carbaugh, chap. 9 1 regional trade agreements types of regional trade arrangements free trade areas...

Carbaugh, Chap. 9 1

Regional trade agreements

Types of regional trade arrangements Free trade areas (NAFTA, for example) Customs unions (Benelux, CACM) Common markets (MERCOSUR,EEC) Economic/monetary union (EU)

Carbaugh, Chap. 9 2


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 producer

Dynamic effects Economies of scale Greater competition Investment stimulus

Carbaugh, Chap. 9 3

2

2.25

2.5

2.75

3

3.25

3.5

3.75

4

4.25

0 5 10 15 20 25 30

Grain (bushels)

Static effects of a customs unionP

ric

e ($

)

SG

DL

SL


SUS

SUS+tariff

SG+tariff

a bc

Carbaugh, Chap. 9 4

The European UnionCreated 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

Total Population, GDP, GDP per capita (1996)

EU: 372mil $8.6 tril, $23,200

€-zone: 300mil 7.0 tril, 23,000

USA: 271mil 8.0 tril, 29,300

Carbaugh, Chap. 9 5

Regional trade agreements: case studies

The European Union (cont’d)

Within-region trade to grew much more quickly than world trade in the 1960s

Steps to remove remaining barriers (1985-92) further increased integration 1987 Delors Report Four Freedoms: goods, services, labor, capital

Maastricht Summit (1991) began process of economic and monetary union (EMU)

Carbaugh, Chap. 9 6


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%

Carbaugh, Chap. 9 7


Other key EU policies Common agricultural policy

Support payments to farmers Variable import levies Export subsidies

Government procurement policies All EU businesses can bid for larger contracts

in any nation

Carbaugh, Chap. 9 8


Benefits of EMU Europe is not an "optimal currency area" Advantages of EMU:

Lower transaction costs Price comparisons easier Exchange rate risk eliminated Stimulates competition

Carbaugh, Chap. 9 9


Costs of EMU

Loss of monetary policy and the exchange rates as economic adjustment tools

Asymmetric shocks

Use of fiscal policy for adjustment is constrained

Need wage flexibility and labor mobility, which are both low in Europe

How to divide seignorage?

Carbaugh, Chap. 9 10

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

US industrial workers worried about lower pay scale in Mexico and plant relocations

Concerns Mexico would not enforce environmental protection measures



NAFTA after five years Trilateral trade increased significantly Some US jobs were lost to Mexico, but the

numbers were small compared to job creation that came with US growth

Changes in investment flows were small (in relation to total US foreign investment)

Closer political ties were built among the three nations

carbaugh, chap. 9 1 regional trade agreements types of regional trade arrangements free trade areas...

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