ECON3315 International Economic Issues Instructor: Patrick M. Crowley Issue 7: Preferential trading areas: NAFTA and the EU

Overview Balassa’s steps of economic integration Integration in practice: NAFTA, the EU, and other regional integration projects NAFTA The EU

Balassa’s steps of regional economic integration Bela Belassa (1963) first came up with steps for countries to be more economically integrated Steps are as follows: Free trade Customs union Common market Economic union Monetary union Fiscal union Political union What’s the difference between a free trade area and a customs union? Do countries wanting more regional integration have to follow in the order above?

Examples of different stages of integration Level of integration Description Characteristics Examples Regional autarky - bilateral trade agreements Japan (before ASEAN) A FTA - tariffs and quotas removed internally - national tariffs retained against outside NAFTA B Customs union - common external tariff Mercosur C Common market - free movement of factors of production, goods and services EU (before EMU) D Economic union - harmonization or coordination of some national policies - transfer of some policies to supranational level Competition policy in the EU E Monetary union - single currency - single central bank ECB in the EU F Fiscal union - harmonization of taxes - fiscal sovereignty EU to some degree G Political union - effective and democratic body at supranational level Does not exist out of a regional integration project

Examples of different stages of integration

Integration in practice Many examples of regional economic integration around the world: North America – CUFTA and NAFTA Europe – EU, EFTA, BAFTA, CEFTA Caribbean – CARICOM Central and South America – Mercosur, SELA, CAN Africa – AU, SACU, COMESA, WAEMU Asia – ASEAN, AFTA Australasia – ANZFTA - see http://www.wto.org/english/tratop_e/region_e/region_e.htm for more

Welfare effects of FTA vs CU

NAFTA Grew out of CUFTA – idea was to extend to Mexico, but whole new agreement happened Basically a free trade area, but with side agreements on labor standards, environment, and migration of professionals “Rules of origin” allow for duty free trade as long as 62.5% of value added within NAFTA Environmental commission set up in Montreal to oversee complaints about environmental degradation “Snap-back” provision allows for tariffs to be restored if surge of imports threatens domestic industry Trade dispute mechanism consists of 3 experts – usually resolves disputes amicably – exceptions though (e.g. softwood lumber)

NAFTA Maquiladora program US boom of the 90s benefited maquiladoras, but China’s entry into the WTO has eroded competitiveness of plants, with many closing Critics say that although trade has increased, Mexican real wages in manufacturing have fallen, and also environmental degradation evident Difficult to say if NAFTA has had large effects, as phased in over 10 years, and also lots of other events happening Impact clearly much greater on Canada and Mexico than on the US

EU Originally formed as a customs union for steel and coal (Treaty of Rome 1958) Grew into EEC – customs union Then EC – common market (Single Market 1992) Then EU – economic union and some political pooling of sovereignty (European Parliament) Now EMU, which also involves monetary union (euro) (Treaty of Maastricht, 1991) Big debate in 90s surrounded widening vs deepening Now 27 member states, with EMU adopted by only 13 member states Switzerland and Norway do not want to join, and France has effectively stopped Turkey from joining

EU Trade creation significant Trade diversion also present, although size differs depending on study EMU is thought to have increased trade significantly, although estimates vary widely Growth and Stability pact has “coordinated” fiscal policy Commission acts as civil service but can also impose fines European Council decides on major issues

EMU timeline ERM of the EMS (79) Delors report (89) Treaty of Maastricht (91) Currency crisis (92-93) Euro introduced and exchange rates fixed (99) Money euro introduced (02) Greece added (04) Slovenia added (07) Cyprus and Malta added (08) Slovakia added (09)