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Regional Trade Agreements
Linda YoungPOLS 400International Political EconomyWilson Hall – Room 1122
Fall 2005
Linda Young, POLS 400, International Political Economy
Regional Trade Agreements (RTA)
• RTA: actions by governments to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions
• Numerous and increasing– only 3 WTO members not party to a RTA– 2003 – 265 notified to the WTO– 138 since creation of WTO in 1995– 190 in force– 90 operational but not notified
Linda Young, POLS 400, International Political Economy
Regional Agreements: Goals and Forms
Diverse Goals
• Specific goals – developing eco-tourism along the Mekong river
• Overarching goals – economic and political union
Free Trade Area: NAFTA
• Free trade for goods and services• Members set tariffs for outside FTA• Rules of origin important
Linda Young, POLS 400, International Political Economy
RTAs: Goals and Forms
• Customs area: external, common tariffs– no need for border inspections, customs
fees due to unified policies– still may impose some health and safety
regulations• Economic Union: four freedoms
– freedom of movement for goods, services, capital and people
• Static and dynamic efficiency gains, but…
Linda Young, POLS 400, International Political Economy
Economic Arguments a Small Part
• Economic benefits used to entice countries to work though political differences
• Worries about a democratic deficit– governing bodies: members not elected
• Nation state important (security) but unable to deal with many problems that transcend boundaries and overwhelm the nation state– middle ground between the state and the
multilateral system • Different motivations explain their importance
Linda Young, POLS 400, International Political Economy
European Regionalism: Diverse Motivations
• US: wanted an anti-communist ally. Marshall plan ($12 billion – current $90 billion) conditional on cooperation in use
• Europeans: solution to the “German problem” how to live with Germany without being dwarfed
• Kant (1724-1804): desire to move away from incessant European war
• France: “United States of Europe” enhancing sovereignty/stature of member nations
• Political economist, Jean Monnet, saw economic benefits as providing the impetus
Linda Young, POLS 400, International Political Economy
Trade Diversion: When a FTA is formed, members lower barriers to trade with each other compared to barriers to trade with other nations. Imports may be reduced (or cease) from a more efficient producer outside of the FTA, and increase from a member of the FTA due to the advantage the FTA member has in terms of trade barriers – not due to a comparative advantage. Trade Creation: When a FTA is formed, trade may increase between members as each party adjusts their production and trade in line with comparative advantage.
Trade Diversion and Creation
Linda Young, POLS 400, International Political Economy
WTO and RTAs
• Article 24: Exceptions to equal treatment for all trading partners (MFN treatment)
• Criteria: help trade flow more freely among members without raising barriers to the rest of the world
• Duties and other trade barriers should be reduced or removed on substantially all sectors of trade – and non members should not find trade more restrictive than before
• GATS (services agreement) also allows for economic integration
• WTO committee to monitor complimentarity versus competition of RTAs
Linda Young, POLS 400, International Political Economy
Notified RTAs to the GATT/WTO (1948-2005) by Entry into Force
Goods Services Accessions Cumulative
RTAs in force as of February 2005by year of entry into force (left-hand scale)
and cumulative (right-hand scale)
No
. o
f R
TA
s
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 1, p. 2.
Linda Young, POLS 400, International Political Economy
Notified RTAs in Force, as of February 2005,by Type of Agreement
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 2, p. 3.
84%
8%
8%
FTA Customs Union Partial Scope
Linda Young, POLS 400, International Political Economy
RTAs’ Configuration, as of February 2005
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 4, p. 5.
Linda Young, POLS 400, International Political Economy
Cross-Regional RTAs’, as a Percentage of Total RTAs, as of February 2005
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Chart 5, p. 6.
r
European RTA Network
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Map 1, p. 9.
Western Hemisphere RTA Network
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Map 2, p. 11.
NAFTA
Andean Community
Participations in RTAs, as of January 2005
Source: J. Crawford and R. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO, Geneva, Switzerland, 2005, Discussion Paper No. 8, Map I, p. 20.
Linda Young, POLS 400, International Political Economy
Interpretations of Regionalism
Realist
Historical Structuralist
Liberal
Linda Young, POLS 400, International Political Economy
Rewards for Good Behavior
“ Let me be clear. I’ll use my position as chairman of the Senate Finance Committee, which has jurisdiction over international trade policy in the US Senate, to carefully scrutinize the positions take by many WTO members during this Ministerial. The United States evaluates potential partners for free trade agreements on an on-going basis. I’ll take note of those nations that played a constructive role in Cancun, and those nations that didn’t.” Grassley 2003
Source: Actionaid International, 2003, Divide and Rule: The EU and US Response to Developing Country Alliances at the WTO.
Linda Young, POLS 400, International Political Economy
Rewards (con’t)
• Costa Rica, El Salvador and Guatemala – expanded export quotas if they abandon the G-20
(El Salvador left during the Ministerial)• Guatemala, Peru, Colombia and Costa Rica all left
the G-20 in weeks after the Ministerial “You want to negotiate with us? Then get out of the G-20!”
• Since Cancun, US signed a FTA with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua, CAFTA-DR
• EU with Merocsur
Linda Young, POLS 400, International Political Economy
CAFTA: US & Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua
• Bush: notified Congress of intent to negotiate January 2003
• Included Dominican Republic so CAFTA-DR
• Converts non-reciprocal, discretionary benefits from GSP and CBI into permanent and reciprocal benefits
• Covers all trade – agriculture important, services too
• Will improvement US access to these markets
– tariffs vary from Honduras agriculture averaging 35% and Nicaragua averaging 60%
• Impact for CAFTA-DR small – already had access to US market from GSP/CBI
Source; Paggi, Mechel, et al. Regional Free Trade Agreements and Implications for US Agriculture: The Case of CAFTA-DR. Choices, 2nd Quarter 2005
Linda Young, POLS 400, International Political Economy
Trade Flows
• US exports wheat, soybeans, tobacco, animal fats, poultry meat, dairy and other intermediate goods
• US imports: bananas and other fresh fruit, coffee, sugar, vegetables and seafood
• Agreement puts CATFA-DR access on par with Mexico with the exception of sugar
• For the US – preferential access to some extent – depends on CAFTA-DR current other FTAS– 2001: 70% of Costa Rica’s fresh grapes from the US,
27% from Chile – then an agreement between Chile and Central America – US exports declined – now expected to rebound
Linda Young, POLS 400, International Political Economy
Adjustment
• CAFTA-DR a small market – some increased exports, but not much for the US
• Little adjustment pressure in US from increased imports– CAFTA countries already had preferential access
• Burden of adjustment in those countries• Exception for US is sugar – increased imports to
affect US domestic prices and also cost of sugar program– Increase by 109,000 mt to 153,000 over 15 years – US may provide compensation instead of more
access to sugar
Linda Young, POLS 400, International Political Economy
European Community 1957-1967
1951: European Coal and Steel Community• Belgium, West Germany, Luxembourg, France, Italy
and the Netherlands
1957: Treaties of Rome• Creating the European Atomic Energy Community
(EURATOM) and
• The European Economic Community (EEC)
– customs market with Italy, France, Belgium, Luxembourg, the Netherlands and Germany
– members removed trade barriers and formed a "common market“
Linda Young, POLS 400, International Political Economy
Common Agricultural Policy
Address food security, farm income and political opposition to the common market
High price supports; tariffs against imports
Linda Young, POLS 400, International Political Economy
1967: Now Named the European Community
Beyond economic union
Bicycle theory of ever greater union
Institutions merged – single Commission, Council of Ministers, European Parliament
Tensions over new members, larger costs
Linda Young, POLS 400, International Political Economy
The Treaty of Maastricht (1992) European Union (EU)
• Lead to creation of the Euro• Introduced a three-pillar structure
– community pillar – economic and trade issues traditional areas of responsibilities
– common foreign and security policy pillar – foreign policy and military matters
disagreement over extent of cooperation intergovernmental, not surpanational
– justice and home affairs pillar – criminal matters law enforcement, criminal justice, civil judicial, asylum
and immigration
1952 1958 1967 1987 1993 1999 2003 ?
EC - European Community... E U R O P E A N U N I O N ( E U )
European Coal and Steel Community (ECSC)
European Economic Community (EEC)
European Community (EC)
Euratom (European Atomic Energy Community)
Justice &
Home Affairs Police & Judicial Co-operation in Criminal Matters (PJCCM)
European Communities:
ECSC, EEC (EC, 1993), Euratom Common Foreign and Security Policy (CFSP)
Treaty of Paris
Treaties of Rome
Merger Treaty
Single European Act
Treaty of Maastricht
Treaty of Amsterdam
Treaty of Nice
European Constitution
Timeline of the Treaties and EU Constitution
Source: Wikipedia – the free encyclopedia (http://en.wikipedia.org/wiki/Maastricht_Treaty)
“Three Pillars” – European Communities (ECSC, EC, Euratom), Common Foreign and Security Policy (CFSP), Justice and Home Affairs
Linda Young, POLS 400, International Political Economy
Membership
• 1952: Belgium, France, West Germany, Italy, Luxembourg, The Netherlands (founding members)
• 1973: Denmark, Ireland, United Kingdom
• 1981: Greece
• 1986: Portugal, Spain
• 1990: East Germany reunites with West Germany and becomes part of the EU
• 1995: Austria, Finland, Sweden
• 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia
Linda Young, POLS 400, International Political Economy
EU Monetary System (EMS)
• 1979: eight countries, mutually fixed ERs, the European Monetary System
• ECUs- European Currency Units – a basket of member currencies
• Each country “fixed” in terms of parity to the ECU – allowed to float within bands +/- 2.25%
• If French franc depreciates relative to DM, it must sell DMs
• If misaligned, then currency realigned• Capital controls until 1987 – private citizens could
not trade foreign currencies, no speculative attacks
Linda Young, POLS 400, International Political Economy
Crisis with German Reunification
• Economic reunification in 1990– East Germans – traded East German currency
for DM; huge rush for consumer goods
– large fiscal expenditures on the East
– need to rebuild infrastructure
• Fear of “overheating,” i.e., inflation
• Cut the money supply
Linda Young, POLS 400, International Political Economy
But Germany is within an Exchange Rate Band
• Other EMS countries cut money supply too• They had no output/expansionary boom• With cut in money supply, output fell and
unemployment rose• Speculators entered the market – anticipated
revision of central parities (bands)• Pressure on the Lira, devalued• September 16, Black Wednesday
– Lira and British pound out of the EMS system– other currencies devalued– larger bands for currencies in the system
Linda Young, POLS 400, International Political Economy
European Monetary Union
Why – given previous experience?
Jan 1, 2002 – 12 countries monetary union• central bank in Frankfurt• must agree on common monetary policy
Linda Young, POLS 400, International Political Economy
Gains from Monetary Union
• Lower transaction costs of cross border trade – What if all traders bringing goods into Montana had to convert currency?
• Lower uncertainty – for transactions across borders in the future
• Lower investment risk – payoff time longer, more uncertainty
• With the EMS, risk of speculative attack due to POSSIBILITY that currencies would be realigned
• Remember – get a loan in depreciating currency, buy the currency you think will appreciate relative to the one in the loan– borrow Francs (1000) and buy DM 500 (2FF=1DM)– value of FF falls now 3 FF-1 DM– now sell DM 500 and get 1,500 francs– pay back loan, profit 500 FF
Linda Young, POLS 400, International Political Economy
Costs of Monetary Union
• Cannot use independent monetary policy• Spain ALONE has a recession – high
unemployment and falling output• Before: use monetary policy to increase money
supply to have lower interest rates, cheaper to build a factory or buy a car, stimulate demand for investment projects and consumption, more demand, factory hires more workers, raise GDP and lower unemployment
• Now it can’t act independently – central bank decides on monetary policy
Linda Young, POLS 400, International Political Economy
How Costly is this Loss of Independence?
• If all EMU countries have the same shock, such as fall in demand for European goods, then not a big problem, use monetary policy to increase money supply and work towards full employment– but if Spain is the only one?– shocks more symmetric, when economies similar
• Factor markets integrated?– if so, then unemployed in Spain can move to Denmark
• Fiscal federalism? If Spain hurt by a shock, then income transferred from Denmark to Spain, cover cost of unemployment – federal taxes and unemployment compensation
• In sum – countries benefit that are highly integrated, similar; that allow flows of labor, and perhaps integrated fiscal management (benefits > costs)
Linda Young, POLS 400, International Political Economy
EMU versus the United States
• Extent of trade – European countries trade 10-20% of GDP with each other – less than trade between US regions/states
• Some asymmetry due to differences in economies– Northern Europe – more production intensive in
capital and skilled labor
– some asymmetry in the US – California recession due to cutback in defense
• Some labor mobility in Europe – but less than US • Not much fiscal federalism in Europe
Linda Young, POLS 400, International Political Economy
Benefits of the EMU
• Joint decision making – next step to political integration
• Prevent political opposition to free trade
• European economy – more efficient, sell us goods cheaper, and be richer and buy more of ours
• Easier for our firms to conduct business there
• Euro to compete with the dollar as an international currency reserve
NAFTA: Ethyl’s Challenge under NAFTA
Ethyl is a U.S. firm
Investor to state dispute settlementprocedures – NAFTA Chapter 11
Canadian parliament banned inter-provincial trade ingasoline additive methylcyclopentadienyl manganese tricarbonyl (MMT) by prohibiting provincial trade
Linda Young, POLS 400, International Political Economy
− could pose a health risk− would have to modify automobiles/could damage
sensors− not enough evidence to ban it altogether− ban problematic for Ethyl
Ethyl Challenged this Decision
Under NAFTA Chapter 11
Ruling considered tantamount to an expropriation and Ethyl wanted compensation
Canada agreed to pay damages and the case was dropped
Linda Young, POLS 400, International Political Economy
Rights of Investors vis-à-vis Governments
New doctrine towards “takings”? (All governments have the right to seize property.)
Favorable to owners of assets whose value might be diminished – U.S. negotiators wanted that for U.S. investors
Seems to grant international investors a privileged position (more protection than in OECD national law)
Intent to prevent governments from using pretexts to force the exit of MNC from a market (i.e., price regulation used previously)
Linda Young, POLS 400, International Political Economy
Would NAFTA Have Worked?
Tension between upholding domestic environmental regulations and providing assurances to international investors on the security of their investment
NAFTA says “Article IV.2.1 will not apply to any measure taken to protect public health or safety; to ensure the preservation of a species of plant or animal, or to safeguard the physical environment, provided that the measure is applied in a manner that does not discriminate against any individual or class of investment in order to achieve a benefit for some other individual or class of investment.”
Linda Young, POLS 400, International Political Economy
Ethyl Dispute Key in Defeating the Multilateral Agreement on Investment (MAI)
Similar to NAFTA investment protection provisions– NAFTA on steroids
MAI – under the OECD 1995-2000 (wrong venue?) Proposed
– national treatment(pre and post establishment)
– standards for investor protection– forbid requirements including use of local
suppliers, minimum export levels, export requirements, joint ventures
– dispute settlement
Linda Young, POLS 400, International Political Economy
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