Economists believe…
free trade agreements produce gains from trade for all member countries.
Levels of Economic Integration:
- Free Trade Area
- Customs Union
- Common Market
- Economic Union
- Political Market
Free Trade Area
Eliminates all barriers to the trade of goods and services among member countries.
- Each country is allowed to determine its own trade policies with regard to nonmembers.
- European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, Switzerland
- North American Free Trade Agreement (NAFTA) - U.S., Canada, Mexico
Customs Union
An agreement between two or more countries to remove trade barriers and lower or eliminate tariffs.
- Eliminates trade barriers between member countries and adopts a common external trade policy.
- The EU began as a customs union
- Andean Community (formerly the Andean Pact) (Bolivia, Colombia, Ecuador, Peru)
Common Market
- No restrictions on immigration, emigration, or cross-border flows of capital among member countries.
- Requires harmony and cooperation on fiscal, monetary, and employment policies.
- Mercosur (Argentina, Brazil, Paraguay, Uruguay) is hoping to establish a common market
Venezuela accepted for membership but awaiting ratification by Paraguay.
Economic Union
Requires a high degree of integration, a coordinating bureaucracy, and the sacrifice of national sovereignty to the bureaucracy.
- European Union (EU)
Political Union
EU headed toward at least partial political union, and the U.S. is an even closer example of political union.
Economic Case for Integration
- All countries gain from free trade and investment
- Assumes an absence of barriers
- Motivated by desire to exploit gains from free trade and investment.
Political Case for Integration
- Linking countries together, making them more dependent on each other, promotes political cooperation
- Reduces the likelihood of violent conflict
- Gives countries greater political clout when dealing with other nations.
Impediments for Integration
While a nation as a whole may benefit from a regional free trade agreement, certain groups may lose.
- It implies a loss of national sovereignty.
Regional economic integration is onluy beneficial if…
the amount of trade it creates exceeds the amount it diverts.
Trade Creation
Related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union.
Trade Diversion
Related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
WTO rules shure ensure that…
a free trade agreement does not result in trade diversion, but they do not cover some nontariff barriers.
Europe has 2 trade blocks:
- European Union (EU) - 28 members
- European Free Trade Area (EFTA) - 4 members
The Euopean Union was a product of 2 political factors:
- The devastation of western Europe during two world wars and the desire for a lasting peace.
- The European nations’ desire to hold their own on the world’s political and economic stage.
Political Structure of the European Union:
1- European Commission
Run by commissioners appointed by member countries and approved by the European parliament.
2- European Council
The ultimate controlling authority within the EU
One representative from the government of each member state.
3. European Parliament
751 members elected by the member states
Debates legislation proposed by the commission and forwarded to it by the council.
- Treaty of Lisbon increased power of the parliament
4. Court of Justice
Single European Act of 1987 Objectives:
- Remove all frontier controls among EC countries
- Apply the principle of “mutual recognition” to product standards
- Institute open public procurement to nonnational suppliers
- Lift barriers to competition in the retail banking and insurance businesses
- Remove all restrictions on foreign exchange transactions between member countries by the end of 1992
- Abolish restrictions on cabotage by the end of 1992
Maastricht Treaty
Agreed to in 1992, but not ratified until January 1, 1994, that committed the 12 member states of the European Community to a closer economic and political union.
Benefits of the Euro
Savings from having to handle one currency, rather than many
Makes it easier to compare prices across Europe
Producers forced to look for ways to reduce production costs
Boosts development of highly liquid pan-European capital market
Will open investment options
Cons of the Euro
- Loss of control over national monetary policy
- EU is not an optimal currency area
Optimal currency area
Region in which similarities in economic activity make a single currency and exchange rate feasible instruments of macroeconomic policy.
Enlargemnet of the European Union
Expansion into eastern Europe
13 countries applied by end of the 1990s
Had to establish stable democratic governments
Show respect for human rights
New members had to wait to adopt euro
Eastern European countries only account for 5 percent of the GDP of current EU members
Turkey has been denied entry because of human rights concerns
North American Free Trade Agreement (NAFTA)
-Abolished tariffs on 99% of the goods traded between members
-Removed barriers on the cross-border flow of services
-Protects intellectual property rights
-Removes most restrictions on FDI between members
-Allows each country to apply environmental standards
-Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored
