Forms of Trade Cooperation
Economic Integration
s Free
s Mutual
trade benefits
s Geographical proximity - common
history, interests, and culture
s Ideology
s Similar levels of economic development
Trade Area - no tariff among
members e.g. NAFTA, EFTA
s Customs Union - no barriers among
members & a common external tariff
s Common Market - Tariff policy of CU +
elimination of restrictions on factors of
production
s Economic Union - CM policies +
harmonization of national monetary &
fiscal policies
s Political Union - Unification of countries
Level of Economic Integration
Case for Regional Integration
Political Union
Economic Union
s
Common Market
Customs Union
EU
1992
Free
Free
Trade
Trade Leve
lo
Area
f
Area
NAFTA
Int
e
gra
t
ion
Figure 8.2
Economic
– Allow countries to
specialize in products they
produce efficiently.
– Easier to gain agreement
than GATT/WTO.
– Role of FDI is enhanced.
– Exploit gains from free
flow of goods and services
and investment.
s
Political
– Creates incentive for
political cooperation.
u
Reduces potential for
violent confrontation.
– Enhanced clout to deal
with ‘superpowers’.
1
Economic Effects of Integration
s Resource
flow to efficient producers
s Firms achieve economies of scale of not
only in production but marketing, R&D,
and purchasing
s Competition intensifies as new players
enter industry
s Countries have greater clout & politically
stronger than if they go alone
s Net effect = trade creation - trade
diversion
Problems of Trade Integration
s Extent
of trade creation vs. trade
diversion
– trade creation occurs when high cost
domestic producers are replaced by low
cost producers with the free trade area
– trade diversion occurs when lower cost
external suppliers are replaced by higher
cost suppliers within free trade area
s Nationalism
- policy differences among
countries
s Presence of non-tariff barriers
Andean PACT
ANCOM: Andean Pact
s Bolivia,
Colombia, Ecuador, Peru, Venezuela
Agreement, 1969. One of oldest
still in existence.
s Nearly failed. Rejuvenated in 1990 in the
Galápagos Declaration.
s Cartagana
– Changed from FTA to customs union in 1992.
s Still
has many political and economic
problems.
2
Mercosur
The Mercosur
s 1988:
Argentina, Brazil. 1990: Paraguay,
Uruguay
s 1995: Agreed to move toward a full customs
union.
s Trade quadrupled between 1990-1998.
s Has significant trade diversion issues.
– Yeats Report.
s Economic
problems, first in Brazil (1999),
then in Argentina (2001) has put plans for the
customs union on hold.
Other Hemisphere Associations
s Central
American Common Market
– 1960s: Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua.
– Collapsed in 1969.
s CARICOM
– 1973: English-speaking Caribbean countries.
– 191: Failed for third time to establish common
external tariff.
s Free
Trade Area of the Americas
– 1998: 34 heads of state met in Santiago, Chile
and inaugurated talks to create a FTAA by 2005.
3
Regional Trade Blocs in Africa
s9
ASEAN
trade blocs on the continent.
– Many countries are members of more than
one group.
s Progress
has been slow.
– Political turmoil.
– Deep suspicion of free trade.
u Less
developed, less diversified economies need
“protection”.
Association of Southeast Asian
Nations
s Created
in 1967.
political and social
cooperation.
s Economic,
– Little has been accomplished.
s Brunei,
Indonesia, Laos, Malaysia, the
Philippines, Myanmar, Singapore,
Thailand and Vietnam.
4
Asia Pacific Economic
Cooperation
s Founded
in 1990 to ‘promote open trade
and practical economic cooperation’.
–
–
–
–
‘Promote a sense of community.’
18 members.
50% of world’s GNP.
40% of global trade.
s Brookings
Institution: APEC “is in danger
of shrinking into irrelevance as a serious
forum.”
EU Evolution
s Product
of two political factors:
– Devastation of WWI and WWII and desire
for peace.
– Desire for European nations to hold their
own, politically and economically, on the
world stage.
s 1951
- European Coal and Steel
Community.
s 1957- Treaty of Rome establishes the
European Community.
s 1994 - Treaty of Maastricht changes name
to the European Union.
European Union - Institutions
s European
Commission
– executive arm of the EC
s Council
of Ministers
– decision making body
s European
Parliament
– consultative not legislative role
s Court
of Justice
– interprets EC treaties & directives
5
EU Governance
European Commission
European Council
Heads
of of
State
Heads
State
and
and
Commission
Commission
President
President
Resolves policy
issues sets
policy direction.
2020
Commissioners
Commissioners
appointed
byby
appointed
members
forfor
members
4 year
terms
4 year
terms
EU - 1992
Proposing,
implementing,
monitoring
legislation.
Council of Ministers
European Parliament
1 1
representative
representative
from
each
from
each
member
member
Ultimate controlling authority.
No EU laws w/o approval.
Court of Justice
Propose amendments to
630
directly
630
directly
legislation, veto power
elected
members
elected
members over budget and singlemarket legislation,
appoint commissioners.
1 1judge
judgefrom
from
each
eachcountry
country
Hears
appeals of
EU Laws.
s Poor
performance, high inflation &
absence of an integrated European
market gave rise to 1985 white paper
s The European Act (1987)
– Physical Barriers
– Technical Barriers
– Fiscal Barriers
Specific Acts.
s Eliminate
Border Controls
– 1988 Single Administration Act.
s Standardization
– more than 100,000 regulations
– 1992 Mutual Recognition Principle products lawfully produced or marketed in
1EU country will have access to all EU
member states
Specific Acts (cont.)
s National
Procurement
– Public procurement 15% of EU GDP
– open bidding in 4 previously closed
strategic sectors: telecommunications,
transport, energy, & water supply
s VAT
Harmonization
– 2 tier 4-9% basic necessity goods
– 14-20% on standard goods
6
Treaty on European Union
s Signed
in Maastricht February 1992
s Main provisions
– common currency by 1999
– common European passport
– cooperation in fields of justice
– cooperation on visa policy, environmental
protection, and consumer protection
The Euro
s
Treaty of Maastricht:
– 11 of 15 member
states.
– Jan. 1, 1999 Exchange rates locked
in.
– Jan. 1, 2002 - Euro
notes and coins
issued.
– National currencies
taken out of
circulation.
Costs of the Euro
lose monetary policy control.
– European Central Bank controls policy for
the “Euro zone”.
s EU is not an”optimal currency area”.
– Country economies are different.
s Early experience has seen a slump
(approximately 20% through 2001) against the
dollar.
s
Benefits:
– Savings from using only one
currency.
– Easy to compare prices,
resulting in lower prices.
– Forces companies to be more
efficient and cut costs.
– Creates liquid pan-Europe
capital market.
– Increases range of
investments for individuals
and institutions.
EU Issues
s Countries
s Enlargement.
s Fortress
Europe?
– Create European barriers to trade from the
outside?
– EU promises to support GATT and the WTO.
– No guarantees, however.
– Too early to judge whether the Euro is/is not a
success.
7
Depression
– US stock market collapse
– Smoot-Hawley Act (1930)
US had positive trade balance with world
u Act imposes tariffs to protect U.S. firms.
u Foreign response was to impose own barriers
u US exports tumbled
u
– Labor-intensive industries
move to Mexico.
– Mexico gets investment
and employment.
– Increased Mexican income to
buy US/Canada goods.
– Demand for goods increases
jobs.
– Consumers get lower prices.
Loss of jobs to Mexico.
Mexican firms have to
compete against efficient
US/Canada firms.
– Mexican firms become
more efficient.
s
s
Environmental
degradation.
Loss of national
sovereignty.
Impact of NAFTA
has been muted.
Small trade and jobs gain
for US.
Regional Trade Agreements Notified to
GATT and the WTO, 1948-1999
25
25
20
20
15
15
Active,
Active,Dec
Dec99
99
Inactive,
Inactive,Dec
Dec99
99
10
10
55
00
Figure 8.1
1993
1993
s Great
Enlarged and productive
regional base.
1983
1983
World War I to World War II
1918 - 1939
s
s
1973
1973
Protect
intellectual
property Remove FDI
restrictions
Apply
national
Two commissions
environmental
to enforce treaty
standards
s
For
1963
1963
Abolish
tariffs
Remove
cross-border
flow of
services
Against
1948
1948
Jan. 1, 1994
NAFTA: For/Against
NAFTA
8
GATT/WTO - Principles
GATT/WTO
s Most
s Created
in 1947 by 23 countries; 117
members by 1993
s Impetus - Smoot Hawley tariff by U.S.
reduced world trade by 67%
s Purpose of GATT
s Promote free trade and reduce barriers
to trade worldwide
GATT Negotiating Rounds
s Geneva
1947
s Annecy 1949
s Torquay 1950-51
s Geneva 1956
s Dillon
1960-62
s Kennedy 1964-67
s Tokyo
1973-79
s Uruguay 1986-94
23
13
38
26
45
62
99
117
%
Annual Growth Under
GATT
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
Favored Nation (MFN) status
– a tariff granted to one member has to be
given to all other members
s Principle
of National Treatment
– foreign firms subject to the same rules &
regulations as a country’s domestic firm; no
discrimination of foreign firms
s Consensus
Principle
– trade disputes to be settled by unanimous
agreement of all parties involved in dispute
GATT Rounds of Talks
s 1949
Annecy Round
Torquay Round
s 1956 Geneva Round
s 1961-62 Dillon Round
s 1964-67 Kennedy Round
s 1973-79 Tokyo Round
s Reduced tariff barriers from an average
of 40% in 1940 to 5% in 1980 in mfg.
industries
s 1950-51
1953-63
1963-73
World Trade
World Income
9
Average Reduction in US Tariff
Rates 1947 - 85
1980-1993: Disturbing Trends
120
Index
Pre-Geneva
Tariff = 100
100
s Pressures
80
60
u
40
u
20
yo
World’s second largest economy.
World’s largest exporter.
– The U.S.’s persistent trade deficit.
– Many countries had found ways to avoid GATT
restrictions.
To
k
ed
y
ill
on
K
en
n
D
ay
en
ev
a
G
To
rq
u
nn
ec
y
A
en
ev
a
G
Pr
eG
en
ev
a
0
GATT Negotiating Rounds
WTO 1994 Accord Highlights
s Uruguay
for greater protectionism:
– Japan’s economic success.
Round 1986-1993
s Tariffs - phased out and eventually
eliminated on 85% of the world trade
s Agriculture - farm subsidies to be cut by
an average of 36%
s Intellectual Property - extend GATT
rules to all intellectual property
s Textiles - quotas under Multi-Fiber
Agreement phased out in 10 years
WTO 1994 Accord Highlights
s Dumping
- prevented by the use or
threat of use of countervailing duties
s Trade-Related Investment Measures
(TRIMS) - prevents local content
requirements and trade balancing
requirements imposed on foreign firms
s Voluntary Export Restraints - prohibited
s Service industries covered under GATT
provisions under separate agreement
s Dispute Resolution - binding
10
WTO
s
s
s
141 members (China) and 28 candidates.
Between 1995 and 2000, 213 disputes brought before
the WTO.
Significant victories:
– Telecommunications
u
u
68 countries (90%) of world
revenues
Pledged to open their markets
competition
telecommunications
to fair
– Financial Services
u
u
95% of financial services market
102 countries will open, to varying
markets.
degrees, their
11