Economic Integration

1. Economic Integration Chapter 8

2. Introduction • Three scopes of economic integration • Global: trade liberalization by GATT and WTO • Regional: preferential treatment of member countries in the group • Bilateral: preferential treatment between two countries • Regional and bilateral agreements are against the MFN clause (normal trading relations), but allowed under WTO. • Visit www.wto.org for regional trade agreements.

3. The General Agreement on Tariffs and Trade (GATT) General Agreement on Tariffs and Trade (GATT):established by twenty-three signator nations in 1947 as a multilateral agreement whose objective is to liberalize world trade • Most-favored nation clause (MFN): the fundamental principle of “trade without discrimination,” i.e., each member nation must open its markets equally to every other member nation • Eight major rounds of negotiations from 1947 to 1994 led to a wide variety of multilateral reductions in both tariff and nontariff barriers. • The World Trade Organization was created in 1995 for the purpose of institutionalizing the GATT.

4. The World Trade Organization (WTO) World Trade Organization (WTO): a permanent body founded in 1995 to (i) facilitate the development of a free and open international trading system according to the GATT and (ii) adjudicate trade disputes between or amongst member nations • normal trade relations: replacing the most-favored-nation clause, the principle prohibits any sort of trade discrimination Exceptions: • preferential treatment for products of emerging economies • concessions granted to members of economic blocs • dispute resolution: a clearly defined mechanism for the settlement of disputes [continued]

5. The WTO: Decision-making Units • Ministerial Conference • General Council • Goods Council • Services Council • Council on Trade-related Aspects of Intellectual Property (TRIPS) Countries may bring charges of unfair trade practices to a WTO panel; accused countries may appeal; WTO rulings are binding. If an offending country fails to comply with a judgment, the rights to compensation and countervailing sanctions will follow.

6. Four stages (levels) of regional economic integration • FTA (free trade area): • no internal tariffs among members, but each country imposes its own external tariffs to the third country. • NAFTA (North America Free Trade Agreement • AFTA (ASEAN Free Trade Area) • EFTA (European Free Trade Area) • Customs union: • no internal tariffs and common external tariffs • Mercosur (Southern Common Market), • CACM (Central American Common Market) • CARICOM (Caribbean Community and Common Market)

7. Four stages (levels) of regional economic integration • Common market: • free movement of products and factors (resources), which is customs union plus factor mobility • EU (European Union – previously EEC) • Economic union (monetary union): • common market plus common currency • coordination of fiscal and monetary policy • EMU (Economic and Monetary Union)

8. Economic effects of economic integration • Static effects: Short-term effects (shift of production) • Trade creation: production shifts to more efficient member countries from inefficient domestic or outside countries. • Trade diversion: production shift to inefficient member countries from more efficient outsiders. • Dynamic effects: Long-term effects • Cost reduction due to economies of scale • Cost reduction due to increased competition.

9. European Union (europa.eu) • Treaty of Paris (1951) • Formation of ECSC (European coal and steel community) by six countries • Treaty of Rome (1957) • Formation of EEC (European economic community), initially free trade area, becoming a customs union in 1967. • The Stockholm convention in 1960 created EFTA by seven countries to counteract EEC.

10. European Union (EU) - continued • Single European Act of 1987 • Creation of single market (Common market) effective on Jan. 1, 1993 • Rename EEC by EU (15 members until 2003) • 27 member countries (10 joined in 2004 and 2 in 2007 • Treaty of Maastricht (1992) • Creation of an economic union, EMU (11 members) • Establishment of European Central Bank on July 1998 • Introduction of a common currency, euro on Jan. 1, 1999 • Circulation of euro on Jan 1, 2002

11. Organization of EU • European Commission: • administrative body of 27 members • Initiate proposals • Guardian of the treaties • Implementing policies • European Parliament • 785 members elected according to population distribution • Legislative body, but final decision by Council of Ministers • Control over budget and supervision of the Commission

12. Organization of EUContinued • European Council and Council of Ministers • European Council: summit meeting of state heads, providing guidelines • Council of Ministers • 25 different councils (agriculture, transport, etc.) • Final say on legislations • Different votes allocated to individual countries (according to population) • Unanimity or qualified majority voting required depending on issues. • Others • Court of Justice, Court of Auditors, sub-committees

13. EMU (www.ecb.int) • European Monetary System in 1979  European Monetary Institute in 1994  European Central Bank in July 1, 1998 • Convergence criteria • Inflation rate: less than 1.5% above the average • Long-term interest rate: within 2% of the average • Budget deficit: no more than 3% of GDP • Public debt: no more than 60% of GDP • 15 member countries • U.K, Denmark and Sweden opted out.

14. Challenges Facing the EU • the transition of economically disparate entrants into the EU • the unanimous adoption of a new constitution • the resolution of the Common Agricultural Policy (CAP) with internal constituencies on the one hand and non-members nations on the other • the harmonization of fiscal, monetary, and commercial policies The Common Agricultural Policy (CAP)represents a set of rules and mechanisms designed to: - regulate the production, trade, and processing of agricultural products in the EU - provide farmers with a reasonable standard of living and consumers with safe, quality food at fair prices

15. NAFTA • North America Free trade Agreement • Free trade area among the U.S., Canada and Mexico • The largest trading bloc in terms of GNP • A good example of trade diversion (production shifted from Asia to Mexico) • History • Automotive products Trade Agreement (1965) between the U.S. and Canada • Canada-U.S. Free Trade Agreement (1989) • NAFTA (1994)

16. Provisions of NAFTA • Elimination of tariffs • Most tariffs will be eliminated by 2004 • The remaining by 2008 • Elimination of non-tariff barriers • Harmonization of trade rules (subsidies, antidumping, safety standards) • Liberalization of capital movement (FDI) • Protection of intellectual properties • Dispute settlement • Provisions on labor and environmental standards

17. Economic Effects of NAFTA • Trade :Trade among members increased faster than trade with the rest of world • Investment: Mexico is the main beneficiary (FDI not only from the U.S. and Canada, but also from other countries) • Employment: Difficult to measure because of too many confounding variables. Overall employment effect in the area including the U.S. has been positive. • Visit www.ustr.gov and find this report by clicking "Regional" under "Trade Agreements" and then "North American Free Trade Agreement.” 

18. Economics Effects of NAFTA continued • Visit www.ustr.gov and find this report by clicking "Regional" under "Trade Agreements" and then "North American Free Trade Agreement.” 

19. Issues related to NAFTA • Rule of origin and local content • Rule of origin: products must originate from North America to get preferential treatment. • Local content: the percentage of value of a product that must be from North America to be considered as North American origin (Currently 50% for most products and 62.5% for autos. Political pressure to increase this percentage ) • Expansion of membership • FTAA (Free Trade Area of America) proposal in 2001

20. 2003 Comparative Statistics by Trade Group BLOC POP. IN MIL. GNI PER CAPITA GNI ($US BIL.) ($US) ______________________________________________________________________________________________________________________________________________ EU-15 379.7 $10,116 $26,641 EU-25 [+2004 ADMITS] 454.0 $10,544 $23,224 NAFTA 424.9 $12,340 $29,042 Canada 31.6 $ 757 $23,930 Mexico 102.3 $ 637 $ 6,230 USA 291.0 $10,946 $37,610 MERCOSUR 224.0 $ 638 $ 2,848 Source: 2005 World Bank Development Report.

21. Other Regional Trade Blocs • ASEAN and AFTA • Originated in 1967 • Formation of AFTA in 1993 • Reduction of intra-zone tariffs to a maximum of 5% by 2008 (by 2004 for some countries) • Mercosur (Southern Common Market) • Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay. • Aim for a customs union, but not yet

22. Other Regional Trade Blocs • Other Latin American Trade Blocs • Andean group (Andean Common Market) • ALADI (Latin American Integration Association) • CARICOM (Caribbean Community and Common Market) • CACM (Central American Common Market) • African Trade Blocs

23. APEC • Asia Pacific Economic Cooperation • Formed in 1989 to promote trade and investment • 21 member countries that border the Pacific Rim • APEC is not a trading bloc • For trade liberalization and against protectionism • Prefer open regionalism over closed regionalism • Goal: Free and open trade • by 2010 for the industrialized countries • by 2020 for the rest of the members

24. Commodity Agreements commodity agreement: a form of economic cooperation designed to stabilize the price and supply of primary commodities through the use of buffer stocks and/or quota systems • producers’ alliances: exclusive membership agreements between or amongst producing countries (a cartel) - Organization of Oil Exporting Countries (OPEC): a producer cartel whose members include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela • international commodity control agreements (ICCAs): agreements between or amongst producing and consuming countries - International Cocoa Organization (ICO) - International Sugar Organization (ISO)