Chapter 8

IntroductionThree scopes of economic integration

Global: trade liberalization by GATT and WTORegional: preferential treatment of member

countries in the group Bilateral: preferential treatment between two

countries

Regional and bilateral agreements are against the MFN clause (normal trading relations), but allowed under WTO.

Visit www.wto.org for regional trade agreements.

The General Agreement on Tariffs and Trade (GATT)General Agreement on Tariffs and Trade (GATT):

established by twenty-three signator nations in 1947 as a multilateral agreement whose objective is to liberalize world trade

• Most-favored nation clause (MFN): the fundamental principle of “trade without discrimination,” i.e., each member nation must open its markets equally to every other member nation

• Eight major rounds of negotiations from 1947 to 1994 led to a wide variety of multilateral reductions in both tariff and nontariff barriers.

• The World Trade Organization was created in 1995 for the purpose of institutionalizing the GATT.

8-3

The World Trade Organization (WTO)World Trade Organization (WTO): a permanent

body founded in 1995 to (i) facilitate the development of a free and open international trading system according to the GATT and (ii) adjudicate trade disputes between or amongst member nations

• normal trade relations: replacing the most-favored-nation clause, the principle prohibits any sort of trade discriminationExceptions: preferential treatment for products of emerging economies concessions granted to members of economic blocs

• dispute resolution: a clearly defined mechanism for the settlement of disputes [continued]

8-4

The WTO: Decision-making Units Ministerial Conference General Council Goods Council Services Council Council on Trade-related Aspects of

Intellectual Property (TRIPS)Countries may bring charges of unfair trade practices to a WTO panel; accused countries may appeal; WTO rulings are binding. If an offending country fails to comply with a judgment, the rights to compensation and countervailing sanctions will follow.

8-5

Four stages (levels) of regional economic integrationFTA (free trade area):

no internal tariffs among members, but each country imposes its own external tariffs to the third country.

NAFTA (North America Free Trade AgreementAFTA (ASEAN Free Trade Area)EFTA (European Free Trade Area)

Customs union: no internal tariffs and common external tariffsMercosur (Southern Common Market), CACM (Central American Common Market)CARICOM (Caribbean Community and Common

Market)

Four stages (levels) of regional economic integrationCommon market:

free movement of products and factors (resources), which is customs union plus factor mobility

EU (European Union – previously EEC)Economic union (monetary union):

common market plus common currency coordination of fiscal and monetary policyEMU (Economic and Monetary Union)

Economic effects of economic integrationStatic effects: Short-term effects (shift of

production)Trade creation: production shifts to more

efficient member countries from inefficient domestic or outside countries.

Trade diversion: production shift to inefficient member countries from more efficient outsiders.

Dynamic effects: Long-term effectsCost reduction due to economies of scale Cost reduction due to increased competition.

European Union (europa.eu)Treaty of Paris (1951)

Formation of ECSC (European coal and steel community) by six countries

Treaty of Rome (1957)Formation of EEC (European economic

community), initially free trade area, becoming a customs union in 1967.

The Stockholm convention in 1960 created EFTA by seven countries to counteract EEC.

European Union (EU) - continuedSingle European Act of 1987

Creation of single market (Common market) effective on Jan. 1, 1993

Rename EEC by EU (15 members until 2003)27 member countries (10 joined in 2004 and 2 in

2007Treaty of Maastricht (1992)

Creation of an economic union, EMU (11 members)Establishment of European Central Bank on July

1998Introduction of a common currency, euro on Jan. 1,

1999Circulation of euro on Jan 1, 2002

Organization of EUEuropean Commission:

administrative body of 27 members Initiate proposalsGuardian of the treatiesImplementing policies

European Parliament 785 members elected according to population

distributionLegislative body, but final decision by Council

of MinistersControl over budget and supervision of the

Commission

Organization of EUContinuedEuropean Council and Council of Ministers

European Council: summit meeting of state heads, providing guidelines

Council of Ministers 25 different councils (agriculture, transport, etc.) Final say on legislations Different votes allocated to individual countries

(according to population) Unanimity or qualified majority voting required

depending on issues.

OthersCourt of Justice, Court of Auditors, sub-

committees

EMU (www.ecb.int)European Monetary System in 1979

European Monetary Institute in 1994 European Central Bank in July 1, 1998

Convergence criteriaInflation rate: less than 1.5% above the averageLong-term interest rate: within 2% of the

averageBudget deficit: no more than 3% of GDPPublic debt: no more than 60% of GDP

15 member countries U.K, Denmark and Sweden opted out.

Challenges Facing the EU the transition of economically disparate entrants into the EU

the unanimous adoption of a new constitution the resolution of the Common Agricultural

Policy (CAP) with internal constituencies on the one hand and non-members nations on the other

the harmonization of fiscal, monetary, and commercial policies

The Common Agricultural Policy (CAP) represents a set of rules and mechanisms designed to: - regulate the production, trade, and processing of agricultural products in the EU - provide farmers with a reasonable standard of living and consumers with safe, quality food at fair prices

8-14

NAFTANorth America Free trade Agreement

Free trade area among the U.S., Canada and Mexico

The largest trading bloc in terms of GNPA good example of trade diversion (production

shifted from Asia to Mexico)History

Automotive products Trade Agreement (1965) between the U.S. and Canada

Canada-U.S. Free Trade Agreement (1989)NAFTA (1994)

Provisions of NAFTAElimination of tariffs

Most tariffs will be eliminated by 2004The remaining by 2008

Elimination of non-tariff barriersHarmonization of trade rules (subsidies,

antidumping, safety standards)Liberalization of capital movement (FDI)Protection of intellectual propertiesDispute settlementProvisions on labor and environmental

standards

Economic Effects of NAFTATrade :Trade among members increased faster

than trade with the rest of worldInvestment: Mexico is the main beneficiary

(FDI not only from the U.S. and Canada, but also from other countries)

Employment: Difficult to measure because of too many confounding variables. Overall employment effect in the area including the U.S. has been positive.

Visit www.ustr.gov and find this report by clicking "Regional" under "Trade Agreements" and then "North American Free Trade Agreement.” 

Economics Effects of NAFTA continuedVisit www.ustr.gov and find this report by clicking "Regional" under "Trade Agreements" and then "North American Free Trade Agreement.” 

Issues related to NAFTARule of origin and local content

Rule of origin: products must originate from North America to get preferential treatment.

Local content: the percentage of value of a product that must be from North America to be considered as North American origin (Currently 50% for most products and 62.5% for autos. Political pressure to increase this percentage )

Expansion of membershipFTAA (Free Trade Area of America) proposal in

2001

2003 Comparative Statistics by Trade GroupBLOC POP. IN MIL. GNI PER

CAPITA GNI($US BIL.) ($US)

______________________________________________________________________________________________________________________________________________

EU-15 379.7 $10,116 $26,641EU-25 [+2004 ADMITS] 454.0 $10,544 $23,224

NAFTA 424.9 $12,340 $29,042 Canada 31.6 $ 757 $23,930 Mexico 102.3 $ 637 $ 6,230 USA 291.0 $10,946 $37,610

MERCOSUR 224.0 $ 638 $ 2,848

Source: 2005 World Bank Development Report.

8-20

Other Regional Trade BlocsASEAN and AFTA

Originated in 1967Formation of AFTA in 1993Reduction of intra-zone tariffs to a maximum of

5% by 2008 (by 2004 for some countries)Mercosur (Southern Common Market)

Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay.

Aim for a customs union, but not yet

Other Regional Trade BlocsOther Latin American Trade Blocs

Andean group (Andean Common Market)ALADI (Latin American Integration

Association)CARICOM (Caribbean Community and

Common Market)CACM (Central American Common Market)

African Trade Blocs

APECAsia Pacific Economic CooperationFormed in 1989 to promote trade and

investment21 member countries that border the Pacific RimAPEC is not a trading blocFor trade liberalization and against

protectionismPrefer open regionalism over closed regionalismGoal: Free and open trade

by 2010 for the industrialized countriesby 2020 for the rest of the members

Commodity Agreementscommodity agreement: a form of economic

cooperation designed to stabilize the price and supply of primary commodities through the use of buffer stocks and/or quota systems

• producers’ alliances: exclusive membership agreements between or amongst producing countries (a cartel)- Organization of Oil Exporting Countries (OPEC): a producer cartel whose members include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela

• international commodity control agreements (ICCAs): agreements between or amongst producing and consuming countries - International Cocoa Organization (ICO) - International Sugar Organization (ISO)

8-24