Regional Trading

Arrangements

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 CHAPTER OUTLINE
• Regional Integration versus Multilateralism
• Types of Regional Trade Agreements (RTA’s)
• Types of RTA’s
• Effects of RTA’s – Static and Dynamic Effects
• The European Union
• The European Monetary Union
• North American Free Trade Area (NAFTA)
• Russia and WTO

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Regional Integration vs. Multilateralism
• WTO
• Promote trade liberalization through
worldwide agreements
• Trade liberalization by any one nation
• Extended to all WTO members, 153 nations
• Nondiscriminatory
• Regional trading arrangements
• Nations reduce trade barriers only for a small
group of partner nations
• Discriminating against the rest of the world
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 Types of Regional Trading Arrangements
• Economic integration
• Process of eliminating restrictions on global
trade, payments, and factor mobility
• Results in the uniting of two or more national
economies in a regional trading arrangement
• Degrees of Economic integration
Free Trade Area, Customs Union
Common Market, Economic Union
Monetary Union
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 Types of Regional Trading Arrangements
• Free Trade Area (FTA)
• Association of trading nations
• Members agree to remove all tariff and non‐
tariff barriers among themselves
• Each member maintains its own set of trade
restrictions against outsiders
• North American Free Trade Agreement (NAFTA)
• Canada, Mexico, and the United States

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 Types of Regional Trading Arrangements
• Customs union
• Agreement among two or more trading
partners
• Remove all tariff and non‐tariff trade barriers
among themselves
• Each member nation imposes common trade
restrictions against non‐members
• East African Community (EAC)
• Southern African Development Community
(SADC)
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 Types of Regional Trading Arrangements
• Common Market
• Group of trading nations
• Free movement of goods and services among
member nations (without trade restrictions)
• Initiation of common external trade restrictions
against non‐members
• Free movement of factors of production across
national borders within the economic bloc
• European Common Market, 1992

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 Types of Regional Trading Arrangements
• Economic Union
• Group of Trading Nations
• Adopt all elements of a Common Market plus
• National, social, taxation, and fiscal policies are
harmonized and administered by a
supranational institution
• Requires an agreement to transfer economic
sovereignty to a supranational authority
• European Union (1994)

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 Impetus for Regionalism
• Motivations for regional trading arrangements
• Prospect of enhanced economic growth
• Economies of large‐scale production
• Foster specialization and learning‐by‐doing
• Attract foreign investment
• Foster a variety of noneconomic objectives
• Managing immigration flows
• Promoting regional security
• Enhance & solidify domestic economic reforms

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Effects of a Regional Trading Arrangement
• Static effects (see Figure 8.1)
• Trade‐creation effect (areas “a + b”)
• Welfare gains
• domestic production of one member in the union
• Replaced by another member’s lower‐cost imports
• Trade‐diversion effect (area “c”)
• Welfare losses
• Imports from a low‐cost supplier outside the union
• Replaced by a higher‐cost supplier within the union
• Production and Consumption Effects

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Effects of a Regional Trading Arrangement
• Dynamic effects
• Creation of larger markets
• Dynamic gains
• Economies of scale
• Greater competition
• Stimulus of investment

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North American Free Trade Agreement
• North American Free Trade Agreement, 1994
• Mexico, Canada, and the United States
• Provide each member nation better access to
the others’ markets, technology, labour, and
expertise
• Economies of scale

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North American Free Trade Agreement
• NAFTA & Mexico
• Benefits
• Increase in the production of goods and services –
comparative advantage
• Rising investment spending
• Increase wage incomes and employment, national
output, and foreign‐exchange earnings
• Facilitated the transfer of technology
• Costs
• Agriculture – 25% of population
• Devastated by US competition
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North American Free Trade Agreement
• NAFTA & Canada
• Benefits / safeguards
• Maintenance of its status in international trade
• No loss of its current free‐trade preferences in U.S.
• Equal access to Mexico’s market
• Costs
• Concerns about Canada’s European‐style social
welfare model
• Uncompetitive practices and policies
• Downward pressure on the country’s base of personal
and corporate taxes
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North American Free Trade Agreement
• NAFTA & the U.S.
• Benefits
• Expanding trade opportunities
• Reducing prices;
• Increasing competition
• Economies of large‐scale production
• More reliable source of petroleum
• Less illegal Mexican immigration
• Enhanced Mexican political stability

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North American Free Trade Agreement
• NAFTA & the U.S.
• Costs
• Industries that rely on trade barriers to limit
imports of low‐priced Mexican goods
• Citrus and sugar
• Unskilled workers
• Fear that U.S. companies will move to Mexico
• No because of different worker productivity
• Concern: Mexico’s environmental regulations
• Greater trade creation than trade diversion
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NAFTA & U.S./Mexico Trucking Dispute
• Conflict between Trade Partners of NAFTA
• Differences due to Safety Standards or Jobs?
• Differences in safety standards between U.S.
Canada and Mexico trucking system
• President Clinton (1995) imposes restrictions
on Mexican cargo trucking for safety reasons
• 2007 – agreement with Mexico to create a
Pilot program for Mexican trucks to operate in
U.S.
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NAFTA & U.S./Mexico Trucking Dispute
• After 18 months of the program, Teamsters
object leading to cancel the program
• Mexico retaliates by imposing tariffs on 99
products (mostly agricultural goods)
• 2011 – U.S. and Mexico strike a deal to end
the Trucking dispute
• Modest gains for Mexican Truckers

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