Multilateral trade arrangements [GATT  WTO] Nondiscrimination: bilateral liberalization extended to all members. “Most favored nation” BUT Complex negotiations: 150+ nations at the table Regional trade arrangements: EU, NAFTA Economic integration  economies of scale Basis for enlargement As integration proceeds, costs of staying out increase As labor deploys to competitive sectors, benefits (and political support) spreads. BUT trade diversion vis a vis non-members

Regional trade agreements Types of regional trade arrangements  Free trade areas (NAFTA, for example)  Customs unions (Benelux, CACM)  Common markets (MERCOSUR,EEC)  Economic union (EU)  Economic and monetary union (USA, EMU)

Effects of regional trade agreements  Static effects  Trade creation effect  consumption effect … buy more from your partner  production effect … less inefficient domestic production  Trade diversion effect  … buy less from efficient, low cost producers not in the club  Dynamic effects  Economies of scale  Greater competition  Investment stimulus

European Union / European Monetary Union Created by the Treaty of Rome (1957) Original Members: Belgium,France,Germany, Italy,Luxembourg,Netherlands Joiners,’73: Denmark,Ireland,UK Joiners,’80s: Greece, Portugal, Spain Joiners,’95: Austria,Finland,Sweden Joiners, ‘00s: Transition economies: Slovenia, Poland, Czech Republic, Slovakia, Hungary, Estonia, Latvia, Lithuania, Bulgaria, Romania + Cyprus, Malta Total Population, GDP, GDP per capita (PPP, 2008) EU: 500mil $15.2tril $30,500 €-zone: 326mil 10.6 tril 32,500 USA: 306mil 14.3 tril 46,900

European Union  Within-region trade grew much more quickly than world trade in the 1960s  Steps to remove remaining barriers ( ) further increased integration  1987 Delors Report  Four Freedoms: goods, services, labor, capital  Maastricht Summit (1991)  began process of economic and monetary union (EMU)

EU Economic & Monetary Union (1999)  National currencies replaced with the euro, 2002  European Central Bank created to control monetary and exchange rate policy  “Convergence criteria” required for membership:  Price stability … 3.2% inflation  Low long-term interest rates … 7.7%  Stable exchange rates  Sound public finances  Deficit/GDP … 3%  Debt/GDP … 60%

Other key EU policies  Common agricultural policy (CAP)  Support payments to farmers  surpluses  Export subsidies  devastates LDC agriculture  Variable import levies: when world price down, EU tariff up  stable prices within EU  Germans supported French farmers  Now support Polish/Hungarian/Baltic farmers  Government procurement policies  All EU businesses can bid for large contracts in any nation

Benefits of EMU  Lower transaction costs  Price comparisons easier  Exchange rate risk eliminated  Stimulates competition Costs of EMU Europe is not an "optimal currency area" Loss of monetary policy and the exchange rates as economic adjustment tools Response to Asymmetric shocks Use of fiscal policy for adjustment is constrained Need wage flexibility and labor mobility both low in Europe

US-Canada Free Trade Agmt. (1989) North American Free Trade Agmt. (1994)  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  Protection of intellectual property rights  Dispute settlement procedures  Side agreements on environmental protection and labor law

Concerns about NAFTA  Main US losers from NAFTA: import-protected industries competing with Mexican producers, and unskilled workers  Trade diversion from low-cost Asian producers  US industrial workers worried about lower pay scale in Mexico and plant relocations  Concerns Mexico would not enforce environmental protection measures  Concern now shifted to China and India