IPE-Regional-Trade-Agreements

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					Linda Young
POLS 400
International Political Economy
Wilson Hall – Room 1122




  Regional Trade Agreements



                                  Fall 2005
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 and Creation
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.

            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

                                         RTAs in force as of February 2005
                                     by year of entry into force (left-hand scale)
                                         and cumulative (right-hand scale)
 No. of RTAs




                                          Goods          Services         Accessions            Cumulative



               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
                                 8%
                   8%




                                                           84%

                      FTA       Customs Union            Partial Scope



       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.



             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




                                                           r




 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.



                  Linda Young, POLS 400, International Political Economy
                        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




       NAFTA



       Andean Community




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.
                         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.
Interpretations of Regionalism


    Liberal                                   Realist



         Historical Structuralist




    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


              Linda Young, POLS 400, International Political Economy
                              Timeline of the Treaties
                                and EU Constitution
1952            1958             1967           1987               1993            1999             2003             ?
                                  EC - European
                                   Community...
                                                              EUROPEAN UNION (EU)
                 European Coal and Steel Community (ECSC)
                     European Economic
                                                      European Community (EC)
                      Community (EEC)
                                      Euratom (European Atomic Energy Community)
                                    European         Justice &
                                   Communities:                   Police & Judicial Co-operation
                                                    Home Affairs
                                 ECSC, EEC (EC,                   in Criminal Matters (PJCCM)
                                  1993), Euratom     Common Foreign and Security Policy (CFSP)
Treaty of       Treaties of      Merger            Single          Treaty of       Treaty of        Treaty of        European
Paris           Rome             Treaty            European Act    Maastricht      Amsterdam        Nice             Constitution

 “Three Pillars” – European Communities (ECSC, EC, Euratom), Common Foreign and Security Policy (CFSP), Justice and Home Affairs




    Source: Wikipedia – the free encyclopedia (http://en.wikipedia.org/wiki/Maastricht_Treaty)
                       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



            Linda Young, POLS 400, International Political Economy
NAFTA: Ethyl’s Challenge under NAFTA

 Ethyl is a U.S. firm

 Investor to state dispute settlement
 procedures – NAFTA Chapter 11
 Canadian parliament banned inter-provincial trade in
 gasoline additive methylcyclopentadienyl
 manganese tricarbonyl (MMT) by prohibiting
 provincial trade
 − could pose a health risk
 − would have to modify automobiles/could damage
    sensors
 − not enough evidence to ban it altogether
 − ban problematic for Ethyl



           Linda Young, POLS 400, International Political Economy
    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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