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International Economics
By Robert J. Carbaugh
7th Edition
Chapter 9:
Regional trading arrangements
Copyright ©2000, South-Western College Publishing
Regional trade agreements
Types of regional trade arrangements
 Free trade areas (NAFTA, for example)
 Customs unions (Benelux)
 Common markets (EU)
 Economic/monetary union
Carbaugh, Chap. 9
2
Regional trade agreements
Effects of regional trade agreements
 Static effects
 Trade creation effect (consumption effect,
production effect)
 Trade diversion effect
 Dynamic effects
 Economies of scale
 Greater competition
 Investment stimulus
Carbaugh, Chap. 9
3
Regional trade agreements
Price ($)
Static effects of a customs union
SL
4.25
4
SG+tariff
SUS+tariff
SG
SUS
3.75
3.5
a
3.25
b
c
3
2.75
DL
2.5
2.25
2
0
5
10
15
20
25
30
Grain (bushels)
Carbaugh, Chap. 9
4
Regional trade agreements: case studies
The European Union
 Created by the Treaty of Rome (1957)
 Policy aims included:




Abolition of tariffs, quotas and other restrictions
Common external tariff
Free movement of capital, labor and business
Common policies on transport, agriculture, and
competition and business conduct
 Coordination of monetary and fiscal policies
Carbaugh, Chap. 9
5
Regional trade agreements: case studies
The European Union (cont’d)
 Lowering of barriers caused within-region
trade to grow much more quickly than
overall world trade in the 1960s
 Steps to remove remaining barriers (198592) further increased integration
 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)
 Member nations will replace national currencies
with the euro by 2002
 New European Central Bank created to control
monetary and exchange rate policy
 “Convergence criteria” required for membership:




Price stability
Low long-term interest rates
Stable exchange rates
Sound public finances
Carbaugh, Chap. 9
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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
Variable levy
Price
Price
CAP: variable levies and export subsidies
6.50
6.00
SEU
5.50
Support Price
4.50
4.00
SWorld
3.50
6.50
6.00
5.50
0
5.00
Export subsidy
5.00
4.50
4.00
3.50
0
3.00
SEU
0
SEU
1
Support Price
SWorld
0
3.00
2.50
SWorld
2.00
DEU
0
1.50
1.00
SWorld
1 2.50
DEU
2.00
0
1.50
1.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Wheat (mill. Bushels)
Wheat (mill. Bushels)
Carbaugh, Chap. 9
9
1
Regional trade agreements: case studies
Price ($)
Opening up government procurement
10,000
Profit0
Profit1
7,000
Profit1
ACUK
(closed procurement)
4,000
ACG
(open procurement)
0
5
10
15
20
25
30
35
40
Quantity of computers (thous.)
Carbaugh, Chap. 9
10
Regional trade agreements: case studies
US-Canada Free Trade Agmt. (1989)
 Elimination of all tariffs and most NTBs over
ten years
 Binational tribunal created to hear trade
disputes
 Canada, in particular, is expected to benefit
from economies of scale
Carbaugh, Chap. 9
11
Regional trade agreements: case studies
North American Free Trade Agmt. (1993)
 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
 Clear and binding protection of intellectual
property rights
 Fair and rapid dispute settlement procedures
Carbaugh, Chap. 9
12
Regional trade agreements: case studies
Key aspects of NAFTA (US perspective)
 Agriculture - cut tariffs on half of US exports
immediately
 Autos - cut Mexican tariffs on car imports
 Energy - lifted trade and investment
restrictions in Mexican oil sector
 Transport - US trucking firms given much
greater access to Mexican market
Carbaugh, Chap. 9
13
Regional trade agreements: case studies
Key aspects of NAFTA (Cont’d)
 Intellectual property - boosted Mexican
protection of patents and copyrights
 Rules of origin - products made outside
North America would have to have
substantial value added in the region to be
duty-free
 Textiles & apparel - tariffs removed only for
goods made with North American materials
Carbaugh, Chap. 9
14
Regional trade agreements: case studies
Key aspects of NAFTA (Cont’d)
 Side agreements:
 Environment - Canada-based agency to
investigate environmental abuses
 Labor - US-based agency to investigate labor
law abuses
Carbaugh, Chap. 9
15
Regional trade agreements: case studies
Special case: economies in transition
 Nations of eastern Europe and the former
Soviet Union have been making a transition
from a non-market (planned) economy to a
market economy since the early 1990s - which
has been very disruptive
 These nations’ planned economies required
them to be largely isolated from world trade instead, set up their own trading bloc, the
Council for Mutual Economic Assistance
(CMEA)
Carbaugh, Chap. 9
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Regional trade agreements: case studies
Economies in transition (cont’d)
 Even after the collapse of the central planning
system, the nations remained tied together
because of historical trade links inside CMEA
and their common legacy as non-market
economies
 Financing limitations have hampered an
increase in trade: transition nations have
generally not been able to increase exports to
match imports and must borrow the difference
Carbaugh, Chap. 9
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Regional trade agreements: case studies
Economies in transition (cont’d)
 Barriers to trade with the West used to make
strategies such as countertrade, co-production
agreements, joint R&D agreements, and
contract manufacturing agreements very
common
 Gradual elimination of barriers to foreign
business in most transition countries has
allowed foreign firms to operate in the region
more normally in recent years
Carbaugh, Chap. 9
18