Regional Trading

Arrangements

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 CHAPTER OUTLINE
• Regional Integration versus Multilateralism
• Types of Regional Trade Agreements (RTA’s)
• Types of RTA’s
• Effects of RTA’s – Static and Dynamic Effects
• The European Union
• The European Monetary Union
• North American Free Trade Area (NAFTA)
• Russia and WTO
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 Regional Integration vs. Multilateralism
• WTO
• Promote trade liberalization through
worldwide agreements
• Trade liberalization by any one nation
• Extended to all WTO members, 153 nations
• Nondiscriminatory
• Regional trading arrangements
• Nations reduce trade barriers only for a small
group of partner nations
• Discriminating against the rest of the world
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 Types of Regional Trading Arrangements
• Economic integration
• Process of eliminating restrictions on global
trade, payments, and factor mobility
• Results in the uniting of two or more national
economies in a regional trading arrangement
• Degrees of Economic integration
Free Trade Area, Customs Union
Common Market, Economic Union
Monetary Union
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 Types of Regional Trading Arrangements
• Free Trade Area (FTA)
• Association of trading nations
• Members agree to remove all tariff and non-
tariff barriers among themselves
• Each member maintains its own set of trade
restrictions against outsiders
• North American Free Trade Agreement (NAFTA)
• Canada, Mexico, and the United States

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 Types of Regional Trading Arrangements
• Customs union
• Agreement among two or more trading
partners
• Remove all tariff and non-tariff trade barriers
among themselves
• Each member nation imposes common trade
restrictions against non-members
• Benelux
• Belgium, the Netherlands, and Luxembourg

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 Types of Regional Trading Arrangements
• Common Market
• Group of trading nations
• Free movement of goods and services among
member nations (without trade restrictions)
• Initiation of common external trade restrictions
against non-members
• Free movement of factors of production across
national borders within the economic bloc
• European Common Market, 1992
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 Types of Regional Trading Arrangements
• Economic Union
• Group of Trading Nations
• Adopt all elements of a Common Market plus
• National, social, taxation, and fiscal policies are
harmonized and administered by a
supranational institution
• Requires an agreement to transfer economic
sovereignty to a supranational authority
• European Union (1994)
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 Types of Regional Trading Arrangements
• Monetary union
• Ultimate degree of economic union
• Unification of national monetary policies
• Acceptance of a common currency managed
by a supranational monetary authority
• The United States of America
• 50 states, common currency
• Single central Bank (Federal Reserve)
• Free trade and factor mobility among states
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 Impetus for Regionalism
• Motivations for regional trading arrangements
• Prospect of enhanced economic growth
• Economies of large-scale production
• Foster specialization and learning-by-doing
• Attract foreign investment
• Foster a variety of noneconomic objectives
• Managing immigration flows
• Promoting regional security
• Enhance & solidify domestic economic reforms
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 Effects of a Regional Trading Arrangement
• Static effects (see Figure 8.1)
• Trade-creation effect (areas “a + b”)
• Welfare gains
• domestic production of one member in the union
• Replaced by another member’s lower-cost imports
• Trade-diversion effect (area “c”)
• Welfare losses
• Imports from a low-cost supplier outside the union
• Replaced by a higher-cost supplier within the union
• Production and Consumption Effects
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 Effects of a Regional Trading Arrangement
• Dynamic effects
• Creation of larger markets
• Dynamic gains
• Economies of scale
• Greater competition
• Stimulus of investment

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 The European Union
• European Community / European Union
• Trade liberalization
• Treaty of Rome in 1957
• Belgium, France, Italy, Luxembourg, the
Netherlands, West Germany
• By 1973
• The United Kingdom, Ireland, Denmark
• 1981 – Greece
• 1987 – Spain, Portugal
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 The European Union
• European Community / European Union
• 1995 – Austria, Finland, Sweden
• 2004 – ten other Central and Eastern European
countries
• Cyprus, the Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia
• 2007 – a total of 27 countries
• Bulgaria and Romania

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 The European Union
• European Union – customs union
• Economic integration to an economic union
• 1957 – trade liberalization
• 1968 – free-trade area
• 1970 – customs union
• 1985 – detailed program for becoming a
common market
• Elimination of remaining nontariff trade barriers by
1992

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 The European Union
• Convergence criteria, EMU
• The Maastricht Treaty, 1991
• Full-fledged European Monetary Union (EMU) by
2003; Single currency, the euro
• Align economic and monetary policy
• Price stability
• Low long-term interest rates
• Stable exchange rates
• Sound public finances
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 The European Union
• European Union - monetary union
• The euro - official currency of 16 of the 27
member states of the European Union
• The eurozone:
• Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia,
Slovenia, and Spain
• U.K., Denmark, and Sweden decided not to adopt
to Euro as their national currency
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 The European Union
• The euro
• Also used in another five European countries
• Used daily by some 330 million Europeans
• Over 175 million people worldwide
• Use currencies that are pegged to the euro
• The second largest reserve currency and the
• Second most traded currency in the world

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 Common Agricultural Policy
• Common Agricultural Policy (CAP)
• Abolished restrictions on agricultural products
traded internally
• Common agricultural policy
• Support of prices received by farmers
• Deficiency payments, output controls, and direct
income payments
• Variable levies
• Export subsidies

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 Common Agricultural Policy
• Variable levies
• Levy – determined daily
• The difference between the lowest price on the
world market and the support price
• More restrictive than a fixed tariff
• Discourages foreign producers
• From absorbing part of the tariff
• From cutting prices to maintain export sales

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 The European Union
• Export subsidies
• Ensure that any surplus agricultural output will
be sold overseas
• EU farmers - incentive to increase production
• Reduce the domestic supply
• Eliminate the need for the government to
purchase the excess

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 The European Monetary Union
• European Monetary Union (EMU), 1999
• Single currency (the euro)
• Lower the costs of goods and services
• Facilitate a comparison of prices within the EU
• Promote more uniform prices
• European Central Bank - Frankfurt, Germany
• Controls the supply of euros
• Sets the short-term euro interest rate
• Maintains permanently fixed exchange rates for the
member countries
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 The European Monetary Union
• Optimum currency area
• Region in which it is economically preferable to
have a single official currency
• Rather than multiple official currencies
• Benefits and Costs:
• More uniform prices; Lower transaction costs
• More certainty for investors; Enhanced competition
• Promote price stability
• Loss of independent monetary policy
• Takes away the flexibility of changing exchange rate
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 The European Monetary Union
• Optimum currency area
• Best chance of success
• Similar business cycles and economic structures
• Single monetary policy should affect all the
participating countries in the same manner
• No legal, cultural, or linguistic barriers to labor
mobility
• Wage flexibility
• System of stabilizing transfers

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 The European Monetary Union
• Europe - suboptimal currency area
• Advantages and Disadvantages
• Improve economic efficiency
• Lower transaction costs of exchanging currency
• Elimination of exchange-rate risk
• Stimulates competition
• Broadening /deepening of Euro financial markets
• EU countries – cannot use monetary policy and
exchange rate as a tool in adjusting to economic
disturbances and limits use of fiscal policy to keep
budget deficits in control
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 The European Monetary Union
• Challenges for the EMU
• Ability of the European Central Bank to focus
on price stability over the long term
• Operation of monetary policy
• Difficulty in reducing budget deficits and debts
• Need for structural reform

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 Will the Eurozone Survive?
• Problems in the Eurozone
• Greece facing increasing debt with investors
casting doubt on it’s ability to pay
• Spain, Portugal and Ireland facing similar
problems
• Need greater coordination of Eurozone
government budgets
• Establishment of European Monetary Fund
• Pros and Cons of European Monetary Fund
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 Will The Eurozone Survive?
• European Monetary Fund?
• Needs a better mechanism to deal with a financial
crisis
• Possible interim solution: European Monetary
Fund (EMF)
• Bailout fund financed out of contributions from
member country governments
• It would put the eurozone in charge of its own destiny
• Eurozone members would have greater powers to
punish fiscal abusers
• Role of Germany – Fallacy of Composition
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 North American Free Trade Agreement
• North American Free Trade Agreement, 1994
• Mexico, Canada, and the United States
• Provide each member nation better access to
the others’ markets, technology, labor, and
expertise
• Economies of scale

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 North American Free Trade Agreement
• NAFTA & Mexico
• Benefits
• Increase in the production of goods and services –
comparative advantage
• Rising investment spending
• Increase wage incomes and employment, national
output, and foreign-exchange earnings
• Facilitated the transfer of technology
• Costs
• Agriculture – 25% of population
• Devastated by US competition
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 North American Free Trade Agreement
• NAFTA & Canada
• Benefits / safeguards
• Maintenance of its status in international trade
• No loss of its current free-trade preferences in U.S.
• Equal access to Mexico’s market
• Costs
• Concerns about Canada’s European-style social
welfare model
• Uncompetitive practices and policies
• Downward pressure on the country’s base of personal
and corporate taxes
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 North American Free Trade Agreement
• NAFTA & the U.S.
• Benefits
• Expanding trade opportunities
• Reducing prices;
• Increasing competition
• Economies of large-scale production
• More reliable source of petroleum
• Less illegal Mexican immigration
• Enhanced Mexican political stability

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 North American Free Trade Agreement
• NAFTA & the U.S.
• Costs
• Industries that rely on trade barriers to limit
imports of low-priced Mexican goods
• Citrus and sugar
• Unskilled workers
• Fear that U.S. companies will move to Mexico
• No because of different worker productivity
• Concern: Mexico’s environmental regulations
• Greater trade creation than trade diversion
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 NAFTA & U.S./Mexico Trucking Dispute
• Conflict between Trade Partners of NAFTA
• Differences due to Safety Standards or Jobs?
• Differences in safety standards between U.S.
Canada and Mexico trucking system
• President Clinton (1995) imposes restrictions
on Mexican cargo trucking for safety reasons
• 2007 – agreement with Mexico to create a
Pilot program for Mexican trucks to operate in
U.S.
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 NAFTA & U.S./Mexico Trucking Dispute
• After 18 months of the program, Teamsters
object leading to cancel the program
• Mexico retaliates by imposing tariffs on 99
products (mostly agricultural goods)
• 2011 – U.S. and Mexico strike a deal to end
the Trucking dispute
• Modest gains for Mexican Truckers

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 North American Free Trade Agreement
• Is NAFTA an optimum currency area?
• Degree of economic integration
• Canada, U.S., Mexico
• Similarity of economic structures
• Canada, U.S.
• Mexico – couldn’t use monetary policy
• Canada – concerned about the loss of national
sovereignty

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