ECON5335 - International Economics

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ECON5335 - International Economics

• Chapter 7
• Regional Integration

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Regional integration background

• Regional integration allowed under GATT article
  XXIV
• States that The contracting parties recognize
  the desirability of increasing freedom of trade
  by the development, through voluntary agreements,
  of closer integration between the economies of
  the countries parties to such agreements. They
  also recognize that the purpose of a customs
  union or of a free-trade area should be to
  facilitate trade between the constituent
  territories and not to raise barriers to the
  trade of other contracting parties with such
  territories.
• What is a customs union?
• What is a free trade area?

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Regional integration background

• para 5 of section XXIV states Accordingly, the
  provisions of this Agreement shall not prevent,
  as between the territories of contracting
  parties, the formation of a customs union or of a
  free-trade area or the adoption of an interim
  agreement necessary for the formation of a
  customs union or of a free-trade area

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Balassas steps of regional economic integration

• Bela Belassa (1963) first came up with steps for
  countries to be more economically integrated
• Steps are as follows
• Free trade
• Customs union
• Common market
• Economic union
• Monetary union
• Fiscal union
• Political union
• Whats the difference between a free trade area
  and a customs union?
• Do countries wanting more regional integration
  have to follow in the order above?

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Examples of different stages of integration
Level of integration Description Characteristics Examples
0 Regional autarky - bilateral trade agreements Japan (before ASEAN)
A FTA - tariffs and quotas removed internally - national tariffs retained against outside NAFTA
B Customs union - tariffs and quotas removed internally - common external tariff Mercosur
C Common market - free movement of factors of production, goods and services EU (before EMU)
D Economic union - harmonization or coordination of some national policies - transfer of some policies to supranational level Competition policy in the EU
E Monetary union - single currency - single central bank ECB in the EU
F Fiscal union - harmonization of taxes - fiscal sovereignty EU to some degree
G Political union - effective and democratic body at supranational level Does not exist out of a regional integration project
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Examples of different stages of integration
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Integration in practice

• Many examples of regional economic integration
  around the world
• North America CUFTA and NAFTA
• Europe EU, EFTA, BAFTA, CEFTA
• Caribbean CARICOM
• Central and South America Mercosur, SELA, CAN
• Africa AU, SACU, COMESA, WAEMU
• Asia ASEAN, AFTA
• Australasia ANZFTA
• - see http//www.wto.org/english/tratop_e/region_
  e/region_e.htm for more

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Welfare effects of FTA vs CU (from Robson chapter)
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NAFTA

• Grew out of CUFTA idea was to extend to Mexico,
  but whole new agreement happened
• Basically a free trade area, but with side
  agreements on labor standards, environment, and
  migration of professionals
• Rules of origin allow for duty free trade as
  long as 62.5 of value added within NAFTA
• Environmental commission set up in Montreal to
  oversee complaints about environmental
  degradation
• Snap-back provision allows for tariffs to be
  restored if surge of imports threatens domestic
  industry
• Trade dispute mechanism consists of 3 experts
  usually resolves disputes amicably exceptions
  though (e.g. softwood lumber)

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NAFTA

• Maquiladora program
• US boom of the 90s benefited maquiladoras, but
  Chinas entry into the WTO has eroded
  competitiveness of plants, with many closing
• Critics say that although trade has increased,
  Mexican real wages in manufacturing have fallen,
  and also environmental degradation evident
• Difficult to say if NAFTA has had large effects,
  as phased in over 10 years, and also lots of
  other events happening
• Impact clearly much greater on Canada and Mexico
  than on the US

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EU
Yellow EU members Grey Candidate countries
Cream Non-members
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EU

• Originally formed as a customs union for steel
  and coal (Treaty of Rome 1958)
• Grew into EEC customs union
• Then EC common market (Single Market 1992)
• Then EU economic union and some political
  pooling of sovereignty (European Parliament)
• Now EMU, which also involves monetary union
  (euro) (Treaty of Maastricht, 1991)
• Big debate in 90s surrounded widening vs
  deepening
• Now 27 member states, with EMU adopted by only 13
  member states
• Switzerland and Norway do not want to join, and
  France has effectively stopped Turkey from
  joining

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EU

• Trade creation significant
• Trade diversion also present, although size
  differs depending on study
• EMU is thought to have increased trade
  significantly, although estimates vary widely
• Growth and Stability pact has coordinated
  fiscal policy
• Commission acts as civil service but can also
  impose fines
• European Council decides on major issues

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EMU timeline

• ERM of the EMS (79)
• Delors report (89)
• Treaty of Maastricht (91)
• Currency crisis (92-93)
• Euro introduced and exchange rates fixed (99)
• Money euro introduced (02)
• Greece added (04)
• Slovenia added (07)
• Cyprus and Malta added (08)
• Slovakia added (09)
• Estonia added (11)

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The euro and the crisis

• Euro also used by other countries sometimes
  outside Europe
• ECB runs monetary policy but no centralized
  fiscal policy
• Hence SGP (Dublin 1996)
• No exit clause for EMU in Maastricht
• Major cause of problems for Greece
• Now austerity packages for all PIIGS
• One size fits all monetary policy means fiscal
  policy takes all the strain