Chapter 5
ECONOMIC INTEGRATION AMONG COUNTRIES
Introduction
The module provides insight into the basic theories underlying customs
union and economic and monetary union, and of the rationale for, and strengths
and weaknesses of, policy intervention at the EU level. It introduces the economic
rationale for the existence of the EU, the working of some of its main policy areas,
and a critique and assessment of developments to date
The emphasis throughout is on the development of appropriate economic theories
and their application in the specific context of the regional integration in Europe.
The nature of economic integration is such that the module involves a broad
coverage of both microeconomics and macroeconomics, often involving applied
issues and analysis going beyond that covered in more theory focussed modules.
At the end of the chapter the students can
1.
Defines the types of international economic integration by understanding
the purpose and significance of international organizations.
2.
Explains the international organizations with economic and social
objectives in the United Nations and this system
3.
Explains organizations operating in the area of international monetary,
trade and development at the global level and evaluates the activities of these
organizations.
4.
Explains regional economic integration organizations and compares
them.
5.
explains the aims and activities of regional development banks
Definitions of economic integration
Pre-discusison
1
The course provides a mix of theory, empirical evidence, legal and
institutional detail. Students will be able to know structure of legal acts establishing
integration blocs, analyze preconditions and effects of trade and monetary
integration, know about modern trends in economic integration.
At the end of the lesson, the students can;
1. Discuss regional economic integration; and
2. Identify the major regional economic areas of cooperation.
Economic integration is the unification of economic policies between
different states, through the partial or full abolition of tariff and non- tariff restrictions
on trade.
The trade-stimulation effects intended by means of economic integration
are part of the contemporary economic Theory of the Second Best: where, in
theory, the best option is free trade, with free competition and no trade barriers
whatsoever. Free trade is treated as an idealistic option, and although realized
within certain developed states, economic integration has been thought of as the
"second best" option for global trade where barriers to full free trade exist.
Economic integration is meant in turn to lead to lower prices for distributors and
consumers with the goal of increasing the level of welfare, while leading to an
increase of economic productivity of the states.
There are four main types of regional economic integration.
1. Free trade area. This is the most basic form of economic cooperation.
Member countries remove all barriers to trade between themselves but are
free to independently determine trade policies with nonmember nations. An
example is the North American Free Trade Agreement (NAFTA).
2. Customs union. This type provides for economic cooperation as in a freetrade zone. Barriers to trade are removed between member countries. The
primary difference from the free trade area is that members agree to treat
trade with nonmember countries in a similar manner.1
3. Common market. This type allows for the creation of economically
integrated markets between member countries. Trade barriers are
removed, as are any restrictions on the movement of labor and capital
between member countries. Like customs unions, there is a common trade
policy for trade with nonmember nations. The primary advantage to workers
is that they no longer need a visa or work permit to work in another member
country of a common market. An example is the Common Market for
Eastern and Southern Africa (COMESA).2
4. Economic union. This type is created when countries enter into an2
economic agreement to remove barriers to trade and adopt common
economic policies. An example is the European Union (EU).3
Pros
The pros of creating regional agreements include the following:
1. Trade creation. These agreements create more opportunities for countries
to trade with one another by removing the barriers to trade and investment.
Due to a reduction or removal of tariffs, cooperation results in cheaper prices
for consumers in the bloc countries. Studies indicate that regional economic
integration significantly contributes to the relatively high growth rates in the
less-developed countries.
2. Employment opportunities. By removing restrictions on labor movement,
economic integration can help expand job opportunities.
3. Consensus and cooperation. Member nations may find it easier to agree
with smaller numbers of countries. Regional understanding and similarities may
also facilitate closer political cooperation.
Cons
The cons involved in creating regional agreements include the following:
1. Trade diversion. The flip side to trade creation is trade diversion. Member
countries may trade more with each other than with nonmember nations. This
may mean increased trade with a less efficient or more expensive producer
because it is in a member country. In this sense, weaker companies can be
protected inadvertently with the bloc agreement acting as a trade barrier. In
essence, regional agreements have formed new trade barriers with countries
outside of the trading bloc.
2. Employment shifts and reductions. Countries may move production to
cheaper labor markets in member countries. Similarly, workers may move to
gain access to better jobs and wages. Sudden shifts in employment can tax the
resources of member countries.
3. Loss of national sovereignty. With each new round of discussions and
agreements within a regional bloc, nations may find that they have to give up
more of their political and economic rights. In the opening case study, you
learned how the economic crisis in Greece is threatening not only the EU in
general but also the rights of Greece and other member nations to determine
their own domestic economic policies.
North America: NAFTA
Brief History and Purpose
The North American Free Trade Agreement (NAFTA) came into
3
being during a period when free trade and trading blocs were popular and
positively perceived. In 1988, the United States and Canada signed the Canada–
United States Free Trade Agreement. Shortly after it was approved and
implemented, the United States started to negotiate a similar agreement with
Mexico. When Canada asked to be party to any negotiations to preserve its rights
under the most-favored-nation clause (MFN), the negotiations began for NAFTA,
which was finally signed in 1992 and implemented in 1994.
The goal of NAFTA has been to encourage trade between Canada, the
United States, and Mexico. By reducing tariffs and trade barriers, the countries
hope to create a free-trade zone where companies can benefit from the transfer of
goods. In the 1980s, Mexico had tariffs as high as 100 percent on select goods.
Over the first decade of the agreement, almost all tariffs between Mexico, Canada,
and the United States were phased out.
The rules governing origin of content are key to NAFTA. As a free trade
agreement, the member countries can establish their own trading rules for
nonmember countries. NAFTA’s rules ensure that a foreign exporter won’t just ship
to the NAFTA country with the lowest tariff for nonmember countries. NAFTA rules
require that at least 50 percent of the net cost of most products must come from or
be incurred in the NAFTA region. There are higher requirements for footwear and
cars. For example, this origin of content rule has ensured that cheap Asian
manufacturers wouldn’t negotiate lower tariffs with one NAFTA country, such as
Mexico, and dump cheap products into Canada and the United States. Mexican
maquiladoras have fared well in this arrangement by being the final production stop
before entering the United States or Canada. Maquiladoras are production facilities
located in border towns in Mexico that take imported materials and produce the
finished good for export, primarily to Canada or the United States.
Europe: EU
Brief History and Purpose
The European Union (EU) is the most integrated form of economic
cooperation. As you learned in the opening case study, the EU originally began in
1950 to end the frequent wars between neighboring countries in the Europe. The
six founding nations were
France, West Germany,
Italy,
and the Benelux
countries (Belgium, Luxembourg, and the Netherlands), all of which signed a treaty
to run their coal and steel industries under a common management. The focus was
on the development of the coal and steel industries for peaceful purposes.
In 1957, the six nations signed the Treaty of Rome, which established the
European Economic Community (EEC) and created a common market between
the members. Over the next fifty years, the EEC added nine more members and
changed its name twice—to European Community (EC) in the 1970s and the
European Union (EU) in 1993.18
4
The entire history of the transformation of the EEC to the EU has been an
evolutionary process. However, the Treaty of Matriarchs in 1993 stands out as an
important moment; it’s when the real economic union was created. With this treaty,
the EU identified three aims. The first was to establish a single, common currency,
which went into effect in 1999. The second was to set up monetary and fiscal
targets for member countries. Third, the treaty called for a political union, which
would include the development of a common foreign and defense policy and
common citizenship. The opening case study addressed some of the current
challenges the EU is facing as a result of the impact of these aims. Despite the
challenges, the EU is likely to endure given its historic legacy. Furthermore, a
primary goal for the development of the EU was that Europeans realized that they
needed a larger trading platform to compete against the US and the emerging
markets of China and India. Individually, the European countries would never have
the economic power they now have collectively as the EU.
Today, the EU has twenty-seven member countries. Croatia, Iceland,
Macedonia, and Turkey are the next set of candidates for future membership. In
2009, the twenty-seven EU countries signed the Treaty of Lisbon, which amends
the previous treaties. It is designed to make the EU more democratic, efficient, and
transparent and to tackle global challenges, such as climate change, security, and
sustainable development.
The European Economic Area (EEA) was established on January 1,
1994, following an agreement between the member states of the European Free
Trade Association (EFTA) and the EC (later the EU). Specifically, it has allowed
Iceland (now an EU candidate), Liechtenstein, and Norway to participate in the
EU’s single market without a conventional EU membership.
Switzerland has also chosen to not join the EU, although it is part of similar
bilateral agreements.
The 27 member countries of the EU
Countries
Austria
Italy
Belgium
Latvia
Bulgaria
Lithuania
Croatia
Luxembourg
Cyprus
Malta
Czechia
Netherlands
Denmark
Poland
Estonia
Portugal
Finland
Romania
France
Slovakia
Germany
Slovenia
Greece
Spain
Hungary
Sweden
Ireland
5
Joining the EU
Becoming a member of the EU is a complex procedure which does not
happen overnight. Once an applicant country meets the conditions for
membership, it must implement EU rules and regulations in all areas.
Any country that satisfies the conditions for membership can apply.
These conditions are known as the ‘Copenhagen criteria’ and include a freemarket economy, a stable democracy and the rule of law, and the acceptance of all
EU legislation, including of the euro.
A country wishing to join the EU submits a membership application to the
Council, which asks the Commission to assess the applicant’s ability to meet the
Copenhagen criteria. If the Commission’s opinion is positive, the Council must then
agree upon a negotiating mandate. Negotiations are then formally opened on a
subject-by-subject basis.
Due to the huge volume of EU rules and regulations each candidate
country must adopt as national law, the negotiations take time to complete. The
candidates
are
supported financially,
administratively and technically
during this pre-accession period.
Candidate countries
These countries are in the process of 'transposing' (or integrating) EU
legislation into national law:
1. Albania
2. Montenegro
3. North Macedonia
4. Serbia
5. Turkey
Potential candidates
Potential
candidate
countries
do
not
yet
fulfil
the requirements
for
EU membership:
1. Bosnia and Herzegovina
2. Kosovo*
This designation is without prejudice to positions on status, and is in line
with UNSCR 1244/99 and the ICJ Opinion on the Kosovo declaration of independence.
6

Economic integration, or regional integration, is an agreement among nations
to reduce or eliminate trade barriers and agree on fiscal policies.

The European Union, for example, represents a complete economic
integration.

Strict nationalists may oppose economic integration due to concerns over a
loss of sovereignty.
Enumeration.
sheet of paper.
Give what is asked.
Write your answer in a separate
1. Member countries of EU
2. Types of regional economic integration
International Organizations with economic and social objective in
the United Nations
Pre-discussion
Model UN is one of the most popular ways to learn about the workings of the
United Nations. Conferences are organized by hundreds of educational institutions at all
levels to engage young students in diplomatic debates and conversations that resemble
those at the United Nations. It is often the first time that students are exposed to
international affairs.
It has been noted, however, that due to a lack of knowledge of the procedural and
substantive roles played by UN diplomats and UN staff, Model UN simulations don’t
accurately reflect the true UN decision-making process.
7
At the end of the lesson, the students can;
1. Determine the objectives and roles of United Nattions
2. Determine the role and functions of international economic organizations
United Nations: Objectives and Roles of United Nations!
The United Nations Organisation (UNO) is the global international
organisation of sovereign independent states. It was established on 24 October
1945. The destruction caused by the Second World War compelled the people to
establish an international organisation for keeping the world away from war and in
favour of friendship and cooperation among all the nations. The UNO was
designed to save the future generations from the scourage of war by promoting
International peace and security.
After the end of the Second World War, the United States, the United
Kingdom, the Soviet Union (Former USSR) some other states held several
meetings and planned to establish an organisation for preserving peace and
promoting social, economic and political co-operation among all nations. As a
result of their efforts, the United Nations Organisation came into existence in 1945
when the representatives of 51 nations signed the Charter of the UNO at San
Francisco.
The name “United Nations” was suggested by US President Franklin
Roosevelt. It was first used in the Declaration of the United Nations made on
January 1, 1942. At San Francisco Conference, it was unanimously adopted as the
name of the new international organization as a tribute to the late President of the
United States. India had not achieved its independence by then and yet it became
one of the founder members of the United Nations.
All nations pledged themselves to the UN Charter. In the UN Charter they
pledged “to save the succeeding generations from the scourage of war” They also
promised to “promote social progress and better standards of life.” The Charter
came into force on October 24, 1945 after a majority of the signatories
deposited their instruments of ratification. Since then every year, 24th October is
celebrated as the United Nations Day.
The UN Charter:
The Charter is the Constitution of the United Nations Organisation. It was
made in October 1944 by the Dumbarton Oaks (Washington DC) Conference. It
8
lays down the rules which govern the organisation and functions of the UNO and
all its organs. The Charter has a Preamble, 19 Chapters and 111 Articles which
explain the purposes, principles, organs, and operating methods of the UN.
The three major international economic organizations are the World Bank, the
International Monetary Fund (IMF), and the World Trade Organization (WTO):
The WTO emerged out of the General Agreement on Tariffs and Trade
(GATT) in 1995; it is an arrangement across countries that serves as a forum for
negotiations on trading rules as well as a mechanism for dispute settlements in
trade issues.(1) By contrast, the World Bank and IMF deal with their member
countries one at a time. They have little influence with industrial countries but can
affect developing countries during times of economic crisis and when those
countries seek additional foreign exchange resources. The origins and evolution of
the three organizations are
of
considerable interest.(2) Perhaps even more
important in light of the recent financial crises in Mexico, East Asia, and a few
other countries, are the questions that arise about the current and future roles of
the IMF and the World Bank.(3)
These questions cover a broad set of issues. A healthy open trading
system is crucial for the progress of the international economy. It is particularly
important in providing an environment in which developing countries can
successfully reform their policies and achieve rapid economic growth and rising
living standards for all. I have been particularly interested in the relationship
between preferential trading arrangements, such as the North American Free
Trade Agreement (NAFTA), and the WTO.(4) The issue is simple: the WTO is
based on the principle of open, nondiscriminatory trade among its members, while
preferential trading arrangements are, by their nature, discriminatory. Under
NAFTA, for example, goods originating in Mexico and Canada are not subject to
duties when they enter the United States, yet the same goods from other countries
are subject to U.S. duties. Assuring that preferential trading arrangements will not
block progress in multilateral liberalization is important, and I am now completing a
paper in which I analyze how much discrimination has been a factor under the first
three years of NAFTA.
My other major concern regarding international economic organizations is
closely related to the subject of developing countries' economic policy reforms. I
want to know what the current and future roles of the World Bank and IMF will be in
economic policy reform in developing countries. In the case of the World Bank, for
example, to what extent will the Bank need to focus its resources on poor countries
and the support of economic policy reforms, as opposed to tackling "new issues,"
such as gender and ethnicity (including treatment of minorities). Both the Bank and
9
the IMF have been criticized by many in light of the Asian financial crises of 1997
and 1998.

The World Trade Organization is a global organization made up of 164
member countries that deals with the rules of trade between nations.

The goal of the WTO is to ensure that trade flows as smoothly and
predictably as possible.

The WTO was born out of the General Agreement on Tariffs and Trade
(GATT), which was established in 1947.

If a trade dispute occurs, the WTO works to resolve it.

Enumeration. Write your answer in a separate sheet of paper.
3. Role of WTO
4. WTO member countries
International Organizations operates in the area of international monetary
activities
Pre-discussion
The IMF promotes international monetary cooperation and exchange rate
stability, facilitates the balanced growth of international trade, and provides
resources to help members in balance of payments difficulties or to assist with
poverty reduction.
Through its economic surveillance, the IMF keeps track of the economic
health of its member countries, alerting them to risks on the horizon and providing
policy advice. It also lends to countries in difficulty, and provides technical
assistance and training to help countries improve economic management. This
work is backed by IMF research and statistics.
The IMF collaborates with the World Bank, regional development banks,
the World Trade Organization (WTO), UN agencies, and other international bodies.
While all of these organizations are involved in global economic issues, each has
its own unique areas of responsibility and specialization. The IMF also works10
closely with the Group of Twenty (G-20) industrialized and emerging market
economies and interacts with think tanks, civil society, and the media on a daily
basis.
The International Monetary Fund (IMF) is an international organization of
189 member countries that works to ensure the stability of the
international monetary and financial system. The IMF’s mandate includes
facilitating the expansion and balanced growth of international trade, promoting
exchange stability, and providing the opportunity for the orderly correction of
countries’ balance of payments problems. The IMF was established in 1945.
The World Trade Organization (WTO) is an international organization of
164 members that deals with the rules of trade between nations. With Russia’s
accession in August 2012, the WTO encompasses all major trading economies.
The WTO works to help international trade flow smoothly, predictably, and freely,
and provides countries with a constructive and fair outlet for dealing with disputes
over trade issues. The WTO came into being in 1995, succeeding the General
Agreement on Tariffs and Trade (GATT) that was established in 1947.
The work of the IMF and the WTO is complementary. A sound
international financial system is needed to support vibrant international trade, while
smoothly flowing trade helps reduce the risk of payments imbalances and financial
crisis. The two institutions work together to ensure a strong system of international
trade and payments that is open to all countries. Such a system is critical for
enabling economic growth, raising living standards, and reducing poverty around
the globe.
How the IMF and the WTO work together
The IMF and the WTO work together on many levels, with the aim of
ensuring greater coherence in global economic policymaking. A cooperation
agreement between the two organizations, covering various aspects of their
relationship, was signed shortly after the creation of the WTO.
The WTO Agreements require that it consult the IMF when it deals with
issues concerning monetary reserves, balance of payments, and foreign exchange
arrangements. For example, these agreements allow countries to apply trade
restrictions in the event of balance of payments difficulties. The WTO’s Balance of
Payments Committee bases its assessments of restrictions in considerable part on
the IMF’s determination of a member’s balance of payments situation.
11
The IMF and the WTO ate international organizations with about 150
members in common. While the IMF’s central focus is on the
international monetary and financial system, and the WTO’s is on
international trading system, both work together to ensure a sound
system for global and payments.
Give what is asked. Write your answers in a separate sheet of paper.
1.
The major international economic organizarions
2.
What are the functions of WTO, NAFTA and GATT?
Africa n Development Bankz
References:
Balassa B. (1991) Economic Integration. In: Eatwell J., Milgate M., Newman P.
(eds) The World of Economics. The New Palgrave. Palgrave Macmillan, London.
https://doi.org/10.1007/978-1-349-21315-3_2
HIx, S.J (2002). International Encyclopedia of Social and behavioral Sciences.
Univerity of London, UK. https://doi.org/10.1016/B0-08-043076-7/01274-2
Ottenhoff,
J.(2011).
Regional
Banks
(ABCs
of
the
IFIs
Brief).
https://www.cgdev.org/publication/regional-development-banks-abcs-ifis-brief.
Manuel Hinds was finance minister of El Salvador. by Guillermo Calvo, Allan
Meltzer,
and
Roberto
Zahler.https://www.cgdev.org/sites/default/files/9780881323535-FinDev5.pdf
International
Monetary
Fund.
Research
Dept.(2019).INTERNATIONAL
MONETARY FUND.http://dx.doi.org/10.5089/9781513523972.026
12
CHAPTER 6
TRADE AND INVESTMENT POLICIES
GATT and NAFTA
Introduction
The overall objective of this chapter is for students to learn how to
analyze global trade from different perspectives and to present findings in a
structured, concise, and convincing way
The GATT 1947 is at the very source of the current WTO system. Its
basic principles applicable to trade in goods have been incorporated into other
WTO agreements dealing with other areas of trade, such as trade in services and
trade in intellectual property products and, it also provided the very first dispute
settlement provisions upon which the WTO dispute settlement system is built.
Although the GATT 1994 is only one of the numerous WTO “goods” agreements,
its importance in the history of the GATT/WTO is undisputable.
This lesson provides an overview of the obligations relating to trade in
goods in the GATT 1994.
The first Section of this lesson defines the GATT 1994 and its constituent
elements. The first lesson also circumscribes the scope of application of the GATT
1994, and examines its relationship with other WTO agreements.
At the end of this chapter, the students can
1. define the GATT 1994 and its scope of application;
2. list the constituent elements of the GATT 1994:
3. explain the relationship between
the GATT
1994 and other WTO
agreements
13
What Does “GATT” Mean?
Pre-discussion
The acronym “GATT” stands for the “General Agreement on Tariffs and
Trade”. It is an agreement between States aiming at eliminating discrimination and
reducing tariffs and other trade barriers with respect to trade in goods.
The GATT was originally, and is still today, only concerned with trade in
goods, although its main principles now also apply to trade in services, and
intellectual property rights as dealt with respectively by the General Agreement on
Trade in Services and the TRIPS Agreement.
The GATT was concluded in 1947 and is now referred to as the GATT
1947. The GATT 1947 was last amended, last in 1965. Later on, additional
disciplines were agreed to in side agreements, such as the Tokyo Round
agreements, which did not amend the GATT 1947 as such, but only bound the
GATT Contracting Parties that became a party to these side agreements.2 The
GATT 1947 was terminated in 1996. However, the provisions of the GATT 1947 as
well as all legal instruments concluded under the GATT 1947 are integrated into
the GATT 1994, subject to clarifications brought about by Understandings which
also form integral parts of the GATT 1994.
The acronym “GATT” is sometimes confusingly used to describe a
number of different things. It is sometimes referred to as the “GATT disciplines”, or
“GATT disputes”, to mean the current WTO obligations or disputes relating to trade
in goods. However, it may also be referred to as the “GATT” to mean the old
multilateral trading system and/or Secretariat preceding the WTO. In this Module,
“GATT” only means the current obligations under the GATT 1994.
The GATT 1994 is one of the multilateral agreements annexed to the
WTO Agreement. It is an international treaty binding upon all WTO Members.
At the end of the lesson, the students can
1.
Determine the role of GATT 1994 in United Nation
2.
Explain the contributions of GATT to other economic organizations
14
The GATT 1994 is only concerned with trade in goods. The GATT 1994
aims at further liberalizing trade in goods through the reduction of tariffs and other
trade barriers and eliminating discrimination.
The Relationship between the GATT 1994 and Other WTO Agreements
the provisions of the GATT 1994 apply to a disputed measure even where the
provisions of other WTO agreements are applicable, to the extent that the
provisions of the GATT 1994 do not conflict with any of the provisions of the other
applicable WTO agreements. In other words, if there is no conflict, the measure at
issue should be examined against all the relevant provisions of the
Different WTO agreements, including the GATT 1994. The Appellate
Body defined the term “conflict” in Guatemala – Cement I. 8 There is a conflict
when adherence to one provision will lead to a violation of another provision.
Following the terms of the Appellate Body, an interpreter must identify an
inconsistency or a difference between the provisions examined before determining
which one of the provisions will prevail.9 In the event of a conflict, and to the extent
of that conflict, the GATT 1994 never prevails. The other WTO agreements on
trade in goods contained in Annex 1A to the WTO Agreement always prevail over
the GATT 1994. Moreover, the WTO Agreement always prevails over any of the
multilateral trade agreements, including the GATT 1994 and all the other
agreements on trade in goods included in Annex 1A to the WTO Agreement.
15



The General Agreement on Tariffs and Trade (GATT) was signed by 23
countries in October 1947, after World War II, and became law on Jan. 1,
1948.

The GATT’s purpose was to make international trade easier.

The GATT held eight rounds in total from April 1947 to December 1993,
each with significant achievements and outcomes.

In 1995 the GATT was absorbed into the World Trade Organization (WTO),
which extended it.
Multiple choice. Encircle the correct letter of your answer.
1. In the period after the Second World War, which of the following institutions
governed trade relations between states?
a. International Monetary Fund (IMF)
b. General Agreement on Trade and Tariffs (GATT)
c. World Trade Organisation (WTO)
d. Bretton Woods
2. True or false: Since the introduction of the WTO, recourse to dispute panels
has decreased considerably.
a. True
b. False
3. What does the GATT 1994 consists of? A: General Agreement of Tariffs and
Trade (GATT 1994) consists of:a.
General Agreement on Tariffs and Trade (1947) GATT 1947 as amended,
rectified or modified of (i.e. updated amended version of the
Agreement)
b.
Legal instruments that came into force under GATT 1947, including
protocols relating to (a) tariff concessions, (b) protocols of accession,
(c) decisions on waivers (d) other decisions of contracting parties.
c.
Understandings on certain GATT Articles adopted in the Ministerial
Conference at Marrakesh in 1994.
d.
The Marrakesh Protocol to GATT 1994.
4. What are the key differences between the GATT 1947 and the WTO
Agreement regarding the trade in goods?
16
a. The GATT was ad hoc and provisional. It was never ratified by members'
parliaments, and it contained no provisions for the creation
of an International Organization. While, the WTO and its agreements are
permanent. As an international organization, it has a sound legal basis
because members have ratified the WTO agreements, and the agreements
themselves describe how the WTO will be functioning to promote trade.
b. The WTO has members while, the signatories to the GATT were called
“contracting parties.
c. The GATT dealt with trade in goods only, while, the WTO covers services
as well as intellectual property.
d. The WTO has a more effective settling system.
North American Free Trade Agreement (NAFTA)
Pre-discussion
The North American Free Trade Agreement (NAFTA) is a trade
agreement that took effect on January 1, 1994, and it encourages trade
between the United States, Canada, and Mexico. The agreement phased
out most of the tariff and non-tariff trade barriers that existed among the
trading countries. NAFTA is the biggest free trade agreement in the world,
with the gross domestic product of participating countries exceeding $20
trillion.
At the end of this lesson the students can
1. define 'NAFTA'
2. explain the basic principles of NAFTA
3. analyze NAFTA's impact on trade for the U.S., Mexico, and Canada
4. outline the positive and negative results of NAFTA
What is the North American Free Trade Agreement?
In January 1994, the United States, Mexico and Canada entered into the North
American Free Trade Agreement (NAFTA), creating the largest free trade area and richest
market in the world. The NAFTA is the most comprehensive regional trade agreement ever
negotiated by the United States and is scheduled to be fully implemented by the year
2008. In 1996,
U.S. two-way trade in goods under the NAFTA with Canada and Mexico stood at $420
billion--a 44 % increase since the NAFTA was signed.
Goals of NAFTA:
1. to reduce barriers to trade
17
2. to increase cooperation for improving working conditions in North
America
3. to create an expanded and safe market for goods and services
produced in North America
4. to establish clear and mutually advantageous trade rules
5. to help develop and expand world trade and provide a catalyst to
broader international cooperation
Benefits of NAFTA:
1. more free trade resulting in greater choices in goods and services
2. lower prices and improved quality products
3. stronger health and safety standards
4. improved economic stability in the U.S. marketplace
5. a marketplace that is increasingly driven more by supply and demand than
by barriers to commerce
What are some of the industries that are experiencing significant benefits as
a result of the NAFTA?
Agricultural Trade: The United States is the world's largest and most competitive
exporter of agricultural commodities. The NAFTA has reinforced the trend toward
greater integration of the North American agricultural marketplace and a more
productive and efficient American agricultural sector.
U.S. consumers are benefiting from more open access to wider sources of supply.
U.S. agricultural exports to North America have grown rapidly since the NAFTA
went into effect, and, if recent trends continue, could reach $30 billion per year by
2005--up from $11.6 billion in 1996.
Automotive Industry: Prior to the NAFTA, U.S. motor vehicle exports to Mexico
faced restrictive trade balancing and local content requirements, as well as tariffs of
20 %. With the reduction/elimination of these trade barriers, liberalized investment
rules and preferential rules of origin, U.S. parts and vehicle manufacturers have
become more efficient and competitive in the North American market. In 1996, the
U.S. exported 51,000 new cars and 31,500 new trucks to Mexico alone for a value
of $1.2 billion.
Textiles and Apparel: The NAFTA has increased economic activity and
enhanced export prospects for textile and apparel producers in the United States.
To be internationally competitive in the global marketplace, U.S. producers of
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textiles and apparel have improved their productivity and concentrated on
specialized products. The NAFTA has enabled U.S. producers to optimize
production and manufacturing investment in North
America, resulting in a shift of production from the Far East to North America,
strengthening the industry's worldwide position. Textile and apparel trade among
the three NAFTA partners has nearly doubled since the NAFTA took effect,
increasing from $6.4 billion in 1993 to $12.4 billion in 1996.
How does the NAFTA affect the environment?
North American consumers will benefit from various initiatives being
undertaken by the NAFTA partners to strengthen and protect the North American
environment. The NAFTA Commission for Environmental Cooperation (CEC) has
deepened trilateral cooperation on a broad range of environmental issues, including illegal
trade in hazardous wastes, endangered wildlife, and the elimination of certain toxic
chemicals and pesticides. Through the CEC, Mexico has agreed to join the United States
and Canada in banning the pesticides DDT and chlordane, ensuring that these long-lived
toxic substances no longer cross our border. The United States and Mexico have also
launched a Border XXI program establishing five-year objectives for achieving a clean
border environment and a blueprint for meeting these objectives

The North American Free Trade Agreement (NAFTA) was implemented in
1994 to encourage trade between the U.S., Mexico, and Canada.

President Trump made a campaign promise to repeal NAFTA, and in
August 2018, he announced a new trade deal with Mexico to replace it.

In September 2018, Canada joined the deal: the United States-MexicoCanada Agreement (USMCA), which was signed into effect on November
30, 2018.
Multiple choice. Encircle the correct letter of your answer.
1. NAFTA is an agreement between all of the following countries EXCEPT
a)
United States
b)
Great Britain
c)
Mixeco
d)
Canada
2. Free trade means
a)
the countries use the same currency
b)
there is a quota on some goods
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c)
trade is quick and easy
d)
there is a quota on some goods
3. NAFTA was signed by the three countries in
a)
2004
b)
1994
c)
1984
d)
2014
4. What is the purpose of NAFTA?
a)
To increase trade between all countries
b)
To help Canada become a more independent nation
c)
To eliminate the environmental issues between the nations involved
5. Which of the following is NOT negative impact of NAFTA?
a)
loss of higher- wage US jobs
b)
American factories moving to Mexico where there are fewer regulations
c)
Mexico does not have strict environment regulations
d)
lowers wages in the US
6. Trade between US, Mexico, and Canada has more than tripled since 1994.
a)
True
b)
False
7. NAFTA
later
created
the
Commission
for
Environmental Cooperation. Where is it located?
a)
8.
US
b. Mexico
c. Canada
Which three countries are members of NAFTA?
a)
The United States, Mexico, and England.
b)
Mexico, Canada, and Brazil.
c)
The United States, Mexico, and Canada.
d)
The United States, Canada, and Russia.
9. When was NAFTA signed and by which US President?
a)
In 2000 by President Bush.
b)
In 1998 by President Clinton.
c)
In 1994 by President Clinton.
d)
In 1990 by President Bush.
10. Member countries of a
levy a common external tariff on goods
being imported from nonmembers.
a)
Regional Trade Agreement
b)
Custom Union
c)
Common market
d)
Free trade agreement
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