REGIONAL AFFINITY ARRANGEMENTS AND THEIR IMPACT ON US OR OTHER DEVELOPED MARKET COMPANIESEduardo Bialostozky, Jose Gomez, Alex Dea, Swetha Vasu, Ravi Kiran Chikoti

INTRODUCTION

Regional Affinity Arrangements as the name suggests are the multilateral international agreements between states of a certain geographic region sharing common interests. Regional agreements are concluded with respect to political, economic, military, environmental, scientific and technical, cultural and legal matters. Several definitions state that these agreements are primarily aimed at the peaceful settlement of any disputes which may arise between the participating states and thus maintain international peace and security in the geographic region. Most often than not the objectives of these agreements has taken the form of a political economy initiative where commercial interests are the means for achieving broader socio-political and security objectives. These agreements are organized either through supranational institutions or through inter-governmental bodies.

The arrangements that are aimed at trade integration are also referred to as Trade Blocs where regional barriers of trade, both tariff and non-tariff, are reduced or eliminated among the participating states. Historic trade blocs include Hanseatic League, a trading alliance in northern Europe in existence between the 13th and 17th centuries and the German customs union of 1834. These Trade agreements can be stand-alone agreements between several states (such as the NAFTA) or part of aregional organization(such as theEU). Depending on the level ofeconomic integration, trade blocs can fall into different categories, such as: preferential trading areas,free trade areas,customs unions,common marketsandeconomic and monetary unions.

PAST TRADE AGREEMENTS

Some popular trade agreements in the past are AFTA, NAFTA and EU. AFTA was formed to increase ASEANs competitive edge as a production base in the world market and attracting more Foreign Direct Investment in to the partnering countries. NAFTA was formed to eliminate the barriers of trade and investment between the 3 participating states EU- FTA was formed to ensure the free movement of people, goods, services and capital, enact legislation and maintain common policies on trade, agriculture,fisheries, and development.

IMPACT AND IMPLICATIONS

ASEAN Free Trade Area (AFTA):The AFTA was signed between the Asia Tigers- Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, and smaller players such as Brunei, Cambodia, Laos and Myanmar. According to this deal, these ASEAN countries would cancel all import and export duty taxes on goods traded between these countries (Cambodia, Laos, Myanmar and Vietnam however impose nominal taxes on certain products that is expected to be lifted on Dec 31st 2015). The ASEAN countries have also signed free trade agreements with China and India. These agreements are strategic in terms of manufacturing and global sourcing. The combined GDP of the ASEAN countries, along with that of Indias and Chinas presents a very tempting consumer market for companies (over 600 million people and a combined GDP of over USD 1.8 trillion). Recently, ASEAN has also combined a free trade agreement with Australia and New Zealand (AANZFTA). This deal eliminates tariffs on 67% of the products that is expected to increase to 96% by 2020.

North American Free Trade Agreement (NAFTA):Signed between Canada, USA and Mexico, the NAFTA came into existence in 1994. NAFTA has two supplements viz. the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). This agreement resulted in modest economic benefits to the participating nations. The GDP witnessed a growth in all the participating countries as represented in Exhibit A. Imports and Exports to the USA had also increased as a consequence of this agreement (in Exhibit B). In Canada, the fears of a declining furniture industry were proven wrong by a positive economic growth figure. The agreement between Mexico and the USA has been a mixed bag especially in the agricultural domain. Also, Mexico was not equipped to sustain in the competitive environment- infrastructure wise-and that led to difficulties for the poor in the country. For USA, jobs in the country moved to Mexico and Canada- leading to a loss of over 700,000 US jobs (see Exhibit C). Debates continue on whether the NAFTA was a boon or a bane, we think the viewpoint could vary depending on the country.

European Union - FTA :The European Union has concluded free trade agreements with several countries while in the process of negotiation with few others. The list of countries in different stages of this deal is depicted in Exhibit D. As with other trade agreements, this agreement comes with both benefits and disadvantages. The positives and the negatives of FTAs in general are listed below:

Common benefits of trade agreements1. Reduced tariffs result in reduced prices of products sold to consumers2. By encouraging free trade, market competition is set into motion- this ultimately will work in favor of consumers who can enjoy the benefits of competition such as low prices and better innovations3. Advantages to international businesses- For example, using the ASEAN agreement, a foreign company can establish a subsidiary in a country like Singapore (where ease of business index is high) and reap the benefits of low cost manufacturing in its ASEAN partner countries4. GDP growth (almost always)Common disadvantages of FTA1. While the certain sectors are benefitted by FTA deals, some sectors take a hit. For instance, Thailand expects its agricultural industry to suffer as a consequence of the ASEAN agreement, and therefore lists agricultural products as sensitive. These products are subject to import tariffs ranging from 5- 20%. Sometimes, as in the case of NAFTA the roles could be reversed- agricultural sector might benefit and the other industries- not so much2. One country could eat into the market share of another country- for instance, Thailand is expected to lose a percentage of its rice trade to Vietnam owing to the latters capabilities in achieving lower production costs. However, these effects can be ironed out in the long run with diversification of trade products and services3. Loss of jobs in one country and an increase in another- specifically as seen by the NAFTA deal that led to fewer manufacturing jobs in the USAINDUSTRY SPOTLIGHT

To further discuss the pros and cons of Free Trade Agreements we would like to focus on a specific industry under a specific Trade Agreement. After the NAFTA was signed, the automotive industry has seen a great dynamic of investments on the three countries (US, Mexico & Canada) that conform to the NAFTA. There is no doubt that Mexico, with a low wage labor force, has seen the most benefits on such industry. The automotive industry, not only the car manufacturers, but also the car components manufacturers have been part of a wave of investments taking advantage of the benefits of labor, geographic location and political stability on such country. After 20 years that the NAFTA was signed, 80% of the vehicles produced in Mexico, are being exported to the United States. A well-defined NAFTA corridor, one of the largest free trade regions nowadays, allows for such benefit. It is also important to mention that the automotive industry led the charge of new investment in the country, but it is also important to acknowledge other industries that greatly benefitted from such wave of investments, such as the real estate industry (providing housing for workers), retail, financial services, and steel, among others.

COMPANY SPOTLIGHT

To further weigh the benefits of the NAFTA on the automotive industry, we want to narrow our research on one specific company.

From January 1 to October 5, 1994, the year the NAFTA was signed, Ford Motor Company exported 18,000 cars from Mexico. This represented a huge increase from its 1,700 cars and truck exported from there in 1993. In 2011, Ford was the export leader with 449,925 units. Ford exported over 97% of the vehicles it made in Mexico. GM was a relatively close second with 443,237 vehicles exported, 81% of the total produced. This shows how automotive companies use cheap labor in Mexico to export its cheap models from Mexico, but also use such cheap labor to export car components from Mexico to manufacture in the US its more expensive models, such as the Explorer and the Edge. Considering that not only the car companies like Ford or GM invest in countries where it is profitable to do so, also ancillary businesses invest along with those companies. Corporations like Magna, which manufactures several components for cars, or Nemak which manufactures engines for the automotive industry, also follow suit these corporations in order to supply components to the cars. In summary, economists have argued that the NAFTA has also done wrong for countries, arguing that jobs may move from one country to another. The truth is that companies, who are the heart and soul of the economies, have remained competitive worldwide thanks to their ability to take advantage of such benefits by moving their manufacturing facilities from one country to another, which in turn allows them to build their cars, and product, on a more efficient and competitive way.

TREATY SPOTLIGHT: TRANS-PACIFIC TRADE AGREEMENT

The Trans-Pacific Partnership (TPP) is a proposed regional regulatory and investment treaty that would include the United States, Canada, Mexico, Japan, Vietnam, Chile, Peru, Brunei, Singapore, Australia, New Zealand and Malaysia. This deal would bring together two of the worlds largest economies, the U.S. and Japan, into a bloc covering 40 per cent of global output and one third of global trade. [footnoteRef:1] The TPP, however, goes beyond tariff reduction to deal with behind the border issues such as tendering processes, financial regulations, data protection rules and intellectual property laws.[footnoteRef:2] In fact, one could argue that the deal is more about these non-tariff issues than about an actual reduction in tariffs. For example, the U.S. already has trade agreements with more than half the TPP countries, among them Singapore, Australia, Peru and Chile, which has led some experts, such as Peter Petri of Brandeis University, to claim that about four-fifths of the deals benefits to the U.S. would come from outside of traditional tariff cuts. These benefits would include the liberalization of trade in services and writing rules that promote investment and regulate many aspects of commerce.[footnoteRef:3] [1: http://www.economist.com/blogs/banyan/2014/02/trans-pacific-partnership-0 ] [2: http://www.ft.com/cms/s/0/fabfd8ac-d6c1-11e4-97c3-00144feab7de.html#ixzz3YdqQ6pSx ] [3: http://www.wsj.com/articles/what-the-trans-pacific-partnership-wouldand-wouldntdo-1426441618]

Supporters of the TPP assert that passage and implementation would reaffirm The US commitment to the region at a time when Beijings economic pull there is growing and Washingtons decreasing. This situation has been made worse by the United States decision not to support the Asian Infrastructure Investment Bank, which is now being supported by many key U.S. allies including Britain and Germany. Therefore, concluding the Trans-Pacific Partnership, would be a good start in repairing the US image in the region and it would show that the United States remains committed to Asia.[footnoteRef:4] [4: http://www.ft.com/cms/s/2/0d9a619a-dc53-11e4-a6f7-00144feab7de.html#ixzz3Ydn1QYDN ]

Going one step further, some experts, including Michael Green of the Centre for Strategic and International Studies, argue that American leadership in Asia is on the table with this deal saying that TPP failure would undermine the impression of the United States as a Pacific power and look like an abdication of leadership. Similarly, Mireya Sols, a Japan expert at the Brookings Institution, stated that TTP failure would be a devastating blow to the United States credibility.[footnoteRef:5] Finally, even if this treaty was originally meant as a counterbalance to Chinese economic influence, some experts have argued that it must be made clear to Beijing that China is welcome to join so long as it can meet TPP obligations.[footnoteRef:6] They contend that inviting China to join would be the best way of getting them to reform several of their policies including IP protection and environmental policies. [5: http://www.economist.com/news/special-report/21631797-america-needs-push-free-trade-pact-pacific-more-vigorously-americas-big-bet ] [6: http://www.ft.com/cms/s/2/0d9a619a-dc53-11e4-a6f7-00144feab7de.html#ixzz3YdnPWxws ]

In terms of monetary benefits that would result from the TTP, some estimates suggest a $77 billion annual increase in the U.S. GDP by 2025, which would equate to a 0.4% increase in the overall of economic output.[footnoteRef:7] Industries that would benefit most from such a deal include biologic drugs companies that would get a bump thanks to intellectual-property rules that would extend long-term patent protection to such products outside the U.S.[footnoteRef:8] Along with the pharmaceutical companies, technology companies would also benefit greatly as a result of the expected ban on requiring companies to house customers data within a specific country.[footnoteRef:9] Finally, the service sector, which makes up a big portion of the U.S. economy would benefit broadly, as internationally traded services such as software engineering and financial advice would get the big boost.[footnoteRef:10] On the other hand, though, light manufacturing, including some textile and paper-product makers, or other labor-intensive producers that arent as competitive globally would suffer from such a deal. Additionally, the U.S. auto industry could potentially also suffer, depending on the level of tariff cuts in the final deal and how long it takes to implement them.[footnoteRef:11] [7: http://www.wsj.com/articles/what-the-trans-pacific-partnership-wouldand-wouldntdo-1426441618 ] [8: http://www.wsj.com/articles/what-the-trans-pacific-partnership-wouldand-wouldntdo-1426441618] [9: http://www.wsj.com/articles/what-the-trans-pacific-partnership-wouldand-wouldntdo-1426441618] [10: http://www.wsj.com/articles/what-the-trans-pacific-partnership-wouldand-wouldntdo-1426441618] [11: http://www.wsj.com/articles/what-the-trans-pacific-partnership-wouldand-wouldntdo-1426441618]

RECENT NEWS

Talks for the TPP initially started in 2013, but the frequency and volume of discussions has increased significantly over the past few months. One of the reasons for this has been the rise in the trade imbalance. In December 2014, the trade deficit hit $46.56B[footnoteRef:12] the highest number in history. Given the implications that TPP has for imports and exports for the United States, U.S. companies, and politicians, the impetus or a deal became stronger and stronger. Additionally, while talks around TPP from President Obama initially focused on speeches he gave while touring Asian countries, over the last few weeks President Obama has dedicated portions of his addresses and speeches in the United States to talking about the TPP. Whether it was last week to a progressive political action committee or on his weekly radio address, President Obama has made it clear that TPP is a front and center issue.[footnoteRef:13] [12: http://blogs.wsj.com/economics/2015/02/05/love-or-hate-trade-deals-theres-ammunition-in-widening-u-s-trade-deficit/ ] [13: http://www.stuff.co.nz/world/americas/68078422/transpacific-partnership-president-obama-shifts-his-pitch-on-huge-trade-deal ]

TPP has also become a topic of interest to non-U.S countries such as Japan and China. In an April 29th address to a joint meeting of Congressmen and Congresswomen (the first ever by a Japanese Prime Minister) Japanese Prime Minister Shinzo Abe made an appeal to Congress to back a TPP with Japan and 10 other nations to help Japan open up its agriculture and auto markets to American.[footnoteRef:14] In addition to noting the trade opportunities, Japan is also keenly interested in this agreement to help secure the United States as a trusted ally and strategic partner. While Japan has always had concerns about China, recently, Chinas stance over disputed airspace and islands has caused even more reason for concern. The Japanese and U.S. see part of this deal as a way to strengthen ties amongst countries that want to keep China in check. [14: http://www.nytimes.com/2015/04/30/us/politics/shinzo-abe-japan-trade-accord-speech-to-congress.html ]

While the Chinese are not a part of the TPP talks, they had initial concerns with what this would mean for their country when the talks began in 2013. Since then, their stance has softened, even to the point where some of its government members, such as Vice Finance Minister Zhu Guangyao have gone as far as to say that a pact would be incomplete without including China,[footnoteRef:15] and hinted that China might want to participate someday. [15: http://mobile.nytimes.com/2015/04/29/business/international/once-concerned-china-is-quiet-about-trans-pacific-trade-deal.html?referrer ]

Finally, as President Obama moves the TPP up on his priority list Congress has begun discussing whether or not to provide Obama with Trade Promotion Authority (T.P.A) Passing TPA would allow President Obama fast track authority to authorize trade deals, and ensure Japan that it cannot face a situation where its best offer is accepted by international negotiators, only to be amended by Congress.[footnoteRef:16] [16: http://mobile.nytimes.com/2015/04/29/business/international/once-concerned-china-is-quiet-about-trans-pacific-trade-deal.html?referrer ]

KEY CHALLENGES AND CONCERNS

While talks for passing a TPP heat up, there still remain considerable challenges and concerns that could derail future progress. First, President Obama faces significant challenges in getting this deal through, even within his own democratic party. Many Democrats are concerned trade deals have hurt U.S. jobs and have given foreign countries an advantage because they play to a different set of rules. Recently, big name democrats such as Hillary Clinton have shown caution and concern[footnoteRef:17] about passing a trade deal while Elizabeth Warren recently penned an editorial in the Washington Post highlighting her concerns for the TPP. [footnoteRef:18] [17: http://www.stuff.co.nz/world/americas/68078422/transpacific-partnership-president-obama-shifts-his-pitch-on-huge-trade-deal ] [18: http://www.washingtonpost.com/opinions/kill-the-dispute-settlement-language-in-the-trans-pacific-partnership/2015/02/25/ec7705a2-bd1e-11e4-b274-e5209a3bc9a9_story.html ]

Another challenge President Obama faces is being able to connect this to the United States, and specifically, the average middle class American. Initially, much of the rhetoric around a TPP deal stemmed from geopolitical reasons, and while those have won over some people, others, especially politicians, whose support Obama needs to pass this through, have drawn some concerns over how this connects to everyday Americans. As Senator Chuck Schumer (D-NY) said, When the administration sells me on this, its all geopolitics, not economics: I agree with that. But I need to be sold on the economics. [footnoteRef:19] [19: http://www.nytimes.com/2015/04/30/us/politics/shinzo-abe-japan-trade-accord-speech-to-congress.html ]

Another major concern around the TPP stems from who stands to benefit from the passing of such agreement. While those in support of the agreement (from the US and other countries) like to talk about the economic benefits and the geopolitical benefits, there are major concerns that special interest groups, big business and lobbyists will significantly benefit from these agreements in the process. Its expected that parts of the Final TPP will include provisions around things like intellectual property of digital content, and patent protections for pharmaceutical drugs, both industries with strong ties to special interest groups, lobbyists and big business. While its clear how a big pharmaceutical company would benefit from a longer patent protection, its less clear as to how that would benefit the average American.

While the passing of a TPP has challenges for the United States, it also presents challenges for other countries involved in the deal such as Japan. In general, the lack of specificity around concessions around core issues presents pause for concern, either if or if not this passes. During the negotiations, there has been a strong push for Japan to make a stronger statement acknowledging and denouncing some of their past transgressions and inhumane actions by the Japanese during World War II around the sexual enslavement of Korean women. While Prime Minister Abo has acknowledged that Japan must not avert its eyes from the past, he has yet to offer specific details or comments, and many are concerned that he wont honor his word in making these statements.[footnoteRef:20] If Japan refuses to make concessions in this area, it could potentially hold up an agreement from being pushed through. Another potential concern is the tariffs that Japan places on American products. Rep. Paul Ryan (R-Wisconsin) pointed out that Japan lays significant tariffs on American foodstuffs and autos, some of which can exceed 700%.[footnoteRef:21] While Japan has lobbied hard to be a part of the TPP, it hasnt presented specifics as to how they would rectify these tariffs, which clearly have implications for U.S. manufacturers and producers. If Japan does not make concessions and this passes, the trade deficit will continue to be a challenge for the United States. [20: http://www.nytimes.com/2015/04/30/us/politics/shinzo-abe-japan-trade-accord-speech-to-congress.html ] [21: http://www.washingtonpost.com/blogs/plum-line/wp/2015/04/27/is-tpp-trade-deal-a-massive-giveaway-to-major-corporations-an-exchange-between-obama-and-sherrod-brown/]

CONCLUSION

This makes up the case for and against the Regional Affinity (Free Trade) Agreements. Advocates of worldwidefree trade are generally opposed to trading blocs, which, they argue, encourage regional as opposed to global free trade.Scholars and economists continue to debate whether regional trade blocs are leading to a more fragmented world economy or encouraging the extension of the existing globalmultilateraltrading system. While rest think that despite the variations across sectors and regions these agreements do promote cooperative growth and development of the larger society in the long run.

Appendix

Exhibit A: GDP growth in the NAFTA nations*

Exhibit B: Imports and Exports USA from Canada and Mexico (2003)

Exhibit C: Drop in US manufacturing jobs

Exhibit D: EU-FTA deals and negotiations

Exhibit E: Trade Imbalance (WSJ)

Exhibit F: TPP Impact (WSJ)

References

Regional Affinity Agreements:1. http://encyclopedia2.thefreedictionary.com/Regional+Agreements 2. http://en.wikipedia.org/wiki/Regional_integration3. http://en.wikipedia.org/wiki/Trade_blocAFTA:1. http://siteresources.worldbank.org/INTGEP2005/Resources/GEP107053_Ch03.pdf2. http://www.aseanbriefing.com/news/2014/02/13/understanding-aseans-free-trade-agreements.html3. http://www.business-in-asia.com/asia_freetrade.htmlNAFTA:1. http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement2. *http://www.bloomberg.com/bw/articles/2013-12-30/nafta-20-years-after-neither-miracle-nor-disasterEU:1. http://en.wikipedia.org/wiki/European_Union_free_trade_agreements2. http://en.wikipedia.org/wiki/Free_trade_areaCompany and Industry Spotlight:1. http://bridgemi.com/2014/09/twenty-years-after-nafta-a-mini-detroit-rises-in-mexico/2. http://geo-mexico.com/?p=83953. http://www.statista.com/statistics/316786/global-market-share-of-the-leading-automakers/4. http://www.census.gov/econ/index.html5. http://www.gbm.scotiabank.com/English/bns_econ/bns_auto.pdf