ADM 3318 Lecture Notes - Lecture 9: Free-Trade Area, Economic Integration, Customs Union

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peardinosaur3

16 Jun 2018

School

University of Ottawa

Department

Administration

Course

ADM 3318

Professor

Radhakrishnan Swaminathan

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Economic Integration at a Region Level

Economic integration

At a smaller level

Visualize agreements among countries in a region

Objective

To reduce, and over a period of time remove, tariff and

nontariff barriers to the free flow of goods, services, and

factors of production between each other such as…

NAFTA

□

In shot, being almost as good as doing business in the home

country

□

○

More recent

BRIC now BRICS - South Africa has recently been added

41% of the population, combined GDP of USD 16.6 Trillion,

combined GDP of USD 37 Trillion in PPP and 22% of global GWP

A formation or a grouping that is more non-geographic

Growing more faster than other economies

○

Levels of integration

Free trade area (NAFTA)

Between member nations

No discriminatory tariffs, subsidies, quotas,

administrative barriers

□

Dealings with other nations

Independent trade policy - with freedom on tariffs,

quotas

□

Customs union

Between member nations

No discriminatory tariffs, subsidies, quotas,

administrative barriers

Elimination of all trade barriers

□

Dealings with other nations

Common external trade policy outside the union

Establishment of administrative structure and

mechanism to manage such policy

□

Common market

Between member nations

No barriers to any factor of production

Free movement of labour, capital, immigration,

emigration, cross border flows

□

Demands

High level of harmony amongst stakeholders

Close working together on issues of monetary and fiscal

policies, creation of jobs, managing unemployment

□

Dealings with other nations

Common external trade policy outside the union

Establishment of administrative structure and

mechanism to manage such policy

□

Economic union

Between member nations

Compete freedom of movement of labour, capital and

other resources within

Common external trade policy

Common currency, fiscal and money policy,

harmonisation of tax rates

□

Demands

High level of harmony amongst stakeholders

Integration in decision making, structure and

mechanism to manage all administrative and conflict

resolution

Bureaucracy infringement on national sovereignty

□

Dealings with other nations

One common voice on all trade issues - to some extent

even in political issues

□

Political union

Between member nations

For all practical purposes, highest level of integration is

intended

Political and economic

□

Demands

High level of harmony amongst stakeholders

Integration in decision making, political structure and

mechanism to manage all administrative and conflict

resolution

Common bureaucracy to handle citizens

□

Dealings with other nations

One common voice on all trade issues - and even in

political issues

Almost as a single nation

□

○

•

Regional level

Economic integration

Promotes investments

Allows scaling across borders

Gains across border - optimal conditions

○

Political integration

Making them mutually dependant

Countries become allies and don’t fight

Potentially reducing conflict□

Politicians can fight to a certain point □

More stability across larger geography

More "clout" for any negotiation with any other entity on the

"global" stage

○

Barriers to free trade/integration

In the short run it is possible that some people will lose their

jobs

□

However, in the long-run, more skilled jobs will appear □

Issues of stakeholder interests

Does it make some stakeholders more important than others?□

It can be hard to decide who is more important when making

decisions

□

Is sovereign power being diluted?

Subservience in some manner?□

With the EURO, it is a shared currency

No one country has the power to control it

□

If a country is struggling with money, they aren't able to go

and print more money

□

Costs of integration

Who bears it? Is it acceptable?□

Levels of "pain"

Industries, services that get impacted □

With integration, factories may be forced to close to save

some money

□

Political issues of integration

○

•

Macro issues against integration

Increasing argument against FTS's by economists

A case of the "case" being oversold with real benefits being

overstated and costs understated

○

Trade diversion possibilities and cases making the FTA only "protect" local

producers at the cost of locking others out as against trade creation

○

•

Major groupings across the world

European Union (EU)

Highest level of integration□

Going strong not with stranding BREXIT □

What makes it work?

Political will across countries□

Formalized in a structure

The European Council

The Council of Minsters

The European Commission

The European Parliament

The Court of Justice

□

Interestingly, there are "stronger" countries within the Union

which carry clout and responsibility as well (Germany)

□

The Euro as a single currency

Gains

Easy to benchmark costs and prices across markets

Single currency protects value and customers and

businesses will realize significant savings

□

Costs/losses □

○

European Free Trade Association (EFTA)

○

Association of Southeast Asian Nations (ASEAN)

○

Caribbean Single Market and Economy (CSME) CARICOM

○

North America Free Trade Association (NAFTA)

NAFTA is currently in a lot of trouble

○

•

Class 9 - Feb. 5th

Monday, February 5, 2018

10:23

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Document Summary

To reduce, and over a period of time remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other such as . In shot, being almost as good as doing business in the home country. Bric now brics - south africa has recently been added. 41% of the population, combined gdp of usd 16. 6 trillion, combined gdp of usd 37 trillion in ppp and 22% of global gwp. A formation or a grouping that is more non-geographic. Independent trade policy - with freedom on tariffs, quotas. Free movement of labour, capital, immigration, emigration, cross border flows. Close working together on issues of monetary and fiscal policies, creation of jobs, managing unemployment. Establishment of administrative structure and mechanism to manage such policy. Compete freedom of movement of labour, capital and other resources within. Common currency, fiscal and money policy, harmonisation of tax rates.

Related Questions

Which of the following is NOT criteria for member nations to use the euro as outlined in the Maastricht Treaty?

A. Specific interest rates

B. A specific level of inflation

C. A lack of price transparency

D. A specified level of debt

E. A specified level of government deficit

Which of the following statements does not describe the African Union (AU)?

A.The AU envisions a united and strong Africa.

B. The aim of the AU is to remove vestiges of colonialism and apartheid.

C. The AU aims to continue the policies of colonialism.

D. The AU aims to intensify cooperation for development.

E. On the African continent, 53 nations created the African Union (AU).

Which of the following is NOT a positive effect of regional trade agreements?

A. Corporate savings

B. Trade diversion

C. Employment opportunities

D. Political cooperation

E. Trade creation

Which of the following is NOT a fact about ASEAN that warrants consideration?

A. Corruption and shadow markets

B. Economic competition

C. Political change and turmoil

D. Diverse cultures and politics

E. Common tariffs and standards

Which of the following statements about ASEAN is FALSE?

A. ASEAN consists of five countries.

B. ASEAN seeks to promote economic, cultural, and social development.

C. ASEAN was formed in 1967.

D. ASEAN serves as a forum to resolve differences peacefully.

E. ASEAN seeks to counter China's rising strength, resources of cheap labor, and abundant raw materials.

Which of the following is NOT a provision of NAFTA?

A. Adding new countries to the European Union

B. Liberalized rules for the granting of subsidies

C. Liberalized rules regarding government procurement practices

D. Elimination of tariffs in North America

E. Trade in services, intellectual property rights, and standards of health, safety, and the environment

Which of the following is NOT a negative effect of regional trade agreements?

A. Political cooperation

B. Employment shifts

C. Trade diversion

D. Loss of national sovereignty

E. Cultural homogenization

Which of the following is NOT an effect off NAFTA?

A. The United States exports more to Mexico.

B. NAFTA has created jobs in the United States.

C. Mexico's exports to the United States have increased.

D. The United States has developed a trade deficit with Canada and Mexico.

E. Trade among Canada, the United States, and Mexico has increased.

Which of the following is NOT a main regional trading bloc?

A. North American Free Trade Agreement

B. United Nations

C. European Union

D. Association of Southeast Nations

E. Southern Common Market

orangeporpoise713

The largest corporation based in the United States is:

A) General Motors.
B) ExxonMobil.
C) General Electric.
D) Microsoft.

Service exports from the United States equal _____ per year.

A) less than $100 billion
B) approximately $250 billion
C) less than $350 billion
D) approximately $500 billion

In addition to agricultural products and manufactured goods, the United States is also the world's largest exporter of:

A) processed and packaged foods.
B) pharmaceuticals.
C) electronics.
D) business services and retailing.

Before entering a country, marketers need to determine if the country has the required _____ to support their marketing efforts.

A) moral code
B) legal system
C) infrastructure
D) trade bodies

In order for a marketer to operate efficiently in a foreign country, it is crucial that a stable _____ be in place to facilitate trade.

A) free trade agreement
B) tariff
C) infrastructure
D) labor force

Which of the following is not a trade barrier to an exporter?

A) Tariffs
B) Import quotas
C) Subsidies
D) Related party trade

A complete ban on the import of a product is known as a(n):

A) import quota.
B) embargo.
C) revenue tariff.
D) protective tariff.

Exchange control is an administrative barrier to international trade that:

A) requires companies that export to sell foreign currencies to the central bank or other foreign agency, and importers to buy foreign currencies from the same organization.
B) supports domestic industry through grants of money or research support.
C) completely bans the importation of a product.
D) sells products in a foreign market cheaper than they are sold domestically.

When a group of nations agree to the free trade of goods among themselves by abolishing tariffs and trade restrictions, the nations have created a:

A) common market.
B) customs union.
C) trading block.
D) free-trade area.

10.

Which of the following is not an objective of the European Union(EU)?

A) eventually remove all trade barriers to free trade among its members.
B) standardize currencies and regulations between member nations.
C) promote the basic tenets of the WTO and GATT treaty.
D) eventually evolve into an independent political entity.

11.

An organization that provides first-time exporters with expertise in locating foreign buyers, handling paperwork, and conforming to local labeling and testing laws is called a(n):

A) export facilitator.
B) export title company.
C) trade assistance corporation.
D) export management company.

12.

McDonald

ivoryturtle973

Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico, Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,â The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,â Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

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ADM 3318 Lecture Notes - Lecture 9: Free-Trade Area, Economic Integration, Customs Union

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