Ing. Tomáš Dudáš, PhD.

IntroductionTomáš Dudáš

University of Economics – Faculty of International Relations

Classes: World Economy, FDI, American Economy, Comparation of Economic Systems...

Email: dudas@euba.sk

Basic description of the subjectThe aim of this subject is to give the students

knowledge about the various forms of economic integration in the world economy – most notably about NAFTA, EU, MERCOSUR, ASEAC, APEC, G8, G20 and others

Literature – assorted readings presented by the lecturer

Basic description of the subjectWritten assignment – the students are

obliged to present a paper (5-7 pages) about a topic presented by the lecturer (30 % of the total points)

Exam – written exam with open essay questions (70 % of the points)

Main topics coveredIntroduction – the economics of economic

integrationEconomic integration in North America –

NAFTAEconomic integration in South America –

MERCOSUR, Andean PactThe role of the European Union in the world

economy

Main topics coveredEconomic integration in Asia – ASEAN, APEC

and other organizationsEconomic integration of Africa – a continent

of failuresThe role of organizations on global level – G7,

G20, UN and othersConclusion and revision

IntroductionThe world economy is a complicated system

Globalization

Multilateralism vs. regionalismGlobal free economy vs. regional economic

integration

Economic integrationAny type of arrangement in which countries

agree to coordinate their trade, fiscal, and/or monetary policies is referred to as economic integration. There are several different degrees of integration.

Economic integration emerged after WWII

Preferential trade agreement (PTA)Weakest form of economic integration It is a trading bloc which gives preferential

access to certain products from the participating countries. This is done by reducing tariffs, but not by abolishing them completely

A PTA can be established through a trade pactThe line between a PTA and a Free trade area

(FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

Example – EU and ACP countries

Free trade agreementForm of economic integration, when a

designated group of countries agree to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them

Members of the FTA do not have common tariff rates

To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods

Examples – NAFTA, CEFTA, EEA

Customs unionA customs union is a is a type of trade bloc

which is composed of a free trade area with a common external tariff.

The participant countries set up common external trade policy, but in some cases they use different import quotas

Examples – MERCOSUR, CARICOM

Single marketA common market is a type of trade bloc

which is composed of a customs union with common policies on product regulation, and freedom of movement of the factors of production (capital and labor) and of enterprise.

The goal is that the movement of capital, labor, goods, and services between the members is as easy as within them.

For both business within the market and consumers, a single market is a very competitive environment, making the existence of monopolies more difficult

Example - EU

Economic and monetary unionAn economic and monetary union is a type

of trade bloc which is composed of a single market with a common currency.

It is to be distinguished from a mere currency union (e.g. the Latin Monetary Union in the 1800s), which does not involve a single market.

This is the fifth stage of economic integration. EMU is established through a currency-related trade pact.

Example - EMU

Levels of Economic Integration

*If the policies are not just harmonized by separate governments, but have a unified government with binding commitments on all members, then you reach political integration and have “full economic integration”.

Type of BlocFree Tradeamong theMembers

CommonExternalTariffs

Free Movement of Factorsof Production (Example:

free labor movementbetween countries)

Harmonization* of AllEconomic Policies - Fiscal,Monetary, etc. (Example:

common currency)Free-trade

area

Customsunion

Commonmarket

Economicunion

Effects of Economic integrationTrade creation

When a customs union is formed, the member nations establish a free trade area amongst themselves and a common external tariff on non-member nations.

As a result, the member nations establish greater trading ties between themselves now that protectionist barriers such as tariffs, quotas, and non-tariff barriers such as subsidies have been eliminated.

The result is an increase in trade among member nations in the good or service of each nation's comparative advantage.

Effects of Economic integrationTrade diversion

When a country applies the same tariff to all nations, it will always import from the most efficient producer, since the more efficient nation will provide the goods at a lower price.

With the establishment of a bilateral or regional free trade agreement, that may not be the case. If the agreement is signed with a less-efficient nation, it may well be that their products become cheaper in the importing market than those from the more-efficient nation, since there are taxes for only one of them.

Consequently, after the establishment of the agreement, the importing country would acquire products from a higher-cost producer, instead of the low-cost producer from which it was importing until then. In other words, this would cause a trade diversion.

North American Free Trade Agreement (NAFTA)NAFTA is an agreement signed by the

governments of the United States, Canada, and Mexico creating a trilateral trade bloc in North America.

The agreement came into force on January 1, 1994. It superseded the Canada-United States Free Trade Agreement between the U.S. and Canada.

In terms of combined purchasing power parity GDP of its members, as of 2008 the trade block is the largest in the world and second largest by nominal GDP comparison (444 million people).

Economy of USALargest economy in the worldGDP – 14,26 billion USD (2008 est.)GDP/c – 46 900 USD (2008 est.)GDP growth – 1,1 % (2008 est.)GDP composition 1,2 % - 19,2 % - 79,6 %Labor force – 154,3 millionUnemployment – 9,8 % (september 09)Inflation – 0,4 % (august 09)

Economy of USAPopulation below poverty line – 12 %Distribution of family income (Gini index) –

41

Main export partners - Canada 20.1%, Mexico 11.7%, China 5.5%, Japan 5.1%, Germany 4.2%, UK 4.1% (2008)

Main import partners - China 16.5%, Canada 15.7%, Mexico 10.1%, Japan 6.6%, Germany 4.6% (2008)

Economy of CanadaOne of the largest countries in the world, but

the population is only 33 millionsGDP – 1,3 billion USD (2008 est.)GDP/c – 39 800 USD (2008 est.)GDP growth – 0,4 % (2008 est.)GDP composition 2,0 % - 28,4 % - 69,6 %Labor force – 18,2 millionUnemployment – 8,7 % (august 09)Inflation – -0,8 % (august 09)

Economy of CanadaPopulation below poverty line – 10,8 %Distribution of family income (Gini index) –

32

Main export partners - US 77.7%, UK 2.7%, Japan 2.3% (2008)

Main import partners - US 52.4%, China 9.8%, Mexico 4.1% (2008)

Economy of MexicoMexican economy is a developing country –

poor compared to the partners in NAFTAGDP – 1,563 billion USD (2008 est.)GDP/c – 14 200 USD (2008 est.)GDP growth – -6,4 % (2009 est.)GDP composition 3,8 % - 35,2 % - 59,0 %Labor force – 45,3 millionUnemployment – 4,0 % (October 08)Inflation – 4,5 % (09 forecast)

Economy of MexicoPopulation below poverty line – more than 40

%Distribution of family income (Gini index) –

48

Main export partners – US 73.1%, Canada 6.2%, Germany 1.9% (2008)

Main import partners - US 55%, China 7.1%, South Korea 5.2% (2008)

Background and negotiationsThe US and Canadian economy became more and

more integrated during the second half of the 20th century

In 1988 Canada and the United States signed the Canada-United States Free Trade Agreement.

The American government then entered into negotiations with the Mexican government for a similar treaty, and Canada asked to join the negotiations in order to preserve its perceived gains under the 1988 deal.

The international climate at the time favoured expanding trade blocs, and the Maastricht Treaty which created the European Union was signed in 1992.

Background and negotiationsFollowing diplomatic negotiations dating

back to 1991 between the three nations, the leaders met in San Antonio, Texas, on December 17, 1992, to sign NAFTA. U.S. President George H.W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas

Before the negotiations were finalized, Bill Clinton came into office in the U.S. and Kim Campbell in Canada, and before the agreement became law, Jean Chrétien had taken office in Canada.

Main measures Market access for goods

Elimination of duties on thousand of goodsSpecial rules and reductions for agricultural,

automotive, textile and apparels goodsSpecial commitments concerning

telecommunications and financial services

Protection for Foreign Investment

Main measures Protection for Intellectual propertyEasier access for business travelersAccess to Government ProcurementRules of OriginSide Agreements

North America Agreement on Environmental Cooperation (NAAEC)

North America Agreement on Labour Cooperation (NAALC)

Comparison with the EU

European Union NAFTA

Politic, economic and social integration

Only trade and investments

Free movement of people Easier movement only for business travelersControl of frontiers and customs

Common money market Common money market is a « long, very long term proposal »

27 « equal » countries US as a leader

Same commercial aim : a huge market for growth

NAFTA - effectsIncrease of trilateral trade

Maquilladoras became the landmark of Mexico

Environment - great concerns, studies show no serious threat for the environment in North America

Agriculture – maybe the most controversial issue

Effects MEXICO Positive effects Negative effects

-Poverty rates fall-Real income rise-Maquiladoras (+15,5% )-Automobile industry- 24500 Mexicans admitted to Canada and US for temporary employment

-2 million jobs lost for Mexican farmers-Rising inequalities- Increases in pollution due to NAFTA in metals sector, petroleum sector and transportation equipment sector

CANADA Positive effects Negative effects

- 65000 Canadians admitted to US for temporary employment

-Possible destruction of Canadian ecosystem and water supply- NAFTA effects on Canadian lawmaking (taxation)

Effects US Positive effects Negative effects

-Automobile industry-25000 US citizens admitted for temporary employment in Canada

-Lost jobs for US workers in manufacturing and assembly industries-Pollution increased in transportation equipment sector

MaquiladoraA maquiladora or maquila is a factory that imports

materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product, usually back to the originating country.

Currently about 1.1 million Mexicans are employed in maquiladoras

The majority of maquiladora employees are women - women will typically work for cheaper wages, and are easier for male employers to direct

As of 200&, maquiladoras still accounted for 45 percent of Mexico’s exports

NAFTA – Critique and realityCritique: After 14 years, we know NAFTA has not

achieved its core goals of expanding trade and investment between the U.S., Canada, and Mexico.

Fact: From 1993 to 2007, trade among the NAFTA

nations more than tripled, from $297 billion to $930 billion. Business investment in the United States has risen by 117 percent since 1993, compared to a 45 percent increase between 1979 and 1993

NAFTA – Critique and reality

Critique: NAFTA has cost the U.S. jobs. Fact: U.S. employment rose from 110.8

million people in 1993 to 137.6 million in 2007, an increase of 24 percent. The average unemployment rate was 5.1 percent in the period 1994-2007, compared to 7.1 percent during the period 1980-1993.

NAFTA – Critique and realityCritique: NAFTA has reduced wages in

Mexico. Fact: Mexican wages grew steadily after the

1994 peso crisis, reached pre-crisis levels in 1997; and have increased each year since. Several studies note that Mexican industries that export or that are in regions with a higher concentration of foreign investment and trade also have higher wages.

NAFTA – Critique and realityCritique: NAFTA has done nothing to improve the

environment. Fact: NAFTA created two binational institutions

unique to the agreement which certify and finance environmental infrastructure projects to provide a clean and healthy environment for residents along the U.S.-Mexico border. To date, they have provided nearly $1 billion for 135 environmental infrastructure projects with a total estimated cost of $2.89 billion and allocated $33.5 million in assistance and $21.6 million in grants for over 450 other border environmental projects

NAFTA – Mexican perspectiveWorkers in maquilladoras:

-Majority displaced workers from the south

-Settle in colonias

-Majority of workers 16-25 yrs old

-66% female workers

-Subject to sexual harassment and rape

-Fired when worker becomes pregnant

“They don’t treat us like

workers, they treat us like

slaves”

The future of the NAFTA ?Obama’s opinion during his campaign against Clinton :

« devastating », « a big mistake »

Obama’s opinion during his campaign against McCain :« this trade zone has a mild, positive effect on the US

economy »

Since his election, he asked for a re-negotiation about environmental and labor topics, but will Mexico and Canada agree ?