Transcript ECON5335 - International Economics

ECON5335 - International Economics
Chapter 7
Regional Integration
Regional integration allowed under GATT article XXIV
States that “The contracting parties recognize the
desirability of increasing freedom of trade by the
development, through voluntary agreements, of closer
integration between the economies of the countries
parties to such agreements. They also recognize that
the purpose of a customs union or of a free-trade area
should be to facilitate trade between the constituent
territories and not to raise barriers to the trade of
other contracting parties with such territories.”
What is a customs union?
What is a free trade area?
2
para 5 of section XXIV states “Accordingly, the
provisions of this Agreement shall not prevent, as
between the territories of contracting parties, the
formation of a customs union or of a free-trade area or
the adoption of an interim agreement necessary for
the formation of a customs union or of a free-trade
area”
Bela Belassa (1963) first came up with steps for countries to be
more economically integrated
Steps are as follows:
i) Free trade
ii) Customs union
iii) Common market
iv) Economic union
v) Monetary union
vi) Fiscal union
vii) Political union
What’s the difference between a free trade area and a customs
union?
Do countries wanting more regional integration have to follow in
the order above?
•Level of integration
•Description
•Characteristics
•Examples
•0
•Regional autarky
• - bilateral trade
agreements
•Japan (before ASEAN)
•A
•FTA
• - tariffs and quotas
removed internally
• - national tariffs retained
against outside
•NAFTA
•B
•Customs union
• - tariffs and quotas
removed internally
• - common external tariff
•Mercosur
•C
•Common market
• - free movement of
factors of production,
goods and services
•EU (before EMU)
•D
•Economic union
• - harmonization or
coordination of some
national policies
• - transfer of some policies
to supranational level
•Competition policy in the
EU
•E
•Monetary union
• - single currency
• - single central bank
•ECB in the EU
•F
•Fiscal union
• - harmonization of taxes
• - fiscal sovereignty
•EU to some degree
•G
•Political union
• - effective and democratic
body at supranational level
•Does not exist out of a
regional integration project
Many examples of regional economic integration around the world:
North America – CUFTA and NAFTA
Europe – EU, EFTA, BAFTA, CEFTA
Caribbean – CARICOM
Central and South America – Mercosur, SELA, CAN
Africa – AU, SACU, COMESA, WAEMU
Asia – ASEAN, AFTA
Australasia – ANZFTA
- see http://www.wto.org/english/tratop_e/region_e/region_e.htm for more
Grew out of CUFTA – idea was to extend to Mexico, but whole
new agreement happened
Basically a free trade area, but with side agreements on labor
standards, environment, and migration of professionals
“Rules of origin” allow for duty free trade as long as 62.5% of
value added within NAFTA
Environmental commission set up in Montreal to oversee
complaints about environmental degradation
“Snap-back” provision allows for tariffs to be restored if surge of
imports threatens domestic industry
Trade dispute mechanism consists of 3 experts – usually resolves
disputes amicably – exceptions though (e.g. softwood lumber)
Maquiladora program
US boom of the 90s benefited maquiladoras, but China’s entry
into the WTO has eroded competitiveness of plants, with many
closing
Critics say that although trade has increased, Mexican real
wages in manufacturing have fallen, and also environmental
degradation evident
Difficult to say if NAFTA has had large effects, as phased in over
10 years, and also lots of other events happening
Impact clearly much greater on Canada and Mexico than on the
US
Yellow = EU members Grey = Candidate countries
members
Cream = Non-
Originally formed as a customs union for steel and coal (Treaty
of Rome 1958)
Grew into EEC – customs union
Then EC – common market (Single Market 1992)
Then EU – economic union and some political pooling of
sovereignty (European Parliament)
Now EMU, which also involves monetary union (euro) (Treaty of
Maastricht, 1991)
Big debate in 90s surrounded widening vs deepening
Now 27 member states, with EMU adopted by only 13 member
states
Switzerland and Norway do not want to join, and France has
effectively stopped Turkey from joining
Trade creation significant
Trade diversion also present, although size differs
depending on study
EMU is thought to have increased trade significantly,
although estimates vary widely
Growth and Stability pact has “coordinated” fiscal
policy
Commission acts as civil service but can also impose
fines
European Council decides on major issues
ERM of the EMS (79)
Delors report (89)
Treaty of Maastricht (91)
Currency crisis (92-93)
Euro introduced and
exchange rates fixed (99)
Money euro introduced
(02)
Greece added (04)
Slovenia added (07)
Cyprus and Malta added
(08)
Slovakia added (09)
Estonia added (11)
Euro also used by other countries – sometimes
outside Europe
ECB runs monetary policy but no centralized
fiscal policy
Hence SGP (Dublin 1996)
No exit clause for EMU in Maastricht
Major cause of problems for Greece
Now austerity packages for all PIIGS
“One size fits all” monetary policy means fiscal
policy takes all the strain