Economic Integration Groups?

Preferential Trade Agreements versus Multilateralism Dr. James D. Goodnow University of North Texas Preferential Trade Agreements vs. Multilateralism • Important Definitions: • What is multilateralism? • The WTO promotes trade liberalization through worldwide agreements • Trade liberalization by any one nation extended to all WTO members, 153 nations • Nondiscriminatory • What are preferential trade agreements? • Nations reduce trade barriers only for a small group of partner nations • Discriminate against the rest of the world

• Attract investment from outside the bloc • Regional consensus for global trade negotiations • Greater political cooperation lessens possibility of future regional wars What are some downsides of preferential trade agreements?

• Trade diversion (from non members to member nations) • Reduces global free trade • Shift employment to lower cost nations within the group • Lose national sovereign trade policy making autonomy (especially in more integrated agreements) Key Question: What are the main preferential trade agreement schemes?

• Free trade area • Customs union • Common market • Economic union • Monetary union vs. fiscal union • Political union What is a free trade area?

• No duties or barriers to international trade in physical products among member countries • Each member has own trade policies with nonmember countries • NAFTA has local content requirements (rules of origin) • Other examples: EFTA (EU plus Norway, Switzerland and Iceland), ASEAN, CER (Australia/New Zealand) For the USA, it’s not just NAFTA

• The USA has free trade agreements with: • Dominican Republic and five Central American countries (Guatemala, Honduras, Nicaragua, Costa Rica, El Salvador) – DR/CAFTA • Chile, Colombia and Peru in South America • Australia, South Korea and Singapore in the Pacific Rim • Bahrain, Israel, Jordan, Morocco and Oman in the Middle East and North Africa • And there has been discussion (as recently as the July 2018 summit between President Trump and the President of the European Commission) about a free trade area (except for automobiles) between the USA and the European Union What is a customs union?

• Free trade in physical products among member nations plus • Common trade policies with respect to physical products with nonmembers • Example: MERCOSUR (Brazil, Argentina, Paraguay, Uruguay, and eventually Bolivia. Venezuela’s membership is currently suspended because its current government broke some of the rules of the association.) What is a common market?

• Customs union policy plus • Free movement of all factors of production (not just physical products) among member countries • Key additions = people (migrants and workers), investments and technologies (e.g. weights, measures, technical and safety standards). • Example: Pre 1992 European Economic Community What is an economic union?

• Common currency • Harmonized tax policies • Common market policies plus fuller integration of economic policies • Agriculture, monetary policies • Example: European Union is partly a monetary union but not an economic union because it lacks harmonized tax policies and has no central tax collection agency or institution What is a political union?

• An economic union plus common foreign policy (e.g. embassies and treaties) and defense policies (e.g. unified command of all armed forces) • Examples: United States, Canada, Switzerland • Note that each of these delegates some rights to states, provinces or cantons What is the European Union?

• 28 western, central and southern European countries except UK (after BREXIT), Norway, Liechtenstein and Switzerland – larger than the USA • Excludes • Russia and other former Soviet Union members (but Estonia, Latvia and Lithuania are EU member states) • Nations comprising the former Yugoslavia except Slovenia and Croatia – (Serbia is expected to be an applicant. Montenegro is not a member but uses the EURO as its currency. Bosnia Herzegovina and Kosovo will probably stay out.) • Albania and Macedonia could be future applicants. • Turkey (applied but denied entry in 2005) Governance of the European Union • Executive Branch – • Commission – Each nation appoints one commissioner • Council – political heads of national governments • Legislative Branch – • Council of Ministers – appointed by governments • European Parliament (directly elected) • Judicial Branch – • European High Court of Justice • Court of Auditors Why BREXIT?

• London area voted stay (keep financial center status) • Scotland, Wales, Northern Ireland voted stay (EU subsidies partly for lost industries like shipbuilding) • Midlands and English country counties voted leave (populism) • Fear of loss of sovereignty – no direct vote for powerful EU Commission and Council of Ministers • Too much regulation from Brussels • Historic antagonism towards the Continent including centuries of rivalry with the French (despite the alliance during the two world wars) • Some English citizens don’t want to have their culture corrupted by other Europeans or a growing number of immigrants outside the British Commonwealth BREXIT AS OF TODAY ACCORDING TO THE ECONOMIST CARTOONIST EU Institutions Possible impacts of BREXIT (in March 2019)

• UK shortages of non perishable food and medicines • Impacts on aviation (UK’s role in Airbus with EU as majority partner), commercial aviation landing rights and related safety agreements (role of Heathrow as a hub?) • Increased border controls (major impact on Northern Ireland) • Lose EU trade deals with 50 plus countries including Mexico, South Korea and Japan • UK made motor vehicles, pharmaceuticals, foodstuffs and chemicals (plus other products) might fail to pass EU standards • IMF projected long term declines in GDP over five years 2019-2024: • UK and Ireland – about 4 percent each • Netherlands, Belgium and Denmark – about 1 percent each • Other EU members – a fraction of one percent Additional impacts of BREXIT

• Positive: UK will no longer need to abide by detailed rulings from Brussels including “forced” migration • Negative: • Harder to sell UK products to EU countries unless a free trade area remains along with common product standards including product safety requirements (a so called “soft Brexit”) • Possible adverse impact on London as major international financial center (Would more coordination of world monetary transactions move from London to Frankfurt?) The European Monetary Union

• What is the European Monetary Union (EMU) that started in 1999? • Single currency (the euro) • Lower the costs of goods and services • Facilitate a comparison of prices within the EU • Promote more uniform prices • European Central Bank - Frankfurt, Germany • Controls the supply of Euros • Sets the short-term Euro interest rate • Maintains permanently fixed exchange rates for the member countries

• Convergence criteria, EMU • Align economic and monetary policy • Price stability – low inflation rates • Low long-term interest rates • Stable exchange rates • Sound public finances – low public debt to GDP ratio

Who uses the Euro? • The euro - official currency of 16 of the 27 member states of the European Union • The Eurozone: • Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain • Montenegro is not a monetary union member but uses the Euro for domestic and international transactions.

• When Texas became a state, the agreement included the right to secede and become an independent country as it was for about a decade in the early 1800s. What would happen if it did secede? • Free trade area with the rest of the US (and NAFTA)? • Dollar based monetary union member (or forego independent monetary policy – like Montenegro)? • Border controls with OK, AR, LA, NM? • Free movement of people to and from other states? • Whose agencies would grant patents, trademarks and copyrights? How can you compare the USA with the EU?

• The United States is both a political and a monetary union • Federal government has Constitutional authority (Similar authority is not centralized in the EU) • Nationwide fiscal and monetary policies • National defense • Retirement and health insurance programs • International affairs • States can keep their identity within the union • Police protection and education

• Key question: Overall, what are the benefits of the North American Free Trade Agreement that started in 1994? • “Free” trade in physical products and intangible services among Mexico, Canada, and the United States • Provide each member nation better access to the others’ markets, technology, labor, and expertise • Permits economies of scale • Lessens possibility of intraregional political strife • But it’s a complicated agreement – lots of “no, not me” or “no, not yet” or “certificate of origin” provisions • And lots of legal “boilerplate”

• How about NAFTA & Mexico? • Benefits • Increase in the production of goods and services – comparative advantage • Rising investment spending • Increasing wage incomes and employment, national output, and foreign-exchange earnings • Facilitated transfer of technology • Costs • Agriculture – 25% of population devastated by US competition

• How about NAFTA & Canada? • Benefits / safeguards • Maintenance of its status in international trade • No loss of its current free-trade preferences in U.S. • Equal access to Mexico’s market • Costs • Concerns about Canada’s European-style social welfare model • Uncompetitive practices and policies • Downward pressure on the country’s base of personal and corporate taxes

• How about NAFTA & the U.S. ? • Benefits • Expanding trade opportunities • Note that trade shares with Canada and Mexico increased prior to the 2007 recession but declined more recently (offset by higher trade with China and other emerging markets) • Reduced prices • Increased competition • Economies of large-scale production • More reliable sources of petroleum • Less illegal Mexican immigration • Enhanced Mexican political stability

• NAFTA & the U.S. • Costs • Increased rules of origin (ROOS) paperwork (NAFTA Certificate of Origin) to lessen trade deflection (e.g. Honda importing cars into Mexico for duty free sale in the US and Canada) • Hurts industries that rely on trade barriers to limit imports of low-priced Mexican goods • Unskilled US workers face Mexican wage competition • Fear that more U.S. companies will move production to Mexico (as many have so far – e.g. maquiladoras) • YET the record shows greater trade creation than trade diversion • Mexico’s relatively weak anti-pollution laws

• Asia-Pacific Economic Cooperation (APEC) • 1989, the United States, Australia, Brunei, Canada, Chile, China, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore, South Korea, Taiwan, and Thailand • 1993, vision of an Asia-Pacific economic community • Eliminate barriers to trade and investment by 2020 • Several countries bordering the Pacific Ocean (except USA and China) have already renegotiated a Trans Pacific Partnership that will go into effect when six national legislatures approve the pact

• Comunidad Andina de Naciones (CAN) • Central American Free Trade Area (CAFTA) • Caribbean Common Market (CARICOM) • Gulf Cooperation Council (GCC) • A common market • Arab Maghreb Union • Southern African Development Community • Economic Community of West African States (ECOWAS) • Economic Community of Southern African States • African Continental Free Trade Area • In the process of ratification by 44 countries Currently under discussion and negotiation…

• Trans Atlantic Partnership (European Union, Canada, USA) • ALSO note that some regional trade agreements overlap • Many countries belong to more than one regional trade agreement What is the status of the Free Trade Area of the Americas? • 1994, Summit of the Americas • 34 nations in North and South America • Except Cuba • Called for the creation of a Free Trade Area of the Americas (FTAA) • If established, FTAA would • Be the largest trading bloc in the world (perhaps the recently signed Japan/EU deal would be bigger) • Have 850 million consumers • Would have a combined gross regional income of more than $14 trillion • Level the playing field for U.S. exporters

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 34 What will prevail in the future? • Can the multilateral WTO system survive despite the threats of populist politicians? • Will results of bilateral negotiations replace the “national treatment” or “most favored nation” treatment accorded to WTO nations? • Will a system of “handicaps” based on special preferences to infant industries in developing countries be a boon or a boondoggle? Is the capitalist system the best path towards development and human welfare? • Will the trading system grow in concentric circles from bilateralism to regionalism to globalism? How will the younger generation think about global cultural differences – as a source of rich variety or as a threat to their status quo? • Will US trade policy return to the global norms and rules it helped create after World War II or will it remain in its present path towards selective isolationism? If global rules prevail, how best can we deal with those who break rules or lack the political will and/or institutions to enforce them?