Regional Trading Arrangements © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 1 PowerPoint slides prepared by: Andreea Chiritescu Eastern Illinois University

Regional Integration vs. Multilateralism WTO Promote trade liberalization through worldwide agreements Trade liberalization by any one nation Extended to all WTO members, 153 nations Nondiscriminatory Regional trading arrangements Nations reduce trade barriers only for a small group of partner nations Discriminating against the rest of the world © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 2

Regional Integration vs. Multilateralism Regional block – stumbling blocs to multilateralism Members not greatly interested in worldwide liberalization May not realize additional economies of scale from global trade liberalization May want to invest their time and energy in establishing strong regional linkages Rather than investing them in global negotiations © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 3

Regional Integration vs. Multilateralism Regional block – building blocks to global free trade and investment When structured according to principles of openness and inclusiveness May achieve deeper economic interdependence among members Greater commonality of interests Simpler negotiating processes © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 4

Regional Integration vs. Multilateralism Regional block – building blocks to global free trade and investment Self-reinforcing process Encourages the partial adjustment of workers Out of import-competing industries in which the nation’s comparative disadvantage is strong Into exporting industries in which its comparative advantage is strong © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 5

Types of Regional Trading Arrangements Economic integration Process of eliminating restrictions on international trade, payments, and factor mobility Results in the uniting of two or more national economies in a regional trading arrangement © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 6

Types of Regional Trading Arrangements Free-trade area Association of trading nations Members agree to remove all tariff and nontariff barriers among themselves Each member maintains its own set of trade restrictions against outsiders North American Free Trade Agreement (NAFTA) Canada, Mexico, and the United States © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 7

Types of Regional Trading Arrangements Customs union Agreement among two or more trading partners To remove all tariff and nontariff trade barriers between themselves Each member nation imposes identical trade restrictions against nonparticipants Benelux Belgium, the Netherlands, and Luxembourg © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 8

Types of Regional Trading Arrangements Common market Group of trading nations Free movement of goods and services among member nations Initiation of common external trade restrictions against nonmembers Free movement of factors of production across national borders within the economic bloc European Union (EU), 1992 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 9

Types of Regional Trading Arrangements Economic union National, social, taxation, and fiscal policies are harmonized and administered by a supranational institution Requires an agreement to transfer economic sovereignty to a supranational authority © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 10

Types of Regional Trading Arrangements Monetary union Ultimate degree of economic union Unification of national monetary policies Acceptance of a common currency administered by a supranational monetary authority © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 11

Types of Regional Trading Arrangements The United States - Monetary union Fifty states with a common currency Federal Reserve Single central bank for the nation Free trade among the states Labor and capital move freely © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 12

Types of Regional Trading Arrangements The United States - Monetary union Federal government Nation’s fiscal policy National defense Retirement and health programs International affairs States can keep their identity within the union Police protection and education © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 13

GLOBALIZATION Missing benefits: the United States falls behind on trade liberalization bilateral or regional trade pacts United States Had trade deals with only 17 countries European Union, Japan, and China Trade alliances ranging from customs unions to large free-trade pacts with a total of 40 countries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 14

GLOBALIZATION Missing benefits: the United States falls behind on trade liberalization Expansion of bilateral and regional trade deals Countries losing faith in the ongoing Doha Round of multilateral trade talks Bilateral and regional deals as a method of liberalizing beyond what the Doha Round would achieve Foster alliances or promote political influence © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 15

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 16 Examples of trade deals involving countries other than the United States TABLE 8.1 South Korea-European Union, 2009 Applies to $96 billion in annual trade Eliminates virtually all tariffs Decreases Korean regulatory barriers on imports of automobiles Canada-Colombia, 2008 Applies to $1.2 billion in annual trade Phases out most Colombian agricultural tariffs Addresses Colombian food-safety standards that restrict trade Japan-Association of Southeast Asian Nations, 2008 Applies to $211.4 billion in annual trade Eliminates Japanese tariffs on 93 percent of import value Eliminates six countries’ tariffs on 90 percent of Japanese imports

Impetus for Regionalism Motivations for regional trading arrangements Prospect of enhanced economic growth Economies of large-scale production Foster specialization and learning-by-doing Attract foreign investment Foster a variety of noneconomic objectives Managing immigration flows Promoting regional security Enhance & solidify domestic economic reforms © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 17

Effects of a Regional Trading Arrangement Static effects of economic integration On productive efficiency And consumer welfare Dynamic effects of economic integration Relate to long-term rates of growth © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 18

Effects of a Regional Trading Arrangement Static effects Trade-creation effect Welfare gain Some domestic production of one customs-union member Replaced by another member’s lower-cost imports Consumption effect Production effect © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 19

Effects of a Regional Trading Arrangement Static effects Trade-diversion effect Welfare loss Imports from a low-cost supplier outside the union Are replaced by purchases from a higher-cost supplier within the union © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 20

The formation of a customs union leads to a welfare-increasing trade creation effect and a welfare- decreasing trade diversion effect. The overall effect of the customs union on the welfare of its members, as well as on the world as a whole, depends on the relative strength of these two opposing forces. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 21 Static welfare effects of a customs union FIGURE 8.1

Effects of a Regional Trading Arrangement United Kingdom (UK) Entered the European Union in 1973 Turned away cheaper agricultural produce from Australia Increased farm output Purchased produce from its more expensive European neighbors Trade diversion Produce prices – increased by 25% Decreased national welfare © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 22

Effects of a Regional Trading Arrangement United Kingdom (UK) Purchased cheaper manufactured goods from European neighbors Trade-creation Increase national welfare Trade creation - stronger effect UK’s overall welfare improved by joining the EU © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 23

Effects of a Regional Trading Arrangement Dynamic effects Creation of larger markets By the move Dynamic gains Economies of scale Greater competition Stimulus of investment © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 24

The European Union European Community / European Union Trade liberalization Treaty of Rome in 1957 Belgium, France, Italy, Luxembourg, the Netherlands, West Germany By 1973 The United Kingdom, Ireland, Denmark 1981 – Greece 1987 – Spain, Portugal © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 25

The European Union European Community / European Union 1995 – Austria, Finland, Sweden 2004 – ten other Central and Eastern European countries Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia 2007 – a total of 27 countries Bulgaria and Romania © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 26

The European Union European Union – customs union Economic integration to an economic union 1957 – trade liberalization 1968 – free-trade area 1970 – customs union 1985 – detailed program for becoming a common market Elimination of remaining nontariff trade barriers by 1992 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 27

The European Union European Union - monetary union The Maastricht Treaty, 1991 Full-fledged European Monetary Union (EMU) by 2003 Single currency, the euro © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 28

The European Union Convergence criteria, EMU Align economic and monetary policy Price stability Low long-term interest rates Stable exchange rates Sound public finances © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 29

The European Union European Union - monetary union The euro - official currency of 16 of the 27 member states of the European Union The eurozone: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 30

The European Union The euro Also used in another five European countries Used daily by some 327 million Europeans Over 175 million people worldwide Use currencies that are pegged to the euro The second largest reserve currency The second most traded currency in the world © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 31

The European Union Countries joining the European Union Obligated to join the EMU To adopt the euro as their national currency Must first satisfy the convergence criteria as mandated by the Maastricht Treaty © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 32

The European Union 2004, new constitutional treaty Changes to the EU’s original governing constitution Abolish the EU’s rotating presidency Appoint a single individual as president of the European Council for up to five years New foreign minister Increasing the powers of the European Parliament Simplifying EU voting procedures © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 33

The European Union French and Dutch voters sidetrack integration Rejected the new constitution, 2005 Undermine social protections Express dissatisfaction Their unpopular national governments The EU bureaucracy Turkey’s prospective EU membership Reduced French influence within the EU Dutch - EU’s big countries - already too strong © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 34

The European Union Agricultural policy Abolished restrictions on agricultural products traded internally Common agricultural policy Support of prices received by farmers Deficiency payments, output controls, and direct income payments Variable levies Export subsidies © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 35

The European Union Variable levies Levy – determined daily The difference between the lowest price on the world market and the support price More restrictive than a fixed tariff Discourages foreign producers From absorbing part of the tariff From cutting prices to maintain export sales © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 36

The common agricultural policy of the EU has used variable levies to protect EU farmers from low- cost foreign competition. During periods of falling world prices, the sliding-scale nature of the variable levy results in automatic increases in the EU’s import tariff. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 37 Variable levies FIGURE 8.2

The European Union Export subsidies Ensure that any surplus agricultural output will be sold overseas EU farmers - incentive to increase production Reduce the domestic supply Eliminate the need for the government to purchase the excess © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 38

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 39 Government support for agriculture, 2007 TABLE 8.2

The European Monetary Union European Monetary Union (EMU), 1999 Single currency (the euro) Lower the costs of goods and services Facilitate a comparison of prices within the EU Promote more uniform prices European Central Bank - Frankfurt, Germany Controls the supply of euros Sets the short-term euro interest rate Maintains permanently fixed exchange rates for the member countries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 40

The European Monetary Union Optimum currency area Region in which it is economically preferable to have a single official currency Rather than multiple official currencies Gains More uniform prices Lower transaction costs Greater certainty for investors Enhanced competition Promote price stability © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 41

The European Monetary Union Optimum currency area Costs If interest-rate changes affect different economies in different ways Loss of two policy instruments Independent monetary policy Option of changing the exchange rate © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 42

The European Monetary Union Optimum currency area Various reactions to economic shocks Mobility of labor Flexibility of prices and wages Automatic mechanism for transferring fiscal resources to the affected country © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 43

The European Monetary Union Optimum currency area Best chance of success Similar business cycles and economic structures Single monetary policy should affect all the participating countries in the same manner No legal, cultural, or linguistic barriers to labor mobility Wage flexibility System of stabilizing transfers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 44

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 45 Advantages and disadvantages of adopting a common currency TABLE 8.3 AdvantagesDisadvantages The risks associated with exchange fluctuations are eliminated within a common currency area. Costs of currency conversion are lessened. The economies are insulated from monetary disturbances and speculation. Political pressures for trade protection are reduced. Absence of individual domestic monetary policy to counter macroeconomic shocks. Inability of an individual country to use inflation to reduce public debt in real terms. The transition from individual currencies to a single currency could lead to speculative attacks.

The European Monetary Union Europe - suboptimal currency area Advantages Improve economic efficiency Lower transaction costs of exchanging currency Elimination of exchange-rate risk Stimulates competition Facilitates the broadening and deepening of European financial markets © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 46

The European Monetary Union Europe - suboptimal currency area Disadvantages EU countries – cannot use monetary policy and exchange rate as a tool in adjusting to economic disturbances Use of fiscal policy - limited by the need to keep budget deficits in control © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 47

The European Monetary Union Challenges for the EMU Ability of the European Central Bank to focus on price stability over the long term Operation of monetary policy Difficulty in reducing budget deficits and debts Need for structural reform © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 48

GLOBALIZATION The euro, ten years later: how has it performed? Benefits of the euro Removed the cost of exchanging currency Eliminated exchange rate risks Reduction in cross-border transaction costs Fostered economic ties Challenges of the eurozone Worries about trade imbalances One-size-fits-all monetary policy has not met the needs of all of its members © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 49

The European Monetary Union Does the Eurozone need a bailout fund? Needs a better mechanism to deal with a financial crisis Possible interim solution: European Monetary Fund (EMF) Bailout fund financed out of contributions from member country governments It would put the eurozone in charge of its own destiny Eurozone members would have greater powers to punish fiscal abusers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 50

North American Free Trade Agreement North American Free Trade Agreement, 1994 NAFTA Mexico, Canada, and the United States Provide each member nation better access to the others’ markets, technology, labor, and expertise Economies of scale © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 51

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 52 Winners and losers in the United States under free trade with Mexico TABLE 8.4 U.S. WinnersU.S. Losers Higher-skill, higher-tech businesses and their workers benefit from free trade. Labor-intensive businesses that relocate to Mexico benefit by reducing production costs. Domestic businesses that use imports as components in the production process save on production costs. Consumers in the United States benefit from less expensive products due to increased competition with free trade. Labor-intensive, lower-wage, import— competing businesses lose from reduced tariffs on competing imports. Workers in import-competing businesses lose if their businesses close or relocate.

North American Free Trade Agreement NAFTA & Mexico Benefits Increase in the production of goods and services – comparative advantage Rising investment spending Increase wage incomes and employment, national output, and foreign-exchange earnings Facilitated the transfer of technology Costs Agriculture – 25% of population Devastated by US competition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 53

North American Free Trade Agreement NAFTA & Canada Benefits / safeguards Maintenance of its status in international trade No loss of its current free-trade preferences in U.S. Equal access to Mexico’s market Costs Concerns about Canada’s European-style social welfare model Uncompetitive practices and policies Downward pressure on the country’s base of personal and corporate taxes © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 54

North American Free Trade Agreement NAFTA & the U.S. Benefits Expanding trade opportunities Reducing prices Increasing competition Economies of large-scale production More reliable source of petroleum Less illegal Mexican immigration Enhanced Mexican political stability © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 55

North American Free Trade Agreement NAFTA & the U.S. Costs Industries that rely on trade barriers to limit imports of low-priced Mexican goods Citrus and sugar Unskilled workers Fear that U.S. companies will move to Mexico NO because of different worker productivity Concern: Mexico’s environmental regulations Greater trade creation than trade diversion © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 56

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 57 Gross domestic product, employment and labor productivity, 2007 TABLE 8.5

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 58 Trade effects of NAFTA: trade creation and trade diversion (thousands of dollars) TABLE 8.6

North American Free Trade Agreement NAFTA & trade diversion Benefited Mexico’s textile industry Increased market share by late 1990s The gains could not be sustained China – low-cost textiles © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 59

North American Free Trade Agreement U.S. closes its highways to Mexican cargo trucks, 1995 Concern – safety of the trucking system Additional safety requirements Only for Mexican truckers U.S. Teamsters (truckers) union – benefit NAFTA arbitration panel: U.S. was in violation pilot program for Mexican carriers Bad news for Teamsters union © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 60

North American Free Trade Agreement U.S. closes its highways to Mexican cargo trucks, , in violation of NAFTA, U.S. terminated the pilot program Mexico retaliated 89 U.S. products - new tariffs of 10-45% Mostly agricultural products Decreased imports from U.S. American agricultural producers paid a dear price for the protectionism granted the Teamsters union © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 61

North American Free Trade Agreement Is NAFTA an optimum currency area? Degree of economic integration Canada, U.S., Mexico Similarity of economic structures Canada, U.S. Mexico – couldn’t use monetary policy Canada – concerned about the loss of national sovereignty © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 62

TRADE CONFLICTS From NAFTA to CAFTA 2005, Central American Free Trade Agreement (CAFTA) United States Five nations of Central America Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua Caribbean country: the Dominican Republic Trade liberalization measures About 80 percent of U.S. exports become duty-free © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 63

Free Trade Area of the Americas 1994, Summit of the Americas 34 nations in North and South America Except Cuba Call for the creation of a Free Trade Area of the Americas (FTAA) If established, FTAA Largest trading bloc in the world 850 million consumers Combined income of more than $14 trillion Level the playing field for U.S. exporters © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 64

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 65 Major western hemisphere regional trade agreements TABLE 8.7

Free Trade Area of the Americas Obstacles to FTAA FTAA’s allowance for other trade agreements Smaller partners - special assistance Agricultural issues U.S. refused to lower subsidies and tariffs that protect U.S. farmers Honoring intellectual property rights Opening of government contracts to foreign bidders © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 66

Asia-Pacific Economic Cooperation Asia-Pacific Economic Cooperation (APEC) 1989, the United States Australia, Brunei, Canada, Chile, China, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore, South Korea, Taiwan, and Thailand 1993, vision of an Asia-Pacific economic community Eliminate barriers to trade and investment by 2020 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 67

Transition Economies Transition economies Transition from a centrally planned economy to a market economy Economic reforms in Eastern European nations in the 1990s © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 68

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 69 GDP per capita* for the transition economies, 2007 (in dollars) TABLE 8.8

Transition Economies Market economy Decisions of independent buyers and sellers Acting in their own interest Govern both domestic and international trade Prices are market-determined Value alternatives Allocate scarce resources Play rationing and signaling roles © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 70

Transition Economies Nonmarket economy Centrally planned economy Less regard for market considerations State planning and control Govern foreign and domestic trade Controls the prices and output Fixes prices – insulated from foreign-trade influences Ration arbitrary quantities among buyers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 71

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 72 Economies in transition: 2009 index of economic freedom* TABLE 8.9

Transition Economies Motivation for transition Failure of the economy to generate a high standard of living No incentives for producers To efficiently supply the goods and services That consumers wanted to purchase © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 73

Transition Economies Motivation for transition Normal operation of markets – obstructed Widespread use of price controls Reliance on inefficient public enterprises Extensive barriers to competition Government regulation of production and investment No incentives for entrepreneurs Lack of enforceable property rights © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 74

Transition Economies Motivation for transition For the communistic countries Central plans decided production levels Managers – no incentive to modify their output as long as quotas were realized Underproduction of consumer goods Widespread rationing Absent incentives to innovate Inefficient state-owned enterprises Public funds were channeled into favored industries Weaknesses of the political and economic systems © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 75

From 1993 to 2005, economic growth was strongest for the freer countries of the former Soviet bloc. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 76 For the former Soviet bloc countries, freer economies grow faster FIGURE 8.3

Transition Economies Russia’s WTO accession negotiations Slow for several reasons Still in transition Ongoing challenges Restructuring its economy Privatizing government-owned industries Implementing market-oriented economic reforms Difficult to reach political consensus on reforms 1998 economic crisis Rising world oil prices beginning in 2000 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 77