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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 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 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 16 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 17 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