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 © 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 2 Question: What are benefits of preferential trade agreements? • Freer movement of goods, people, money and/or ideas (Trade creation – expanded trade among member countries) • Expand market size • Harmonize or simplify regulations (including product specifications and safety standards) • Lower costs of production (economies of scale due to larger market size, restructure or rationalize costs, regionally standardized products) Other benefits of preferential trade agreements • 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 © 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 20 The European Union’s Monetary Union • 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 © 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 21 The European Monetary Union 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. © 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 22 EU’s Impact on Business • National trade policy barriers to economic exchanges removed • No need for foreign exchange market for currencies among countries using the EURO • Restructuring of overcapacity industries while permitting economies of scale for companies, mergers and acquisitions • Identical pricing across the region What would happen if there were a Texit? • 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