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Trade agreements

Countries agree to lower or eliminate tariff and NTB
restrictions amongst member countries.


Why are RTAs/PTAs permitted under Article 24?

1. May demonstrate "quasi-national" characteristics
2. Consistent with broad objective of multilateralism
3. Supplemental route to ultimate free trade objectives of GATT and WTO - aims at getting to the same final result


What are the four types of preferential trade arrangements?

1. Free Trade Area
2. Customs Union
3. Common Market
4. Economic Union


Free Trade Area

Reduced trade barriers among member countries, but each member maintains its own tariffs and other trade barriers with respect to other countries:

ex. U.S. - Canada Free Trade Agreement


Customs Union

No trade barriers among member countries, and common external tariffs and non-tariff barriers w.r.t. other


Common Market

Customs union, plus harmonization of national tax systems, social insurance, agricultural policies, labor and capital migration, and fixed exchange rates

Ex. European Community


Economic union

Common market, plus harmonization of all economic policies, common currency, common foreign policy

ex. European union


Free Trade Area Trade Arrangements

1. Free trade among members


Customs union Trade Arrangements

1. Free trade among members
2. Common external tariff


Common Market Trade Arrangements

1. Free trade among members
2. Common external tariff
3. Free factor movement


Economic Union trade Arrangements

1. Free trade among members
2. Common external tariff
3. Free factor movement
4. Harmonization of all policies


Trade creation with PTA (low cost supplier) consumers

+ (a+b+c+d)


Trade creation with PTA (low cost supplier) producers



Trade creation with PTA (low cost supplier) government revenue



Trade creation with PTA (low cost supplier) net welfare

+ (b+d)


Trade diversion with PTA (high cost supplier) consumers

+ (a+b+c+d)


Trade diversion with PTA (high cost supplier) producers



Trade diversion with PTA (high cost supplier) government revenue

- (c+e)


Trade diversion with PTA (high cost supplier) Net welfare

+ (b+d) - e


What was the origination of the North American Free Trade Agreement (NAFTA)

1. Mexican domestic economic reforms in 1980's
2. Canada- U.S. Free Trade Agreement in 1989, establishing free trade area over 10 years
3. Surge of regional trade agreements in Western hemisphere since late 1980's


What were the major objectives of NAFTA

1. Increasing trade within region relative to that with external trading nations
2. Increasing competitiveness
3. Increasing exports to other trading blocs
4. Enhancing industrial complementarity


What were the unstated objectives of NAFTA?

1. Compete successfully with Eu, MERCOSUR, Japan
2. Decrease illegal immigration from Mexico


What was the purpose of the NAFTA side agreements reached in environment and labor?

1. Investigate abuses in either area
2. Imposes fines or trade sanctions if countries fail to enforce environmental laws or labor standards
3. Environmental issue still a source of conflict
4. Another issue: "rules of origin" as they apply to transshipped products made elsewhere


NAFTA's effects on U.S. jobs

1. U.S. is $124 billion richer each year
2. For every job lost due to NAFTA, gains to U.S. economy around $450,000
3. U.S. jobs lost offset by jobs gained, with salaries higher
4. Trade with mexico supports 14 million U.S. jobs


NAFTA’s effects on U.S. jobs moreover:

1. Many of U.S. job losses would have occurred anyway
2. Mexico blamed for jobs lost to China and other countries
3. Job and income losses are concentrated and easy to identify, while gains are dispersed


Summing up - NAFTA after 20+ years

1. Mexico's exports quintupled
2. Different sectoral impacts in Mexico
3. Mexico: trade up sharply, real wage growth modest, economic growth slower than expected (many reasons)
4. Overall impact on U.S. economy and labor market very small, due to size
5. Impact on Canada perhaps the most positive


Highlights in Evolution of European Union 1991

Maastrict Treaty: Members agree to coordination of policies in key areas, movement toward common currency (the "euro"), common monetary policy (by 1999), change in name to European Union


Maastricht Treaty (1991) set up “Convergence Criteria” for
EMS member countries to meet to qualify for unification (5)

1. Inflation no more than 1.5%
2. Long-term interest rates no more than 2 %
3. Budget deficit 3% of GDP or less
4. Government debt 60% of GDP or less
5. Currency within EMS trading bands for at least two years


What are the benefits of the Eurozone and single currency? (8)

1. Eliminated costs of exchanging currencies
2. Reduced exchange rate risk and volatility
3. More rapid economic and financial market integration
4. Preventing competitive devaluations and speculative attacks
5. Imposing greater economic discipline through member countries having to abide by jointly imposed conditions
6. Seignorage from the use of the Euro in international currency transactions
7. reduced cost of borrowing in international markets
8. Enhancing political economic strength of Eu in international affairs


What are the cons of the Eurozone?

1. EU not a true "union" EU does not equal US
2. EU has monetary union but without coordinated fiscal policy
3. Major differences in fiscal discipline, budget deficits, and government debt
4. Different debt levels, economic conditions and risk perceptions create high interest rate differentials