IB 350, Ch. 9

Pros and Cons of Economic Integration

(Pros) Increased trade Increased capital flows Production efficiencies Price reductions Change in job market (Cons) Loss of national sovereignty Labor dislocation (domestic) Labor dislocation (foreign invasion?) Potential trade diversion

European Union: Challenges

-Differing economic strains with current crisis -pressure on Euro (Greece, Italy and others) -Market differences - harmonization and friction -England vs. "Continent" -Cost of social policy -Common Agricultural Policy (CAP) -Bureaucracy (5 governmental bodies) -Further expansion: Macedonia (FYR), Serbia, Iceland, Turkey!?

Challenge to the Euro

-European Stability Pact - was it self-delusion? (don't ask/don't tell) -Debt liability in over-leveraged countries AND lender countries -German fiscal conservatism -Impact on the EU?

Free Trade in the Americas (FTAA)

-Post -NAFTA : Summit of the Americas in 1994 -34 democratic nations -Followed by Summits in 1998, 2001, and 2005 -Target was 2005 -Nov 1, 2002 - 2004: Brazil and US co-chair -No agreement reached as of 2011

Short history of the EU*

1951: The European Coal and Steel Community is established by the six founding members 1957: The Treaty of Rome establishes a common market 1973: The Community expands to nine member states and develops its common policies 1979: The first direct elections to the European Parliament 1981: The first Mediterranean enlargement (12 nations) 1993: The Treaty of Maastricht establishes the European Union 1995: The EU expands to 15 members 1999: Euro established (non-cash) 2002: Euro notes and coins are introduced 2004: Ten more countries join the Union 2004: European Constitution adopted (subject to countries approval) 2005: EU constitution DOA (French & Holland rejection) 2007: Treaty of Lisbon (subject to countries approval)* 2009: Irish voters FINALLY approve the Treaty of Lisbon and all nations sign the treaty (as of Nov. 4, 2009 - Dec. 1 2009 activation!)

Context for Integration

Increasing Trade (Benefits) -> Increased Pressure for Governmental Protection = Conflict Solutions -GATT, WTO -Regional Integration Which is better?

• What are major challenges facing the EU for the future?

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• What are some key differences between the US and the EU?

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• What are some key reasons for European expansion?

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• What are some of the most significant regional trade alliances and which general geographic area does each encompass (NOT individual countries in the trade regions)?

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• What are the four basic levels of economic integration and what are the distinguishing features of each?

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• What are the key characteristics of NAFTA?

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• What are the positive and negative effects of trade agreements (on both individual countries and the efficiency of markets overall)?

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• What are the relative merits and deficiencies of both WTO (global) and regional integration as solutions to trade disagreements and global trade goals? (Consider the group exercise discussion in relation to this issue)

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• What has been the general impact of NAFTA on participant countries?

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• What have been the interests/roles of other key countries on regional integration in the Americas (Venezuela, Chile, Mexico, U.S.)?

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• What is the FTAA and what is the current status of FTAA negotiations?

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• What is trade diversion?

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• What is/was the role of Brazil in moves toward economic integration in the Americas and overall?

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• What were the major landmarks in the evolution of the European Union (EU)?

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• What are some evidences of the popularity of regional/bi-lateral economic agreements? And what are some of the reasons for their growth over the last two decades?

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Economic Integration (largely regional)

1 Agreements regarding: -tariffs -quotas -mobility of capital and labor -economic issues -political issues 2 Growing participation -Only 3 WTO members with no trade agreements -Currently 170 bilateral or regional agreements with 70 more operational, but not yet "notified" * -Possibly 300 by end of 2005 (per WTO) * Controversial issue for WTO - 2006 agreement on "transparency"

Background of NAFTA

1 Canadian FTA (1989) -Existing FTA w/ U.S. (unhappy with some provisions) 2 Mexico -Economic stagnation -Anti - U.S. 3 de la Madrid: Economic liberalization -1982-88: tariffs from 16.4% to 9.5% -Licensing requirements reduced 4 Salinas de Gortari: Further liberalization -Privatized 160 state-owned companies -Permitted 100% ownership in 73% of industries in Mexico -Growth in U.S. economic ties: 75% of exports to U.S.

Basic Levels of Integration

1 Free Trade Area = -no tariffs and quotas inside the region 2 Customs Union = -Free Trade Area + same tariffs and quotas outside the region 3 Common Market = -Customs Union + mobility of capital and labor 4 Economic Union = -Common Market + Common currency, tax rate, fiscal policy, monetary policy

NAFTA Details

1 Implemented Jan 1, 1994 2 Covered 9000 items - Immediate elimination of quotas and license on all 9000 - 50% immediate tariff elimination - 15% in 5 years - Nearly all - as of January 1, 2008 3 Side agreements in labor and environment (and enforcement of those) 4 Snap-back provisions

Learning objectives - EU

1 Know the basic divisions within the EU 2 Know the key milestones in the evolution of the European Union 3 Understand some differences between the EU and the US 4 Understand the rationale for EU expansion 5 Understand some key challenges/questions facing the EU today

EU vs. US

1 Lower economic growth (variable) 2 Higher unemployment (historically!) 3 More social programs 4 Less income variance 5 Values -Soft power -Responsibility of the "State" vs. individual -Sense of history/less adaptable

Major Regional Trade Associations

1 NAFTA (The North American Free Trade Agreement): Canada, Mexico, U.S. 2 MERCOSUR (Common Market of the South): Brazil, Argentina, Uruguay, and Paraguay (Bolivia, Chile, Columbia, Ecuador and Peru are associate members and Venezuela has joined but not approved by Paraguay). 3 UNASUR: Argentina, Brazil, Bolivia, Colombia, Chile, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay, Venezuela 4 CACM (Central American Common Market): Belize, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua, and Panama. 5 CAFTA-DR: all of above except Belize but with the U.S. 6 ASEAN (Association of Southeast Asian Nations): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam (ASEAN has FTAs with Australia, China, India, Japan and Korea) 7 EU (European Union): Belgium, France, Germany, Italy, Luxembourg, The Netherlands, U.K., Ireland, Denmark, Greece, Spain, Portugal, Austria, Finland, Sweden, Estonia, Latvia, Lithuania, Poland, Hungary, Czech Republic, Slovakia, Cyprus, Slovenia, Malta, Romania and Bulgaria

Why EU Enlargement?

1 Potential for economic growth 2 Trade efficiencies 3 Economic power/balance 4 Political power/balance 5 Opportunity costs 6 Philosophical values/Identity

Trade Creation vs. Trade Diversion

1 Trade Creation -High cost domestic production and Low cost trade "agreement" partner 2 Trade Diversion -Low cost "NON-agreement" trade partner and High cost "agreement" trade partner

Learning Objectives (Part 1)

1 What are some of the most significant global trade agreements? 2 Why are regional trade agreements attractive to the countries involved? 3 What are different types of regional trade agreements? 4 What are the pluses and minuses of regional economic integration for countries participating? 5 What is trade diversion and in what circumstances can trade agreements cause trade diversion? 6 What are the relative strengths and weaknesses of regional vs. global trade agreements?

Learning Objectives - NAFTA/FTAA

1 What events/situations led up to NAFTA? 2 What are the basic characteristics of NAFTA? 3 What has been the impact of NAFTA on the US and Mexico? 4 What is the Free Trade Area of the Americas (FTAA)? 5 What are the prospects for further economic integration in the Americas and who are the key players? What about UNASUR?

• What have been the successes and failures of the FTAA initiative?

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• What were important events/situations that led up to NAFTA?

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Impact of NAFTA

BOTTOM LINE: 1 Increased trade 2 Positive impact on GDP in Mexico* 3 Investor confidence in Mexico increased -1994 "Tequila" Crisis 4 Marginal impact on U.S. economically -Mexico GDP 4% of U.S. GDP in '93 -Avg. Tariffs at time of pact = 3.5% 5 Some industries impacted more than others (textiles, electronics, agriculture, high tech, lumber, financial institutions, automotive, consumer goods, retailing) 6 Improved political relations and stabilization 7 Internal criticisms/political opposition in all three countries 8 Still a long way from convergence - Greater integration?

Future Prospects for integration in the Americas?

Key issues/background: 1 MERCOSUR: declining impact 2 Free Trade Treaty of the Americas (FTAA) 3 Domestic trade policies: U.S. Steel tariff and Agriculture tariffs subsidies, Intellectual property rights and market access 4 Progress of the WTO/Doha? --> Brazil and the US 5 Merger of Multi- and Bi-lateral Agreements -CAFTA-DR -Chile... Panama, Peru, Colombia, Brazil? 6 UNASUR: (Argentina, Brazil, Bolivia, Colombia, Chile, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay, Venezuela) 7 Chavez, Lula/Rousseff, and Obama A perspective from Brazil