First edition Global Economic Issues and Policies PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western/Thomson Learning. All rights reserved. Chapter 5 Regionalism and Multilateralism

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–2 1.What are the main types of regional trade agreements, and how do economists measure trade within regional trading groups? 2.How is a free trade area such as the North American Free Trade Agreement different from other types of preferential trade arrangements? 3.What distinguishes customs unions such as the European Economic Community of the 1970s and the current Andean Community from common markets such as the European Union and Mercosur?

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–3 4.How can regional trading arrangements lead to both trade creation and trade diversion? 5.What is trade deflection, and how do rules of origin help to limit the extent to which trade deflection occurs? 6.How do multilateral trade agreements contrast with regional trade arrangements?

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–4 Regional Trade Agreements Preferential Trade Arrangement  A trading arrangement in which a nation grants partial trade preferences to one or more trading partners. Free Trade Area  A trading arrangement that removes all barriers to trade among participating nations but that allows each nation to retain its own restrictions on trade with countries outside the free trade area.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–5 Regional Trade Agreements (cont’d) Customs Union  A trading arrangement that entails eliminating barriers to trade among participating nations and common barriers to trade with other countries outside the group. Common Market  A trading arrangement under which member nations remove all barriers to trade among their group, erect common barriers to trade with other countries outside the group, and permit unhindered movements of factors of production within the group.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–6 Regional Trade Agreements (cont’d) Economic Union  A trading arrangement that:  commits participating nations to remove all barriers to trade among their group  to abide by common restrictions on trade with other countries outside the group  to allow unhindered movements of factors of production within the group  to closely coordinate all economic policies with other participants.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–7 Measuring How Much Regionalism Matters for Trade Trade Share  One nation’s flow of international trade as a percentage of a regional or global trade total. Trade Concentration Ratio  The sum of bilateral trade shares within a regional trading bloc divided by the region’s share of world trade.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–8 Figure 5-1 World Trade Shares Source: International Monetary Fund Direction of Trade Statistics, various issues.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–9 Table 5-1a Regional and World Trade Shares of Nations in Selected Regional Trading Blocs Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–10 Table 5-1b Regional and World Trade Shares of Nations in Selected Regional Trading Blocs (cont’d) Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–11 Table 5-1c Regional and World Trade Shares of Nations in Selected Regional Trading Blocs (cont’d) Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–12 Figure 5-2 Trade Shares of Selected Regional Trade Blocs Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–13 Figure 5-3 Trade Concentration Ratios for Selected Regional Trade Blocs Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–14 Preferential Trade Arrangements and Free Trade Areas Preferential Trade Area  A group of countries grant reciprocal, partial trade concessions to each member nation. Free Trade Area  A group of countries grant concessions that entail full elimination of tariffs, duties, and import restrictions, The Effects of the Establishment of NAFTA  U.S. exports to Mexico and Mexican trade with Canada have increased notably, but U.S. imports from Mexico and Canadian trade with the United States have not changed dramatically.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–15 Figure 5-4a Canadian Shares of U.S. Trade since 1980 Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–16 Figure 5-4b Mexican Shares of U.S. Trade since 1980 Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–17 Figure 5-5a Mexican Shares of Canadian Trade since 1980 Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–18 Figure 5-5b U.S. Shares of Canadian Trade since 1980 Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–19 Figure 5-6a U.S. Shares of Mexican Trade since 1980 Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–20 Figure 5-6b Canadian Shares of Mexican Trade since 1980 Source: IMF Direction of Trade Statistics, 2001.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–21 Customs Unions and Common Markets Customs Union  A group of countries that agree to treat themselves preferentially in trade, and commit themselves to adopting identical trade policies with respect to nations outside the customs union. The Treaty of Rome and the European Economic Community (1957)  Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands formed a customs union for free trade among their group but imposed common restrictions on trade with other countries.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–22 Figure 5-8a Average Tariff Rates in the European Union Percent Source: Patrick Messerlin, Measuring the Costs of Protection in Europe, Washington, D.C.: Institute for International Economics, 2000.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–23 Figure 5-8b Average Anti-Dumping Rates in the European Union Source: Patrick Messerlin, Measuring the Costs of Protection in Europe, Washington, D.C.: Institute for International Economics, 2000.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–24 Trade Creation, Diversion, or Deflection? Trade Creation  An additional amount of international trade resulting from trade preferences that a nation grants to a trading partner. Trade Diversion  A shift in international trade caused by one nation giving trade preferences to another, which can cause trade with a third country to decline.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–25 Trade Creation, Diversion, or Deflection? (cont’d) Trade Deflection  The movement of goods or components of goods from a country outside a trading arrangement to one within such an arrangement so that the seller can benefit from trading preferences within the arrangement. Rules of Origin  Regulations governing conditions under which products are eligible for trading preferences under trade agreements.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–26 Figure 5-7 A Graphical Depiction of Trade Creation and Trade Diversion

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–27 Multilateral Approaches and Benefits Multilateralism  An approach to achieving freer international trade via a wide interplay among many of the world’s nations, with an aim toward inducing each country to treat others equally in trading arrangements. Most Favored Nation (MFN)  A country that receives reductions in trade barriers to promote open international trade.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–28 Multilateral Trade Regulation General Agreement on Tariffs and Trade (GATT)  An international agreement among more than 140 nations about the rules governing cross-border trade in goods. World Trade Organization  A multinational organization that oversees multilateral trade negotiations and adjudicates trade disputes that arise under multilateral trade agreements formed under the GATT and the GATS.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.5–29 Multilateral Trade Regulation (cont’d) General Agreement on Trade in Services (GATS)  An international agreement among more than 130 nations about the rules under which services are traded internationally.