Indonesia, Malaysia,
  Philippines, Singapore, and Thailand
• The Australia New Zealand Closer Economic
  Relations Trade Agreement (ANZCERT), FTA,1983

16
Europe

• The European Free Trade Association (EFTA), FTA,
  1960, Iceland, Leichtenstein, Norway, and
  Switzerland
• The Central European Free Trade Agreement
  (CEFTA), 1993, Czech Republic, Hungary, Poland,
  and Slovak Republic, Slovenia, Bulgaria, Romania

17
Latin America

• The Central American Common Market (CACM), CU,
  1960, Costa Rica, El Salvador, Guatemala,
  Honduras, Nicaragua, and Panama
• The Andean Pact, CU, 1991, Bolivia, Columbia,
  Ecuador, and Venezuela
• The Southern Cone Common Market (MERCOSUR), CU,
  1991, Argentina, Brazil, Paraguay, and Uruguay