ECON3315ECON3315International Economic IssuesInternational Economic Issues

Instructor: Patrick M. CrowleyInstructor: Patrick M. Crowley

Issue 7: Preferential trading areas: NAFTA and the EU

OverviewOverview

Balassa’s steps of economic integrationBalassa’s steps of economic integration Integration in practice: NAFTA, the EU, and other Integration in practice: NAFTA, the EU, and other

regional integration projectsregional integration projects NAFTANAFTA The EUThe EU

Balassa’s steps of regional economic Balassa’s steps of regional economic integrationintegration

Bela Belassa (1963) first came up with steps for countries to be more economically integrated

Steps are as follows:i) Free tradeii) Customs unioniii) Common marketiv) Economic unionv) Monetary unionvi) Fiscal unionvii) 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 integrationExamples of different stages of integration•Level of integration •Description •Characteristics •Examples

•0 •Regional autarky • - bilateral trade agreements

•Japan (before ASEAN)

•A •FTA • - tariffs and quotas removed internally• - national tariffs retained against outside

•NAFTA

•B •Customs union • - tariffs and quotas removed internally• - 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 integrationExamples of different stages of integration

Integration in practiceIntegration in practice

Many examples of regional economic integration Many examples of regional economic integration around the world:around the world:

North America – CUFTA and NAFTANorth America – CUFTA and NAFTAEurope – EU, EFTA, BAFTA, CEFTAEurope – EU, EFTA, BAFTA, CEFTACaribbean – CARICOMCaribbean – CARICOMCentral and South America – Mercosur, SELA, CANCentral and South America – Mercosur, SELA, CANAfrica – AU, SACU, COMESA, WAEMUAfrica – AU, SACU, COMESA, WAEMUAsia – ASEAN, AFTAAsia – ASEAN, AFTAAustralasia – ANZFTAAustralasia – ANZFTA - see - see http://www.wto.org/english/tratop_e/region_e/region_e.htmhttp://www.wto.org/english/tratop_e/region_e/region_e.htm for for

moremore

Welfare effects of FTA vs CUWelfare effects of FTA vs CU

NAFTANAFTA Grew out of CUFTA – idea was to extend to Mexico, Grew out of CUFTA – idea was to extend to Mexico,

but whole new agreement happenedbut whole new agreement happened Basically a free trade area, but with side Basically a free trade area, but with side

agreements on labor standards, environment, and agreements on labor standards, environment, and migration of professionalsmigration of professionals

““Rules of origin” allow for duty free trade as long Rules of origin” allow for duty free trade as long as 62.5% of value added within NAFTAas 62.5% of value added within NAFTA

Environmental commission set up in Montreal to Environmental commission set up in Montreal to oversee complaints about environmental oversee complaints about environmental degradationdegradation

““Snap-back” provision allows for tariffs to be Snap-back” provision allows for tariffs to be restored if surge of imports threatens domestic restored if surge of imports threatens domestic industryindustry

Trade dispute mechanism consists of 3 experts – Trade dispute mechanism consists of 3 experts – usually resolves disputes amicably – exceptions usually resolves disputes amicably – exceptions though (e.g. softwood lumber)though (e.g. softwood lumber)

NAFTANAFTA

Maquiladora programMaquiladora program US boom of the 90s benefited maquiladoras, but US boom of the 90s benefited maquiladoras, but

China’s entry into the WTO has eroded China’s entry into the WTO has eroded competitiveness of plants, with many closingcompetitiveness of plants, with many closing

Critics say that although trade has increased, Critics say that although trade has increased, Mexican real wages in manufacturing have fallen, Mexican real wages in manufacturing have fallen, and also environmental degradation evidentand also environmental degradation evident

Difficult to say if NAFTA has had large effects, as Difficult to say if NAFTA has had large effects, as phased in over 10 years, and also lots of other phased in over 10 years, and also lots of other events happeningevents happening

Impact clearly much greater on Canada and Mexico Impact clearly much greater on Canada and Mexico than on the USthan on the US

EUEU

Originally formed as a customs union for steel and Originally formed as a customs union for steel and coal (Treaty of Rome 1958)coal (Treaty of Rome 1958)

Grew into EEC – customs unionGrew into EEC – customs union Then EC – common market (Single Market 1992)Then EC – common market (Single Market 1992) Then EU – economic union and some political Then EU – economic union and some political

pooling of sovereignty (European Parliament)pooling of sovereignty (European Parliament) Now EMU, which also involves monetary union Now EMU, which also involves monetary union

(euro) (Treaty of Maastricht, 1991)(euro) (Treaty of Maastricht, 1991) Big debate in 90s surrounded widening vs Big debate in 90s surrounded widening vs

deepeningdeepening Now 27 member states, with EMU adopted by only Now 27 member states, with EMU adopted by only

13 member states13 member states Switzerland and Norway do not want to join, and Switzerland and Norway do not want to join, and

France has effectively stopped Turkey from joiningFrance has effectively stopped Turkey from joining

EUEU

Trade creation significantTrade creation significant Trade diversion also present, although size Trade diversion also present, although size

differs depending on studydiffers depending on study EMU is thought to have increased trade EMU is thought to have increased trade

significantly, although estimates vary widelysignificantly, although estimates vary widely Growth and Stability pact has “coordinated” Growth and Stability pact has “coordinated”

fiscal policyfiscal policy Commission acts as civil service but can Commission acts as civil service but can

also impose finesalso impose fines European Council decides on major issuesEuropean Council decides on major issues

EMU timelineEMU timeline

ERM of the EMS (79)ERM of the EMS (79) Delors report (89)Delors report (89) Treaty of Maastricht (91)Treaty of Maastricht (91) Currency crisis (92-93)Currency crisis (92-93) Euro introduced and Euro introduced and

exchange rates fixed exchange rates fixed (99)(99)

Money euro introduced Money euro introduced (02)(02)

Greece added (04)Greece added (04) Slovenia added (07)Slovenia added (07) Cyprus and Malta added Cyprus and Malta added

(08)(08) Slovakia added (09)Slovakia added (09)