Chapter 17 NAFTA, CAFTA, GATT, WTO: Are Trade Agreements Good For Us? Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

17-2 Chapter Outline THE BENEFITS OF FREE TRADE WHY DO WE NEED TRADE AGREEMENTS TRADE AGREEMENTS AND INSTITUTIONS ECONOMIC AND POLITICAL IMPACTS OF TRADE THE BOTTOM LINE

17-3 You Are Here

17-4 NAFTA, GATT, and the WTO NAFTA: North American Free Trade Agreement –An agreement between the United States, Canada and Mexico to have substantially free trade. (Some tariffs and quotas are permissible under certain circumstances.) CAFTA: Central American Free Trade Agreement –Patterned on NAFTA. Applies to U.S., Canada, Mexico and six Central American trading partners. GATT: General Agreement on Tariffs and Trade –A multi-nation agreement specifying conditions under which tariffs, quotas and non-tariff barriers are permissible. WTO: World Trade Organization –An organization designed to settle trade disputes.

17-5 The Benefits of Free Trade Free trade makes each trading partner better off than it would have been without trade. Countries export goods to other nations because the producing country can make the good at a lower opportunity cost than the importing country.

17-6 A Simple Example Number of workers produces Amount of Output High TechLow Tech High Skill Low Skill High Skill Low Skill US 1produces 12 produce 11 produces 41 produces 3 Mexico 3 produce14 produce 11 produces 31 produces1 US exports high-tech products to Mexico and Mexico exports low-tech products to the US and both are better off than if they produced the goods themselves.

17-7 Why Do We Need Trade Agreements? It is logical to ask “if trade is so good why do we need an agreement to engage in it?” The answer is that a country can make itself better off by engaging in Strategic Trade Policies designed to get more of the benefits from trade in a country than would exist under free trade. Countries that do this increase the gains from trade to themselves but it is less than the losses to everyone else.

17-8 Example of Strategic Trade Boeing vs. AIRBUS –Boeing had significant market power in the production of airliners prior to the existence of AIRBUS. –Britain and France gave AIRBUS protection against Boeing’s exports to European airlines. –In doing so they might have made themselves better off. Boeing was worse off by more than AIRBUS (and the European consumer and taxpayer) were made better off.

17-9 What Trade Agreements Prevent (or discourage) Tariffs –A tax on imports. Quotas –A limit on imports. Non-tariff barriers –A regulatory means of limiting imports.

17-10 Alphabet Soup: NAFTA North American Free Trade Agreement Creates a (relatively) free trade zone in North America. Includes Canada, Mexico and the United States. Passage –Envisioned by President Reagan in the 1980’s. –Negotiated by President Bush (G.H.W.) in the late 1980s and early 1990s. –Enacted by President Clinton.

17-11 Alphabet Soup: CAFTA Central American Free Trade Agreement Creates a (relatively) free trade zone between NAFTA countries and six Central American Countries Passage –Pushed by Pres (G. W.) Bush –Passed Congress by very narrow margins

17-12 Alphabet Soup: GATT General Agreement on Tariffs and Trade Came into existence shortly after WWII –Uruguay Round set the latest rules A world agreement between more than 100 nations. NOT a free trade agreement –It sets conditions under which tariffs, quotas and non-tariff barriers are acceptable.

17-13 Alphabet Soup: WTO World Trade Organization Set up with GATT but had little power until the Uruguay Round of GATT. Serves as a “court” where countries can argue who is in the right in a trade dispute. Has no enforcement authority.

17-14 International Protests Battle in Seattle –December of 1999 riots broke out in the streets of Seattle with protestors voicing displeasure at NAFTA, WTO, Globalization The effect of trade on American jobs. The effect of trade on the environment, worker safety and child labor standards. G-8 Protests in July 2005 –Rioters protested London gathering of world economic leaders. –Their concerns African Aid, global warming, environmental damage (they attributed to trade), corporate-driven trade policies –Overshadowed by the London Subway bombings.

17-15 Are Trade Agreements Working? The effects of these agreements are often overstated because trade was increasing before they were enacted. Trade agreements have (in isolation from the trend) increased trade somewhat, but have not had the –Dramatically positive impacts envisioned by free-trade advocates. –Dramatically negative impacts envisioned by detractors of globalization.

17-16 The Impact of NAFTA

17-17 NAFTA and Trade Growth Rates Pre- NAFTA 1990 to to 1998 Full Effect 1999 to 2007 US exports to Mexico10.2%12.9%2.7% US imports from Mexico8.2%9.8%5.0% US exports to Canada4.3%4.1%2.1% US imports from Canada4.9%3.5%3.2% US Total Exports3.5%2.9%3.6% US Total Imports3.3%4.1%4.9%

17-18 The Politics of Free Trade There are winners and losers from freer trade. –The winners have tended to be people who are educated and highly skilled. –The losers have tended to be people in manufacturing who have little education.

17-19 More Politics of Free Trade Free trade’s winners are harder to identify that its losers. –A person who loses a job when the plant they work for moves to a different country can easily identify themselves as a loser in free trade. –People who are hired because of an increase in exports may not see the reason. –People who are hired because of higher national incomes usually do not attribute their hiring to free trade policies.

17-20 Differences of Opinion Gary Hufbauer and Jeffery Schott estimated the impact in 2005 to be slightly positive. Economic Policy Institute estimated –1 million jobs were created as a result of the rising exports, –2 million were lost due to more rapidly rising imports. –$7.6 billion net drag on employee wages –the hardest hit states being in the industrial Midwest

17-21 The Bottom Line Trade increases the GDP of the trading countries. Trade can hurt key constituencies with political power. Because the gains to the winners of free trade more then offset the losses to the losers, economists generally view free trade agreements as good. Economists suggest that the losers from free trade agreements (unemployed workers) can (and should) be compensated with retraining opportunities. The implementing legislation of NAFTA provides for this.