1. Types of regional trade arrangements
Regional trade agreements
Types of regional trade arrangements
Free trade areas (NAFTA, for example)
Customs unions (Benelux, CACM)
Common markets (MERCOSUR,EEC)
Economic/monetary union (EU)
Carbaugh, Chap. 9

2. Effects of regional trade agreements
Static effects
Trade creation effect
consumption effect … buy more from your partner
production effect … less inefficient domestic production
Trade diversion effect
… buy less from efficient, low cost producer
Dynamic effects
Economies of scale
Greater competition
Investment stimulus
Carbaugh, Chap. 9

3. Static effects of a customs union
Regional trade agreements
Static effects of a customs union SL
Price ($)
SG+tariff
SUS+tariff a b SG c
SUS DL
Carbaugh, Chap. 9

4. The European Union Created by the Treaty of Rome (1957)
Original Members: Belgium,France,Germany, Italy,Luxembourg,Netherlands
Joiners,’73: Denmark,Ireland,UK
Joiners,’80s: Greece, Portugal, Spain
Joiners,’95: Austria,Finland,Sweden
Total Population, GDP, GDP per capita (1996)
EU: mil $8.6 tril, $23,200
€-zone: 300mil tril, ,000
USA: mil tril, ,300
Carbaugh, Chap. 9

5. The European Union (cont’d)
Regional trade agreements: case studies
The European Union (cont’d)
Within-region trade to grew much more quickly than world trade in the 1960s
Steps to remove remaining barriers ( ) further increased integration
1987 Delors Report
Four Freedoms: goods, services, labor, capital
Maastricht Summit (1991) began process of economic and monetary union (EMU)
Carbaugh, Chap. 9

6. EU Economic & Monetary Union (1999)
Regional trade agreements: case studies
EU Economic & Monetary Union (1999)
National currencies replaced with the euro, 2002
European Central Bank created to control monetary and exchange rate policy
“Convergence criteria” required for membership:
Price stability … 3.2% inflation
Low long-term interest rates … 7.7%
Stable exchange rates
Sound public finances
Deficit/GDP … 3%
Debt/GDP … 60%
Carbaugh, Chap. 9

7. Other key EU policies Common agricultural policy
Regional trade agreements: case studies
Other key EU policies
Common agricultural policy
Support payments to farmers
Variable import levies
Export subsidies
Government procurement policies
All EU businesses can bid for larger contracts in any nation
Carbaugh, Chap. 9

8. Benefits of EMU Europe is not an "optimal currency area"
Regional trade agreements: case studies
Benefits of EMU
Europe is not an "optimal currency area"
Advantages of EMU:
Lower transaction costs
Price comparisons easier
Exchange rate risk eliminated
Stimulates competition
Carbaugh, Chap. 9

9. Regional trade agreements: case studies
Costs of EMU
Loss of monetary policy and the exchange rates as economic adjustment tools
Asymmetric shocks
Use of fiscal policy for adjustment is constrained
Need wage flexibility and labor mobility, which are both low in Europe
How to divide seignorage?
Carbaugh, Chap. 9

10. US-Canada Free Trade Agmt. (1989) North American Free Trade Agmt
Gradual and comprehensive elimination of trade barriers among US, Mexico and Canada over 15 years:
Full, phased elimination of import tariffs
Elimination of most NTBs
Protection of intellectual property rights
Dispute settlement procedures
Side agreements on environmental protection and labor law
Carbaugh, Chap. 9

11. Regional trade agreements: case studies
Concerns about NAFTA
Main US losers from NAFTA: import-protected industries competing with Mexican producers, and unskilled workers
US industrial workers worried about lower pay scale in Mexico and plant relocations
Concerns Mexico would not enforce environmental protection measures
Carbaugh, Chap. 9

12. NAFTA after five years Trilateral trade increased significantly
Regional trade agreements: case studies
NAFTA after five years
Trilateral trade increased significantly
Some US jobs were lost to Mexico, but the numbers were small compared to job creation that came with US growth
Changes in investment flows were small (in relation to total US foreign investment)
Closer political ties were built among the three nations
Carbaugh, Chap. 9