Economic Integration in North America

8/9/2019 Economic Integration in North America

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ECONOMIC

INTEGRATION IN

NORTH AMERICA

Online Tutorial by AdaTeaches


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Summary

Trade blocs and their economicconsequences

Trade creation and trade diversion The North American Free Trade

Association and its impacts


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Chapter Readings

Gerber ch. 13 Pugel ch.1

!alvatore ch. "


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Article Readings

Burfisher, M.E., Robinson, S. and Thierfelder, K. (2001)

The impac of !"#T" on he $nied Saes, Journal of

Economic Perspectives, %ol. 1&, pp. 12&'1.

#lein$ %.&. and !alvatore$ '. (1))*+ ,el-are e--ects o- the

North American Free Trade Agreement, Journal of PolicyModeling $ vol. 1"$ pp. 13/1".

Krueer, ".*. (1+++) "re preferenial radin

arranemens rade'liberalisin or proecionis

Journal of Economic Perspectives, %ol. 1-, pp. 10&'

12. #rugman$ P. (1))3+ The uncom-ortable truth about NAFTA$

Foreign Affairs$ November0'ecember$ pp. 13/1). Rodri, /. (2000) o far ill inernaional economic


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Trade blocs and their economic consequences

A trade bloc is a type o-intergovernmental agreement$ o-ten parto- a regional intergovernmental

organiation$ 2here regional barriers totrade$ (tari--s and non/tari-- barriers+ arereduced or eliminated among the

participating states.


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Types of Trade Blocs

Pre-erential trading areas Free trade areas

ustoms unions ommon mar4ets 5conomic and monetary unions.


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Preferential Trade Area

Pre-erential Trade Areas (PTAs+ e6ist2hen countries 2ithin a geographicalregion agree to reduce or eliminate tari--

barriers on selected goods imported-rom other members o- the area. This iso-ten the -irst small step to2ards the

creation o- a trading bloc.


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Free Trade Area

Free Trade Areas (FTAs+ are created 2hent2o or more countries in a region agree toreduce or eliminate barriers to trade on all

goods coming -rom other members.5.g North American Free Trade Agreement

(NAFTA+ A!5AN Free Trade Area (AFTA+

Paci-ic Alliance


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Customs Union

A customs union involves the removal o-tari-- barriers bet2een members$ plus theacceptance o- a common (uni-ied+ e6ternal

tari-- against non/members. This meansthat members may negotiate as a singlebloc 2ith 3rd parties$ such as 2ith other

trading blocs$ or 2ith the ,TO.


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Common Maret

A 7common mar4et8 is the -irst signi-icant step to2ards-ull economic integration$ and occurs 2hen membercountries trade -reely in all economic resources 9 not :ust tangible goods. This means that all barriers to

trade in goods$ services$ capital$ and labour areremoved. ;n addition$ as 2ell as removing tari--s$ non/tari-- barriers are also reduced and eliminated. For acommon mar4et to be success-ul there must also be a

signi-icant level o- harmonisation o- micro/economicpolicies$ and common rules regarding monopolypo2er and other anti/competitive practices. Theremay also be common policies a--ecting 4ey industries.


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Ad!antages of TradeBlocs increased competition that lo2ers prices

or costs

enhanced ability to achieve scale

economies attracting more direct investment by

-oreign companies


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"isad!antages of TradeBlocs %oss o- !overeignty ;ncreased dependency on participating

members &etaliation -rom non/members


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Trade creation and trade di!ersion

The basic three/country model o- a trade blocsho2s that=

1. ;ts economic bene-its -or the partner

countries and the 2orld depend on itstrade creation$ the amount by 2hich itraises the total volume o- 2orld trade.

. ;ts economic costs depend on its tradediversion$ the volume o- trade it diverts-rom lo2er/cost outside suppliers tohigher/cost partner/country suppliers.


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Trade blocs in "e!elopedCountries

1. The 5uropean >nion -rom 1)*" to 1)) 2as a customsunion$ in 2hich member countries remove tari--s andother barriers to trade among themselves and also adopta common set o- e6ternal tari--s

. ;n 1)) the !ingle 5uropean Act promoted -reemovement o- 2or4ers and capital$ so the 5> became acommon mar4et. (The act also required removal o- manyremaining nontari-- barriers to trade among the membercountries.+

3. As the 5> -urther integrates$ including the adoption o- theeuro as a common currency by 1* o- its members$ the5> is moving to2ard economic union$ in 2hich alleconomic policies 2ould be uni-ied.


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Trade blocs in "e!elopingCountries

1. 5--orts by developing countries to -ormtrade blocs -ailed in the 1)?s and1)"?s$ but they have become more

success-ul since 1))?.. Trade among the &

countries in !outh America e6panded

since the bloc 2as -ormed in 1))1$ butsome o- this e6panded intrabloc trade istrade diversion.


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The >nited !tates role in the globaleconomy

!haped by sie$ 2ealth$ and role as a militarysuper po2er

5ndo2ed 2ith

1. 2ide range o- resources. abundant and -ertile -armland

3. a relatively 2ell educated population

@. disproportionate share o- the 2orld8s top research

universities*. enture capital


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The >nited !tates role in the globaleconomy

>! is third mostpopulouscountry a-ter

hina and ;ndia$and G'P morethan t2icehina8s$ the

2orld8s secondlargest economy


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Background and Context

As the 2orld8s largest economy anything the>nited !tates does has an impact on therest o- the 2orld

Given its large economy and population >.!.trade 2ith the rest o- the 2orld has been asmaller share o- its G'P than in most other

developed economies


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The Trade-to-GDP Ratio for the World, 1960-010


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The Trade-to-GDP Ratio for the !nited"tate#, 1960-010


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$eading !%"% Trade Partner#,1990 and 010

Th "hif i & f !" T d


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The "hifting &ocu# of !" TradeRelation#

Throughout most o- the post/,orld ,ar ;;period the >nited !tates 2as a strongsupporter o- multilateral trade

Three -actors have shi-ted the >.!. -ocusto2ards greater use o- bilateral andplurilateral trade agreements

The >nited !tates is still supportive o- the,TO

Th "hif i & f !" T d


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The "hifting &ocu# of !" TradeRelation# 'cont%(

First$ multilateral trade negotiations became morecomplicated as the GATT and then ,TO addedne2 members

,hen the GATT 2as originally signed in 1)@" it hadt2enty/three members

By the time o- the >ruguay &ound (1)C91))@+

there 2ere 1C signatories to GATT urrently there are 1** member countries in the

,TO

Th "hifti & f !" T d


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!econd$ many quotas have been converted to tari--sand tari--s in general have -allen dramatically

Ne2 multilateral trade negotiations in the 'oha

&ound -ocused on more di--icult issues/ agricultural support systems$

/ intellectual property$

/ services trade$

/ government procurement$ and/ assistance -or developing countries.

Th "hifti & f !" T d


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Third$ the end o- the old ,ar removed one o-the pressures that caused the >nited !tates too--er trade concessions to other countries


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&ree Trade )gree*ent#, +xort#, and *ort#in Billion# of Dollar#, 010


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De*ograhic and +cono*icCharacteri#tic# of .orth )*erica

;ncome per capita is measured in t2o 2ays=/ ;n >.!. dollars converted -rom anadian dollars and


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Poulation and GDP for .)&T) Region,011


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Canada-!" Trade Relation#

The >nited !tates and anada have the largestbilateral trade relationship o- any t2o countries inthe 2orld 2ith t2o/2ay merchandise goods trade in?11 o- more than D*)" billion

'ue to a shared border$ a common historicalbac4ground$ and a similar culture

Also the result o- three stages o- integration= AutoPact o- 1)*$ anada/>.!. Free Trade Agreement(>!TA+ in 1)C)$ NAFTA agreement in 1))@


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Auto Pact o- 1)*

&emoved tari--s on cars$ truc4s$ buses$tires$ and automotive parts bet2een thet2o countries$ greatly bene-iting the

large American car ma4ers.


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#oals of Auto Pact o- 1)*

To reduce production costs in anadaby -orce o- more e--icient production o- asmaller range o- vehicles and

components. To lo2er vehicle prices -or consumers.

To increased production creating

thousands o- :obs and increasing2ages.


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Aftermath of Auto Pact

This trans-er o- control o- anadian automa4ingoperations to their >! parent corporationssubstantially reduced the autonomy o- theanadian operations

The agreement also prevented anada pursuing-ree trade in automobiles else2here internationally.

The Auto Pact 2as abolished in ??1 a-ter a ,orldTrade Organiation ruling declared it illegal$ though

by that time the North American Free Trade Agreement had e--ectively superseded it.


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anada/>.!. Free Trade Agreement(>!TA+

eliminate barriers to trade in goods and servicesbet2een anada and the >nited !tates

-acilitate conditions o- -air competition 2ithin the -ree/

trade area established by the Agreement signi-icantly liberalie conditions -or investment 2ithin

that -ree/trade area establish e--ective procedures -or the :oint administration

o- the Agreement and the resolution o- disputes lay the -oundation -or -urther bilateral and multilateral

cooperation to e6pand and enhance the bene-its o- the Agreement.


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$%ect of CUSTA

ross/border shopping/ 2here anadians2ould ma4e shopping daytrips to >! borderto2ns to ta4e advantage o- tari--/-ree goods

and a high anadian dollar$ provided a mini/boom -or these to2ns.

oncerns that -ree trade 2ould have negativee--ects$ not only on the economy (it might

cause o- capital -light and :ob insecurity dueto international outsourcing+$ but also on thesocial and political -abric o- the country.


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/exican +cono*ic Refor*#

From the 1)*?s until the onset o- the crisis in1)C$


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/exican +cono*ic Refor*#'cont%(

A ma:or 2ea4ness o- ;!; policies= theydiscriminate against e6ports by raising therate o- return -or domestic mar4et producing-irms

'omestic mar4et producing -irms have highprotectionist 2alls and charge higher prices2hile -acing little or no competition

Problems emerged in 1)C1 and in August1)C$ the deb crisis began=


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The deb crisis in


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The solution to the debt crisis required multiplepolicy changes

;n the 1)C?s$


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The .orth )*erican &ree Trade)gree*ent

NAFTA 2as rati-ied in 1))3 ta4ing e--ectEanuary 1$ 1))@

Trade -lo2s increased signi-icantly$ but had

been gro2ing be-ore implementation partly inanticipation o- an agreement

The -irst important -eature o- NAFTA/ most-orms o- trade barriers came do2n


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The .orth )*erican &ree Trade


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A third -eature o- NAFTA is three separatedispute resolution mechanisms$ depending onthe source o- the disagreement

;ndividual chapters cover disputes related todumping and anti/dumping duties treatmento- -oreign investors by national policies$ calledin%esor'sae dispues

The .orth )*erican &ree Trade)gree*ent 'cont%(

The .orth )*erican &ree Trade


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The .orth )*erican &ree Trade)gree*ent 'cont%(

Fourth signi-icant -eature o- the agreement

NAFTA itsel- did not contain language regardinglabor and environmental standards or concerns

T2o side agreements 2ere rati-ied andimplemented !orh "merican "reemen on6abor 7ooperaion and the !orh "merican"reemen on En%ironmenal 7ooperaion.


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To .)&T)-"ecific ##ue#

;llegal immigration is a contentious issuein >.!./.!. economy by buying goodsand services and help 4eep prices lo2 byincreasing labor supply

Opponents argue that the >.!. should notignore illegal behavior and that theincreased labor -rom illegal immigrationsuppresses 2ages -or legal 2or4ers


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Attempts at stricter border en-orcementhave been largely unsuccess-ul atstopping illegal immigration

The border is too long 9 $??? miles

The economic incentive that enter the >.!.is too high

Nearly hal- o- the illegal immigrants enteredlegal$ but did not return home 2hen theirvisa8s e6pired

To .)&T)-"ecific ##ue#'cont%(


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The unprecedented 2ave o- migrationappears to be ending -or three main reasons

1. the border has become harder and more

dangerous to cross. the political and economic environment o-

the >nited !tates is more di--icult

3. the demography o-


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A second issue in the NAFTA region isthe rise in drug violence in


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.e and ld )gree*ent#

The >nited !tates has put in place a serieso- unilateral agreements providing mar4etaccess 2ithout demanding reciprocation$called preferenial areemens

This type o- agreement is enacted to supportthe development e--orts o- a set o- countries$or -or a speci-ic political reason


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The *act of .)&T) on !%"%-/exico Trade

Trade -lo2s bet2een >.!. and


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2e3 Trade nitiati4e# of the !nited"tate#

$a5or and +n4iron*ental


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$a5or and +n4iron*ental"tandard#

;n nearly all the trade agreements since NFATA$!orh "merican "reemen on 6abor

7ooperaion and !orh "merican "reemenon En%ironmenal 7ooperaion have served as

-rame2or4s -or labor and environmental clauses Both o- these agreements operate on the principle

countries should en-orce their o2n la2s and not

be used as tools -or attracting trade or investment

$a5or and +n4iron*ental


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$a5or and +n4iron*ental"tandard# 'cont%(

5n-orcement relies on consultations 2ithparties levying a complaint

Agreements attempt to create publica2areness o- non/compliance 2ithout settingspeci-ic standards or encroaching on thesovereignty o- national governments

General recognition o- labor rights is set -orth in

the 5nernaional 6abour *rani4aion8s(56*) /eclaraion on #undamenal3rinciples and Rihs a 9or



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These -our basic rights are built into conventionsdra-ted by the ;%O that countries are encouragedto sign

1. Freedom o- association and the e--ectiverecognition o- the right to collective bargaining

. The elimination o- all -orms o- -orced orcompulsory labor

3. The e--ective abolition o- child labor @. The elimination o- discrimination 2ith respect to

employment and occupation



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The environmental side agreement o- NAFTAestablished a -rame2or4 -or incorporatingenvironmental clauses into subsequent -ree

trade agreements ;n many respects$ it is parallel to the labor

clause motivated by similar concerns that lo2environmental standards not be used to gain

competitive advantages


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n4e#tor-"tate Relation#

The >nited !tates has -orty bilaeral in%esmenreaies (B5T) 2ith countries across the globe

These agreements set out the rules governing cross/border investment and dispute resolution

5mphasies national treatment o- -oreign investorseliminating distinctions bet2een national and -oreigninvestors

5liminate the use o- most per-ormance requirements-or -oreign investment

5 $ D t T d


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o5 $o## Due to Trade

There are a quite a -e2 estimates o- the :obgains or losses caused by NAFTA and othertrade agreements

,ithin -ive years o- NAFTA8s implementation$the estimates ranged -rom a net loss o-)C$??? a year to a net gain o- @$??? a year

The politics o- trade ma4es the discussion o- :ob impacts necessary

o5 $o## Due to Trade


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o5 $o## Due to Trade'cont%(

The ability o- an economy to generate :obs isdetermined by -actors that do not includetrade

Far more important than NAFTA or any otheragreement are the business cycle$demography$ and labor mar4et policies


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'ui(

G'P per capita can be measured using mar4ete6change rates or purchasing po2er parity. ;- oneis interested in learning about living standards in.!. it is best to

compare

a. G'P per capita using mar4et e6change rates.

b. G'P per capita using purchasing po2er parity.

c. G'P per capita using either purchasing po2er parity ormar4et e6change rates. They both give the same ans2er.

d. G'P per capita using purchasing po2er parity multipliedby mar4et e6change rates.


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;ssues such as immigration and environmental and laborstandards create more tensions in the NAFTA than in othertrade blocs. These tensions are more li4ely to arise in theNAFTA

a. Because there is more geographical distance bet2een the >.!.$anada and


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The >.!. anada Auto Pacta. ;s an important part o- the anada/>.!.

Trade Agreement (>!TA+.b. Allo2s -or -ree trade in automobiles.

c. Allo2s -or -ree trade in auto parts.

d. Both A and B.

e. Both B and .


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.!. Trade Agreement (>!TA+ because they 2orriedthat it 2ould

a. %ead to >.!. ne2s and media over2helming anadian culture$

and that it 2ould -orce anada to abandon some o- its socialprograms.

b. ause -iscal problems as anada lost its ability to collect tari--s

on its imports -rom the >.!.c. Not liberalie enough to help the >.!. and anada remaincompetitive against the rise o- imports -rom developing countries.

d. All o- the above.


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Bet2een 1)? and ??C >.!.manu-acturing e6perienced.

a. A decline in value/added and a small

decrease in employment.b. An increase in value/added and a small

decrease in employment.

c. A decline in value/added and a huge

decrease in employment.d. A small increase in value/added and a large

increase in employment.


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;n the 1)C?s


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Trade agreements such as the NAFTA -orcegovernments to consider the e--ects on :obs$

a. !ince the NAFTA has caused a -all inmanu-acturing 2ages in all member countries.

b. Trade agreements raise these issues politically$even though :obs are more tightly connected tonational labor mar4et$ -iscal and monetary policies.

c. !ince the NAFTA has caused increasedunemployment in all member countries.



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;n ??* the >nited !tates rati-ied the 'ominican&epublic9entral American Free Trade Agreement('&/AFTA+$ 2ith the 'ominican &epublic and-ive entral American countries= The most li4ely

-uture impacts o- this agreement area. A large decrease in >.!. per capita income.

b. Gains -or >.!. agriculture producers 2ho have increasedmar4et opportunities in entral America.

c. Gains -or ban4s$ insurance companies andtelecommunications -irms in entral America 2ho 2ill beable to enter the >.!. mar4et.



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;n Free trade areas &ules o- Origin

a. !et rules about the migration o- 2or4ers. They create

production e--iciencies since -or migration by 2or4ers in the

-ree trade area provides a stable 2or4 -orce.b. 'e-ine 2hich goods quali-y -or -ree trade treatment. They

create ine--iciencies since accounting -or rules or origin iscomple6 and requires a lot or resources.

c. !et rules about the migration o- 2or4ers. They createine--iciencies since they provide pre-erences -or migration by

2or4ers in the -ree trade area.

d. 'e-ine 2hich goods quali-y -or -ree trade treatment. Theycreate production e--iciencies since they help -irms to -ocusinput sourcing in the -ree trade area.


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;t is argued that the >.!. could ease migrationissues 2ith

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Economic Integration in North America

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