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

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

3. 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?

4. 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

5. Examples of different stages of integration

6. 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 for more

7. Welfare effects of FTA vs CU

8. 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)

9. 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

11. 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

12. 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

13. 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)