Embed Size (px)
Citation preview
Economic Integration
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 17Chapter 17
17-2
Learning Objectives
Differentiate among the four basic levels of economic integration.
Identify the static and dynamic effects of economic integration.
Analyze the real-world impact of economic integration on countries in the EU and NAFTA.
Summarize current economic integration efforts in the world.
17-3
Economic Integration
Economic integration occurs when two or more countries come together for purposes of trade and/or economic coordination.
Greater integration may yield additional benefits, but it may also involve giving up increasing sovereignty.
17-4
4 Types of Integration
Free Trade Areas (FTAs) Customs Unions (CUs) Common Markets Economic and/or Monetary Union
17-5
Free Trade Areas
Members remove tariffs and other trade barriers on each other.
Each member maintains its own tariff structure for non-members.
Possible problem: transshipment Example: NAFTA
17-6
Customs Unions
Tariffs between members are eliminated (just like a FTA), but also:• members agree to a common set of
external tariffs and other trade barriers, and
• members speak with one voice in external trade negotiations.
Example: Southern African Customs Union (SACU)
17-7
Common Markets Tariffs between members are
eliminated, a common external tariff is established (all of the features of CUs) plus free movement of labor and capital.
Example: European Community (1957 – 1993)
17-8
Economic and/or Monetary Union
Similar to a common market:• Tariffs between members are
eliminated.• A common external tariff is
established.• Factors can move freely between
member countries. But economic policy is coordinated by a
supranational institution in the economic and/or monetary union.
17-9
Welfare Effects of Integration: Static Issues
Jacob Viner argued that integration leads to two welfare effects:• trade creation: increases a country’s
welfare• trade diversion: decreases a
country’s welfare Whether economic integration is
welfare-enhancing depends on which effect is larger.
17-10
Trade Creation and Trade Diversion: An Example
Suppose we have three countries: Uganda, Sudan, and Kenya.
Initially, Uganda imports textiles and applies a 50% tariff to textiles from both Sudan and Kenya.
Suppose that Sudan is able to produce a unit of textiles for $1, whereas it costs Kenyan producers $1.20 per unit.
Trade Creation and Trade Diversion: An Example
ProductionCosts
Price with50% Tariff
Sudan $1.00 $1.50
Kenya $1.20 $1.80
17-11
17-12
Trade Creation and Trade Diversion: An Example
Prior to integration, Uganda imports from the most efficient supplier, Sudan.
Suppose now that Uganda enters into a free trade agreement with Kenya, but not Sudan.
That is, Sudanese textile imports are dutiable, but Kenya textiles can enter duty-free.
Trade Creation and Trade Diversion: An Example
ProductionCosts
Price with50% Tariff
Price withFTA
Sudan $1.00 $1.50 $1.50
Kenya $1.20 $1.80 $1.20
17-13
17-14
Trade Creation and Trade Diversion: An Example
Notice that Uganda will now import from Kenya, although Sudan is the more efficient producer.
Uganda loses tariff revenue, but reverses some of the deadweight loss caused by the protectionism.
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00
PS rises as a result of initialprotection.
17-15
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00
CS falls as a resultof the initial protection.
17-16
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00
Revenue rises as a resultof the initial protection.
17-17
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00
Welfare declinesoverall by the DWLtriangles.
17-18
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00FTA price$1.20
With FTA, CS rises.
17-19
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00FTA price$1.20
With FTA, PS falls.
17-20
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00FTA price$1.20
With FTA, revenue falls.
17-21
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00FTA price$1.20
Lost revenue transferred back to domestic consumers
Lost revenue not transferred back to domestic consumers
17-22
Trade Creation and Trade Diversion: An Example
D
P
Q
S
Tariff price$1.50
160 200
Free trade price$1.00FTA price$1.20
Overall, we must compare the gain in welfare (trade creation) with the lost revenue (trade diversion).
trade creation
trade diversion
17-23
17-24
Trade Creation and Trade Diversion
When is it likely that trade diversion outweighs trade creation?• When the excluded countries are
much more efficient than the included countries.
• When there are only a few members of the FTA (consider a global FTA: there would be no trade diversion because no country would be excluded).
17-25
Dynamic Welfare Effects
In the long run, integration may increase a country’s welfare because:• increased competition may occur, leading
to lower prices,• larger markets may allow economies of
scale to be realized,• more investment may be attracted, and• increased factor mobility may lead to
greater efficiency.
17-26
The European Community: A Brief History
1951: France, Italy, West Germany, and Benelux countries form European Coal and Steel Community.
1958: ECSC expanded to all products; name changed to European Economic Community (EEC).
17-27
The European Community: A Brief History
Other countries joined over the years:• 1973: Denmark, Ireland, U.K.• 1981: Greece• 1986: Portugal and Spain• 1995: Austria, Finland, Sweden• Recent additions: Bulgaria, Cyprus, Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia
17-28
EC 92
During the 1980s, there were still various and sundry barriers to trade between member countries.
1985: Single European Act (commonly called EC 92): elimination of all barriers to the flow of goods, services, people, and capital by 1992.
It wasn’t 1992, but it eventually happened.
17-29
Further Integration: Monetary Union
1999 • Accounts could be stated in terms of
euros, but member countries’ currencies remained legal tender.
• Each members’ exchange rate was fixed in terms of euros.
• Monetary policy was made by the ESCB; each member no longer controlled its own money supply.
17-30
Further Integration: Monetary Union
2002• In January, euro notes and coins
were issued by the ECB.• In July, national currencies were
withdrawn. Members: Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal, San Marino, Slovenia, Spain, and the Vatican
17-31
NAFTA
On January 1, 1994 the North American Free Trade Agreement came into being.
It allows for a dismantling of trade barriers between Canada, Mexico, and the U.S.
It created a market comparable in size to the EU and EFTA combined.
17-32
NAFTA: Some Provisions
Many tariffs were eliminated immediately; others will be phased out over 5, 10, or 15 years.
Restrictions on trade in services (esp. banking) phased out.
All U.S. environmental standards will remain in force.
17-33
Worries Over NAFTA GDP
• Most studies estimate a sizeable increase in Mexican GDP, with more modest (but positive) effects on Canadian and U.S. GDP.
Employment• There were some dire forecasts of job loss, but
U.S. employment has risen.
Wages• NAFTA has shifted low-skill employment to
Mexico.• U.S. wages have continued to grow.
17-34
Worries Over NAFTA There have also been concerns about
• environmental degradation, and• Mexico’s lower labor standards.
17-35
Recent Discussions of NAFTA
In the 2008 presidential campaign, both Hillary Clinton and Barack Obama called for revisions to NAFTA.
However, it appears the Obama administration plans to move forward with new free trade agreements.
17-36
Other Major Economic Integration Efforts
MERCOSUR U.S.-Central America Free Trade
Agreement – Dominican Republic (CAFTA-DR)
Free Trade Area for the Americas (FTAA) Chilean trade agreements Asia-Pacific Economic Cooperation
(APEC)
