Europe or The Americas

A Critical Analysis of the Effects of Expansion on Trade within the European Union (EU) and the North American Free Trade Agreement (NAFTA)

Pin #: 10470094 By Michael Wade Jackson NAFTA/ INTL Transactions: Fall 2004 Larry Pascal / David Banowsky December 1st, 2004

Globalization Co. is faced with the opportunity to open shop in either the European Union or the Americas. The issues of citizenship or investment are not at issue because this company will be strictly affiliated with the region in which it is founded. This means that the company will meet all requirements to be considered a company owned by a national of the country in which it is located and will be treated as such in the fields of taxation, free trade agreements, labor, agriculture, and assistance to commercial development. The question is then which market or trade alliances pose the most significant benefit to Globalization Co. and in which area of the trade zones should the company be founded. The major issues of concern are: (1) the structure of the free trade zone and agreements; (2) the number of existing and future alliances that will open markets to our product; (3) the internal expansion which is possible within the pre-existing structure of both the EU and NAFTA; (4) the availability of labor; (5) the economic stability within the existing structure; (6) the protection of intellectual property of the company; and (7) the social or cultural differences that may make investment in the region unsound. Advise the Board of Directors (unofficial- remember the company does not exist but in the minds of interested parties, so as to avoid conflict when creating this company) as to the benefits and costs associated with locating Globalization Co. in the European Union versus the United States of America under the structure of NAFTA.

Critical Analysis and Recommendation:
The European Union: (EU) History: The European Union is the product of the Treaty of Paris (1951); Treaty of Rome (1957); The European Free Trade Area Treaty (1959); The Single European Act (1987); and the Maastricht Treaty / Treaty on the European Union (1993)1. These treaties however do not on their face convey the events that lead to the formation of the European Union. The Union itself was the product of a desire to avoid future conflict between former enemies after World War II. These enemies were France and Germany. The Union began as a trade agreement (Treaty of Paris) based on coal and steel – the materials needed to build a war power – and the European Coal and Steel Community (ECSC) was born. The ECSC and the European Union in general have been highly influenced by the French2. This influence is the result of the desire of the French to
1 2

See Ralph H. Folsom, European Union Law, at ix, x (West Group 3d ed. 1999). See Id. And Governing the European Union, (Simon Bromley ed., Sage Publications 2001).


address the “German problem” and to provide a framework to prevent future conflict between the nations3,4. From the ECSC the other nations of Western Europe desired to benefit from free trade or at least tariff breaks on Coal and Steel. This desire produced the European Economic Community (EEC) and the European Free Trade Area Treaty (EFTA). These agreements brought more Western European nations into the fold. However, the Treaty of Rome also encouraged the further enlargement of Europe to include other countries which may desire to benefit from the customs union. The EU has expanded from 15 nations in 1995 to 255 nations at present with the addition of the former Soviet States. This expansion poses interesting opportunities for the citizens of Europe as well as a corporation desiring to be founded in the EU6. Customs Union & Common Market The structure of free trade within the European Union is of considerable importance when analyzing the benefits of founding a corporation within the community. The European Union is based on the free trade model of a customs union. A customs union is an organization of states in which a common external tariff is initiated on imported goods and subsequently once the goods enter the economic community they are then able to flow freely within the member states7. The benefit of a customs union over a free trade area (i.e. NAFTA) is that the imported goods that are not from within the common market are subject to tariff upon importation and not subject to subsequent tariffs when moved between national borders8. The European Union is organized as a common market in which the free movement of goods as well as the free movement of the “factors of production” is present

See Id. (French Influence is prevalent in the ECSC because the former axis powers of Germany and Italy were not in a position to move for a more considerable involvement in the development of the community in 1952 – Remember that the Germany was only West Germany when it joined the ECSC) 4 The ECSC and the Treaty of Paris actually involved Germany and France as well the Benelux countries and Italy. The Benelux countries are Belgium, Netherlands, and Luxembourg. The necessity of including the countries which create a buffer between Germany and France is obvious when the goal of the economic union was to avoid future conflict. 5 The European Union currently consists of: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Portugal, Spain, Sweden, The Netherlands, United Kingdom (Original 15) and Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia (10 New additions to the EU). 6 This analysis does not focus on the political structure of the European Union, however the EU prior to the acceptance of the EU constitution on October 29th, 2004 was the composition of multiple treaties and was founded on the basis of a three pillars approach to the union. The Three pillars were the product of the Maastricht treaty (1993) and are: (1) Community Pillar (economic) ECSC, EEC, and EURATOM; (2) Common Foreign Security Policy; and (3) Justice and Home Affairs. These pillars have subsequently been discontinued and encapsulated in the proposed European Union Constitution which is in the process of seeking ratification. 7 See Folsom, European Union Law, at 5. 8 An example of this would be movement between Canada and the United States. If a good from the Country X into Canada and the tariff for importing the good was imposed this good could move within Canada without concern however, it would be subject to another import tariff once it reached the border of the United States since it is not a good from the member states of NAFTA. So unlike the EU where a good once imported and the appropriate tariff applied under the Customs Cooperation Council tariff schedule which correlates with the harmonized tariff schedule (HTS) adopted by the USA in 1988


within member states. The “factors of production” is defined as capital, labor, enterprise and technology9. This is a significant advantage in a community that is now comprised of some 25 member states. This common market as well will allow the influx of new labor supplies from former Soviet countries10. The move to a customs union with a universal tariff applied to imports and free movement of goods within member states has lead to the elimination of not only tariffs but as well the elimination of “measures or equivalent effect”. “Measures of equivalent effect” are barriers to trade between member states that may not be classified as tariffs but subsequently are restraints on trade which are incompatible with the union11. An example is found in Procureur du Roi v. Dassonville12. This case concerned the Belgian denial to import Scotch whiskey without a British customs label. The European Court of Justice (ECJ) held that such an action had equivalent effect of a quota and was not allowed. Therefore barriers to trade which may resemble a tariff or quota are unlikely to find support either in the ECJ or member states. Non-Tariff Trade Barriers : Article 30 A major issue that faces the European Union and free movement within Europe is the presence of NTBs or Non-tariff trade barriers. These barriers are authorized under the Treaty of Rome as amended in Article 30. Article 30 permits national restraints on imports and exports justified on the grounds of: (1) public morality, public policy or public security; (2) the protection of health and life of humans, animals or plants; (3) the protection of national treasures possessing artistic, historical, or archeological value; and (4) the protection of industrial or commercial property (Intellectual Property)13 However the caveat applies that such national barriers shall not be a mask or shelter for arbitrary restrictions on trade between member states14. The ECJ has reviewed such national barriers and has allowed the British to use Criminal law to prevent the importation of pornography from Holland which is outlawed but not sex dolls from Germany which could be produced in the United Kingdom15. However, the ECJ did not allow Germany to prevent the importation of Heineken under German law which requires “pure standards” for beer16.

See Folsom, European Union Law, at 5 These former Soviet block countries are a majority of the 10 new members of the European Union. These markets will allow for the influx of new labor and employees which were previously restricted by immigration laws and labor requirements. Such restrictions comprise Non-tariff trade barriers (NTB) which are not allowed under the EU common market. 11 See Folsom, European Union Law, at 134-135. See Also Bromley ed. , Governing the European Union. 12 See Procureur du Roi v. Dassonville (1974) Eur. Comm. Rep. 837. See Also Rewe Zentral AG v. Bundenmonopolverwaltung fur Branntwein (1979) Eur.Comm.Rep. 649 (German minimum alcoholic beverage rule unreasonable). 13 Folsom, EU Law, at 138-139. 14 See Id. 15 Id. 16 Id.


Intellectual Property A significant area in which the ECJ and the EU has allowed for the creation of NTBs is the realm of Intellectual Property (aka industrial or commercial property). The creation of NTBs is prevalent in this field because the rights associated with the industrial or commercial property is tightly linked to the nation in which the interest is granted. The EU does have a community patent system however this system is merely the ability to have one patent application file in the member countries and not require the refiling in other member countries after filing in the home nation. However, this EU wide patent system does not mean that if one nation grants a patent that the other nations will also grant a patent. The EU however has agreed on a Common Market Trademark Regime in 199317. Furthermore the EU has recognized a system for copyright protection. The ECJ has however established a doctrine of exhaustion18. This doctrine closely parallels the limits of control found under US copyright law in which after the first sale into the market the good the intellectual property owner loses control over resale. The rights are said to be exhausted. The ECJ has applied this principle to all copyright protected goods except for broadcasts which have been deemed to not be exhaustible. The doctrine of exhaustion has been used as well in the pharmaceutical industry involving both patent and trademark litigation. The best example of this involved the Centrafarm case19. This case involved Sterling Drug which was a US company that owned the British and Dutch trademark and patent rights to negram. A significant disparity in price was created between the UK and the Netherlands. Centrafarm was an independent importer from the UK and Germany. Centrafarm decided to import to the Netherlands and Sterling Drug moved to block the importation. The ECJ held that the rights or Sterling Drug did not extend to the blockage of “parallel goods” and that once the product was on the market the rights were exhausted. This followed Article 30’s restriction on the creation of arbitrary barriers to trade. Since the good was already in the common market and had the consent of the common owner the goods could not be blocked20. The protections on intellectual property within the EU is a barrier to trade however when balanced against the rights of the inventor/company it appears that the balance is appropriate. The main point of contention is the use of the courts in there respective countries to try and torpedo the process of patent litigation. This has been a rising concern in Europe since the creation of the community patent system. This is the process by which the courts of two member nations are used concurrently and that the progress in one court will delay or halt the progress of another court. These efforts and the communities to litigate patent rights have remained UK, France, Germany, and the Netherlands21. The personal opinion of both Mr. Ebbink and Mr. Meibom is that the
17 18

See Folsom, EU Law, at 141 Id. At 142 19 See Centrafarm BV and Adriann de Peipjper v. Sterling Drug Inc. (1974) Eur.Comm.Rep. 1147 20 See Folsom, EU Law, at 143-144. See Also Centrafarm Eur.Comm.Rep. 1147 (1974). 21 APILA Spring Meeting May 13-15 2004 (Dallas, Texas): Patent Litigation Forum Shopping in Europe Personal commentary by speakers: (1)Patrice Vidon,CNCPI (French Institute of Industrial Property Attorneys),Rennes, France; (2) Wolfgang von Meibom, Bird & Bird, Dusseldorf, Germany; (3) Richard Ebbink, Nauta Dutilh, Amsterdam, The Netherlands.


expansion of the EU and the addition of the former Soviet States will not provide a larger forum for IP litigation in the European Union. Currently the ugly step-sister of EU patent litigation is Italy. Spain and Portugal are not utilized as well as Greece the sentiment is that the patent systems in these countries are not able to protect the rights of the IP holder and that judgments from these countries are not recognized22. The conclusion to be made about the protection of Industrial property within the EU is that the system is not perfect but that does embrace and recognize rights in the sweat of the brow. EU Expansion & External Trade Agreements: Avenues to Consumers and the Markets of Tomorrow EU Expansion & EU Constitution23 The European Union is now a trading block of 25 member nations. The community increased from 15 to 25 in May of 2004. In this process of expansion the EU also recognized a need to restate the foundations of the Customs Union and Common Market as well as further developments embraced in the myriad of treaties that form the existing EU. This process has lead to the adoption of a Constitution for the EU which would encapsulate all previous agreements between the member nations. The most important development in this document is the restatement of areas of competency which establishes who controls the flow of trade in the EU24. The European Union has exclusive competence in: (1) Customs Union; (2) Competition (in relation to the single market); (3) Monetary Policy with regard to euro counties; (4) Common commercial policy25. Therefore the European Union with respect to the free flow of goods and the “factors of production” shall be controlled by the Union as a whole and not receive significant interference from member states. EU MERCOSUR FREE TRADE AGREEMENT The EU and MERCOSUR26 entered into trade talks in 1995. This has lead to the formation of a free trade agreement between the two regions which is now being finalized. The agreement itself has slowed between 1995 and 2004 and currently the dispute concerns agricultural subsidies27. The main benefit to both trading blocks is that

Id. I do not share this belief and I do feel that IP issues will arise in the new member states including piracy issues. I also believe that since these member states had to meet the requirements to join the EU which include the recognition of industrial property rights that these countries may become a forum for torpedoes or perversion of Industrial Property law in the EU since the court systems of these countries may lack a structured IP laws. 23 See Europa, A constitution for Europe, available at: 24 See Id. (Competencies means areas in which the EU governmental organizations have control versus national governments. There are three degrees of competency: Exclusive, Shared, & Supporting, coordinating or complementary action) 25 See Id. 26 MERCOSUR is the South American Common Market of Brazil, Argentina, Paraguay, & Uruguay 27 See EU & MERCOSUR available at: ; See Also Counsel on Hemispheric Affairs, EU Mercosur Free Trade: US A third Wheel? Available at:


the expansion of a common market both within Mercosur and free trade with the EU will greatly benefit both groups. The European Union will have access to South America and Central America which it has not had before. EU Mexico: Free Trade Agreement of 2001 The European Union and Mexico entered into a free trade agreement in 2001. The most significant impact is that the duties on imports of goods from Mexico to the EU have been removed in 2003 and the importation of machinery or goods from the EU to Mexico will cease to exist in 200728. This is a beneficial partnership for the EU because it allows EU products to be a stones throw from the border of the United States. Mexico is the European Union’s second trading partner after the United States. Note: The EU also has trade agreements with Chile, Canada29 in the Americas and is pursuing talks with China. North American Free Trade Agreement (NAFTA): FTAA: Free Trade Across the Americas [Note: As the topic of this course was NAFTA and trade in the Americas little space will be allotted to NAFTA/FTAA and more space will be devoted to analysis of the EU and NAFTA for Globalization Co.] History: The North American Free Trade Agreement (NAFTA) was implemented in 1994 and involves the trade between the Untied States, Canada, and Mexico. The agreement itself is a free trade agreement it does not have the character of either a customs union or of a single common market. The agreement was the result of the success of the CFTA between the United States and Canada and the CFTA was a guide post when drafting NAFTA. The agreement itself is unique in that unlike the European Union which states that its expansion shall be limited to European countries NAFTA has within it an expansion provision that allows for any nation to join the agreement30. This provision however to date has not been used. FREE-TRADE NAFTA does not remove customs boundaries and does not allow for the free flow of goods between member nations that do not originate within those countries. This structure is the basis of NAFTA because the customs union and common market models as employed by the European Union are unlikely to be agreed upon when considering the compromises to sovereignty and national identity that usually follow such an

See Victor Rioz, Mexico’s free trade agreements: A world of opportunities, available at: . See Also EU relations with Mexico available at: 29 See Ralph H. Folsom, NAFTA and Free Trade in the Americas, (West Group 2d ed. 2004) at 247. 30 See Folsom, NAFTA, at 238. (NAFTA specifically anticipates growth by accession through Article 2204 with the proviso that current members can veto the accession of an applicant.)


agreement31,32. The benefit of a free trade agreement between the three member nations is that goods that are made within a member state can move without tariff across national borders. This however does not apply to goods which are not from the US, Mexico, or Canada. This poses a major slow down at borders as importers will have to face tariffs at each national border from Canada to the United States to Mexico. This is unlike the European Union where once the common tariff is paid goods can move freely within member states. Intellectual Property The intellectual property and its protection is regulated under NAFTA through the three member countries involvement in the World Trade Organization (WTO) and the TRIPS agreement. NAFTA itself does contain intellectual property protections in Chapter 17 of the agreement. The understanding between TRIPS and NAFTA is that which ever body of law affords the broadest protection shall prevail.33 The TRIPS agreement concerns itself with all fields of intellectual property and most notably looks to prevent counterfeit goods and piracy. The United States has significant structure to its intellectual property framework consisting of federal protection of IP interests. Movement of “Factors of Production” NAFTA unlike the European Union allows for the free movement of goods and limited movement of the “factors of production”. Under NAFTA services34 are limited in movement and the use of labor from the member countries is regulated by the existing laws concerning immigration. NAFTA still employs borders and customs control on national boundaries and the movement of skilled professionals between the US, Canada, and Mexico is slowed by the limited recognition of degrees and training. There is still national protection in NAFTA which is not allowed under the European Union. NAFTA EXPANSION NAFTA under Article 2204 allows for any nation or block of nations to join the NAFTA agreement. As such Australia, South Korea, New Zealand, and Singapore have shown interest in joining NAFTA35. However running concurrent to the possible expansion of NAFTA is the FTAA. The Free Trade Across the Americas appears to be a more likely candidate for expansion than NAFTA36.

A good example of this is Canada’s Cultural Industries exception to NAFTA which allows Canada to block the in flow of US media and books which may impact Canadian Culture. 32 See Folsom, NAFTA, at 33 to 39. 33 See Folsom, NAFTA, at 172 34 This means that in comparison to the EU services are limited under NAFTA. However, if you compare NAFTA and CFTA it is apparent that the shift from a positive list to a negative list has been beneficial to the service trade between US, Mexico, and Canada. 35 Folsom, NAFTA, at 238 36 Personal belief as well as a recognition that NAFTA is called the North American Free Trade Agreement and it would most likely be political suicide for a government to join such an agreement as named in the hearts and minds of their citizens.


FTAA: The most likely road to expansion37 The NAFTA agreement will remain however the most likely avenue for expansion is the FTAA. This agreement is working in the footsteps of the CFTA, NAFTA, and CAFTA (still in the works). The proposed completion date for the FTAA was 2005 however the negotiations are moving slowly based on the behavior of Brazil and its Mercosur trading group. The FTAA hopes to compete for trade with the European Union and to bring economic prosperity across the Americas. Expansion under the FTAA will create a trading block which will consist of approximately 34 countries. These countries cover North, Central, and South America38. The goal of the FTAA is to create a trading block with a combined population of 800 million and a GDP of $13 trillion and $3.4 trillion in world trade (2001). The hope of the FTAA will be to further remove protection on agriculture and other items of trade such as textiles, car parts, and machinery to increase the economic power of the trading group. RECOMMENDATION & HARD NUMBERS Where to put Globalization Co. The analysis involved in determining where to put Globalization Co. is significantly reduced when the issues of national origin are immaterial making the major concerns expansion and markets, as discussed in the hypothetical. The recommendation to the board is to place Globalization Co. in the European Union. WHY? (1) Expansion is not a problem: The European Union is preferred to the NAFTA/FTAA because the countries involved in the EU as well as the free movement of the “factors of production” make the EU more appropriate for Globalization Co. The expansion of the EU has increased the population from that of the EU 15 (380 million) to the EU 25 (455 million)39. This

See Council of the Americas, FTAA: Blueprint for prosperity: building on NAFTA’s success, available at: 38 The 34 countries are: (1) USA (2) Canada (3) Mexico (4) Argentina (5) Bolivia (6) Ecuador (7) Brazil (8) Colombia (9) Chile (10) Paraguay (11) Peru (12) Uruguay (13) Venezuela (14) Antigua and Barbuda (15) Bahamas (16) Barbados (17) Belice (18) Costa Rica (19) Dominica (20) Dominican Republic (21) El Salvador (22) Grenada (23) Guatemala (24) Guyana (25) Haiti (26) Honduras (27) Jamaica (28) Nicaragua (29) Panama (30) St. Kitts and Nevis (31) St. Lucia (32) St Vincent and the Grenadines (33) Suriname (34) Trinidad and Tobago 39 See Key facts and figures about the EU, available at: (Based on EU 15 and analysis of the 10 new member countries including the two remaining applicants for admission Turkey and Romania)


expansion coupled with the EU constitutions move for a more aggressive “cohesion policy” makes the EU a better candidate for investment. Globalization Co. will benefit from the new cohesion policy which will be implemented under the new EU constitution because it provides assistance in addition to national assistance to countries which need to catch up economically with the original EU 15. This policy is designed to grant significant aide to the 10 new member states and will provide approximately 213 billion euro to develop the new member states from 2000-200640. (2) Existing Trade Agreements and Negotiations: The European Union has diligently sought trading partners around the world and even though the EU is only for European nations the establishment of free trade agreements with MERCOSUR (in progress), MEXICO, CANADA, CHILE, and CHINA (in progress) shows a commitment to global trade and as well provides sufficient market structure to be beneficial to Globalization Co. The most important agreement is that with MERCOSUR because MERCOSUR has taken it upon itself to negotiate free trade agreements with its neighbors and other countries in the Americas that have been successful such as the ANDEAN agreement. These agreements as well as the contiguous infrastructure of the European Union make it the more appropriate choice. (3) Customs Union & Common Market The structure of the European Union is already superior to the NAFTA agreement because it allows for the free movement of goods and individuals which provides a significant number of potential workers. The removal of customs and barriers to trade such as tariffs and a continued fight against NTBs makes the EU structure a better fit for Globalization Co. Conclusion The European Union is the correct fit for Globalization Co. in light of the structure of the union as well as the level of economic stability within the member countries. The process of admission to the European Union required the meeting of certain economic stability and unemployment requirements as well as commitments to democracy which creates stability in this region. The recommendation is to review placing the company in the original EU 15 versus the 10 newly admitted nations. The most appropriate position would be to establish the company in one of the EU 10 with the most stable democracy and best infrastructure to handle deployment of the product to the Union and the world.


See Europa, A constitution for Europe. (This is significant investment on the part of the European Union. This amount is a third of the total community budget. This assistance is in addition to existing national programs.)


WHY NOT NAFTA/FTAA? [Note: The assumption is that Globalization Co. if organized in the NAFTA region would found itself in the United States since it has beneficial bankruptcy laws as well as infrastructure comparable to that of the European Union 15] (1) Expansion is a problem The NAFTA agreement even with Article 2204, which allows for membership of nations and trade groups irrespective of geographical location, has not gained favor among American States. The negotiations concerning the FTAA have stalled with the country of Brazil hampering the process while trying to increase its power by forming and agreement with the European Union. The countries that wish to join the FTAA as well contain a significant number of non-contiguous regions which provide problems to product distribution. The FTAA also appears to be at least two to three years away from completion since the original deadline to conclude talks was January 2005. (2) Existing Trade Agreements and Negotiations The United States does not seem to have a lot of trade agreements but that may be the result of the policy of the government that free trade is a tool to national security. The European Union was founded on such a belief and it was aimed at addressing the so called “German Problem” however the United States and NAFTA have not provided sufficient framework to expand. (3) Free Trade Zone There are benefits to free trade in goods of the member states but trade with remaining nation borders and the inability to move goods from one member to the other that have already received that members import tariff can cause problems which are not positive of an agreement to remove barriers to trade. The strong nationalism of the three member countries is as well a rationale behind the development of a Free Trade zone and not that of a Customs Union and Common Market. These issues will most likely hamper the expansion of United States and trade in North America for the future. Conclusion: NAFTA/FTAA is not yet developed enough to offer the benefits of the European Union. The markets which will be opened with an agreement in the Americas can just as easily be reached through the EU MERCOSUR agreement. NAFTA even with Article 2204 has not been a viable avenue of expansion and the FTAA is not readily apparent on the horizon so long as disagreements between Brazil and the United States remain.


Bibliography 1. Bromley, Simon, Governing the European Union, Sage Publications London 2001. 2. Council of the Americas, FTAA: Blueprint for prosperity Building on NAFTA’s Success, 2001 available at: 3. Europa, Key Facts and Figures about the European Union, EU Press available at: 4. Europa, A Constitution for Europe, EU Press available at: 5. Folsom, Ralph H., European Union Law 3rd Edition, West Group Minnesota 1999. 6. Folsom, Ralph H., NAFTA and Free Trade in the Americas 2nd Edition, Thomson & West 2004


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