Types of regional trade arrangements

1
Types of regional trade arrangements
Regional trade agreements

• Free trade areas (NAFTA, for example)
• Customs unions (Benelux, CACM)
• Common markets (MERCOSUR,EEC)
• Economic/monetary union (EU)

2
Effects of regional trade agreements
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

3
Static effects of a customs union
Regional trade agreements
SL
Price ()
SGtariff
SUStariff
a
b
SG
c
SUS
DL
4
The European Union

• Created 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

5
The European Union (contd)
Regional trade agreements case studies

• 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)

6
EU Economic Monetary Union (1999)
Regional trade agreements case studies

• 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

7
Other key EU policies
Regional trade agreements case studies

• 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

8
Benefits of EMU
Regional trade agreements case studies

• Europe is not an "optimal currency area"
• Advantages of EMU
• Lower transaction costs
• Price comparisons easier
• Exchange rate risk eliminated
• Stimulates competition

9
Costs of EMU
Regional trade agreements case studies

• 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?

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

11
Concerns about NAFTA
Regional trade agreements case studies

• 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

12
NAFTA after five years
Regional trade agreements case studies

• 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