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McGill University
Management Core
MGCR 382
John Saba

1 major question from today (regional trade agreements, bloc), Same number of MCQ, 4/5 general questions Lecture 12 Chapter 8: international coop among nations Objective 2B: WTO…….extending the GATT 1. Extending the GATT: other associated agreements (Uruguay round extended GATT to cover 3 new areas) Area of trade Governing agreement Goods GATT Services GATS (general agreement on trade & services) IP TRIPS (trade-related aspects of IP agreement) Investment TRIMS (trade-related investments measures agreement) a. GATS i. 2/3 of global production ii. 1/3 of global employment iii. 1/5 of global trade iv. Services = FASTEST growing sector of economy v. Services are intangible, do not pass through customs stations  subject to NTBs vi. GATS extends NON-DISCRIMINATORY principle & use of NATIONAL TREATMENT approach to cover trade in services vii. Effect: country must treat foreign firms same way as it treats domestic firms viii. Covers ALL services & identifies 4 forms of services 1. Telecomm 2. Tourism 3. Banking 4. Professional services e.g. law, accounting b. TRIPS i. Theory: 1. Strengthened protection granted to owners of IPR 2. Developed enforcement & dispute settlement procedures to punish violators ii. Practice: efforts to improve IP protection have largely failed due to lax enforcement by certain countries e.g. china c. TRIMS i. Trade-balancing: may NOT require foreign investors to limit imports of inputs to an amt equal to their exports of local production ii. Forex access: may NOT restrict investors’ access to forex iii. Domestic sales requirement: may NOT require investor to sell a % of factory’s o/p in local mkt 2. Enforcement of WTO decisions a. Dispute settlement (Before 1994, inefficient & weak) i. After arbitration panel determined that a country violated GATT rule, country could only be sanctioned if it VOLUNTARILY accepted it ii. WTO enforcement powers – MUCH STRONGER iii. When countries believe another WTO member violated rules, they may file a complaint against that country & start the dispute-settlement process iv. WTO panel will evaluate the complaint & impose SANCTIONS if decided b. Step 1: if WTO panel finds offending country violates rules, Panel will likely ask the offending country to eliminate the disputed trade barrier c. Step 2: if offending country refuses to do so, WTO will allow complaining country to impose trade barriers on offending country equal to damage caused by trade barrier i. Also: offending country not allowed to counter-retaliate by imposing new trade barriers on complainant Objective 3: Contrast diff forms of econ integration among cooperating countries 1. Context & definition a. Problems with WTO/GATT i. Countries frustrated with WTO’s requirement of consensus of all members on trade issues + lengthy negotiating rounds b. Solutions: i. WTO encouraged & approved that countries have cooperated bilaterally, multilaterally & regionally to establish their own trade agreements outside WTO c. Effect: bilateral, multilateral & regional trade agreements proliferated that further liberalize & globalize i. 50+% of world trade happens under some form of pref trade agreements signed among countries d. International liberalizing agreements: covers trade in goods + services + IP, investment, gov procurement etc e. 2 key types of trade agreements among >2 countries trying to achieve freer flow goods/services i. Bilateral & multilateral agreements 1. When 2+ countries not necessarily bordering each other e.g. Japan-Thai FTA guarantees 90% of exports b/w both countries will be tariff-free in 10 years ii. Regional agreements 1. When 2+ counties in a geog region & constitute a bloc 2. Definition: RTAs occur b/w >2 countries in a geog region (forming an economic bloc) to reduce (& ultimately eliminate) tariff, non-tariff &/or investment barriers among member countries 3. Each country offers the others pref access to its mkts 4. RTAs provide varying degrees of access & integration 5. FTAs account for 90+% of RTAs -> customs unions less than 10% RTAs 6. Nearly all WTO members belong to at least 1 RTA e.g. Mexico NAFTA & FTA with EU & bilateral agreements with Chile & Venezuela 7. Today: 40% of world trade occurs via RTAs & thus econ blocs 2. Types of REGIONAL integration a. RTAs: classified into 6 types going from less to more integrated b. LEAST LEAST: PARTIAL TRADE AGREEMENTS (usually bilateral/multilateral) i. Covers 2 or more countries (not necessarily bordering each other) ii. Liberalizes trade for only certain specified goods &/or services iii. May be popular among developING countries that may want to: 1. Generally remain protectionist with most countries on most goods 2. Specifically want to liberalize (i.e. free) trade with >1 countries on certain goods &/ir services iv. E.g. Bilateral Japan-Thai FTA c. Least: FTA (90% of all RTAs) e.g. NAFTA, European FT Association (oldest), ASEAN i. Simplest & most popular type of RTA ii. >2 countries agree to free trade in BLOC e.g. members agree to mutually & gradually eliminate formal trade barriers for ALL goods/services among members iii. BUT: each member country pursues indep. external trade policies respecting non-member countries iv. Most FTAs do NOT permit total free trade & provide for certain exceptions that are excluded from agreement 1. e.g. US legally prohibited import of Canadian beef for some time based on fear of “mad cow” 2. NAFTA permits Canada to protect Canadian culture by prohibiting amt of US progs that Canadian TV stations may buy v. There’s no common tariff wall e.g. Canada & US have diff import tariffs against German Mercedes vi. PROBLEM: TRADE DEFLECTION 1. Non-members can reroute [deflecting] their exports by: a. 1 exporting pdts to member country with lower trade barriers nd b. 2 re-exporting pdts to member country with higher trade barriers vii. Solution: most FTA specify RULES OF ORIGIN [impt] 1. These rules try to prevent trade deflection by detailing conditions under which a good is classified as a member/non-member good a. NAFTA rules of origin provide that most pdts qualify for pref treatment as “NA” pdt only if they undergo substantial processing/assembly in Canada, US, Mexico. d. 2 least: CUSTOMS UNION i. COMBINES elimination of internal trade barriers among its members with ADOPTION of COMMON external trade policies toward non-members 1. E.g. US, Canada, Mexico ALL charge 10% tariff to Mercedes 2. E.g. Mercosur (Argentina, Brazil, Paraguay, Uruguay, Venezuela)’s goal is to become COMMON MKT 3. E.g. Andea Pact (Bolivia, Columbia, Ecuador, Peru)’s members are also Associate members of Mercosur ii. Effects: customs union avoids trade deflection problem coz of uniform treatment of goods from non-member countries rd e. 3 least: COMMON MARKET i. Combines 2 elements of customs union + agreement to permit FREE MOBILITY of FOP (labour, capital, tech) e.g. no restrictions on immigration, cross-border flows of capital ii. Promotes FREE MOVEMENT of FOP e.g. EU iii. European Economic Area = agreement b/w EU & certain non-EU European countries e.g. Norway & Iceland iv. Effect: productivity expected to rise coz FOP are FREE TO LOCATE where returns to them are HIGHEST v. Benefits to individual members varies: 1. Skilled labour move to countries where wages are higher (Germany seen influx of skilled workers) 2. Capital & tech -> firms may locate production facilities, invest in other businesses & utilize their technologies anywhere within common market nd f. 2 most integrated: ECONOMIC UNION i. All of the above + agreement to: 1. Coordinate macroeconomic (fiscal & monetary) policies (incl. harmonization of tax rates; social welfare progs) 2. Adopt common currency 3. Harmonize many standards & regulations ii. E.g. BENELUX: Belgium, Netherlands & Luxembourg  they’re part of EU too iii. E.g. EU is imperfect economic union coz of: 1. Lacks Common monetary policy: Only 17 countries use EURO 2. Lacks common fiscal policy: diff tax rates, gov spending, national deficits & debts 3. Had some success at harmonizing many standards & regulations incl: a. Eliminating border controls b. Harmonizing product & labelling standards c. Establishing EU-wide policies for energy & agriculture d. Standardizing laws & regulations regarding corporate behaviour incl. competition & mergers e. Harmonizing procedures for licensing of professionals (e.g. doctors lawyers) so they may practice in any member country g. 1 Most integrated: POLITICAL UNION i. All of the above + complete political integration e.g. complete political & economic integration of 2 or more countries thereby effectively making them into ONE country ii. POLITICAL UNION = TOTAL BOTH ECONOMIC & POLITICAL integration/union of >2 countries, thereby effectively making them into ONE country iii. Political integration includes an agreement to unify all policies (political, economic, social, foreign & defence) using common institutions iv. E.g. each country is its own political Union 3. Effects of regional integration a. Effects on economy i. Potential disadvantage = trade DIVERSION 1. Occurs when, as a result of imposition of common external barriers, trade shifts from MORE EFFICIENT external non-member sources to LESS EFFICIENT suppliers within bloc (since within bloc trade becomes more attractive) ii. Potential benefit = trade CREATION 1. Occurs when production shifts from LESS EFFICIENT domestic producers to MORE EFFICIENT regional producers for reasons of absolute/CA iii. NET effect = national patterns of trade are changed, MORE trade occurs INSIDE bloc, LESS trade occurs OUTSIDE bloc b. Effects on firms i. Opens markets  can lower their average production & distribution costs by EOS ii. Lower cost structure  better compete internationally, be more efficient iii. Firms seek to establish manufacturing facilities within bloc to seek benefits of insider status Objective 4: Compare essential elements of leading regional trading blocs 1. NAFTA a. Larger territory & GDP than EU, generally very rich mkt b. Vast income diff exists b/w Mexico & NA, BUT PPP gap is smaller c. 2-step devt process i. 1989 CAN-US FTA 1. Objectives achieved = eliminated most tariffs & NTBs for trade of pdts originating in both countries 2. Facilitated conditions of fair competition b/w CAN & US 3. Significantly liberalized investment rules b/w CAN & US 4. Provided for dispute settlement procedures ii. Effects of this FTA 1. Helped Canada overcome growing US protectionism & Asian competitiveness 2. Econ effects: BOTH exports grew (CAN trade volume dramatic increase)  motivated Mexico to want to join 3. Canada benefitted MORE than US iii. 1994 NAFTA 1. Phased in over 15-yr period 2. Context: NAFTA facilitated by maquiladora pgram, in which US firms located manufacturing plants south of US border to access low-cost labour w/o significant tariffs 3. NAFTA created continental free trade zone & econ trading bloc 4. NAFTA does NOT abrogate (cancel & replace) previous CAN-US FTA 5. CAN-US FTA continues to exist as support agreement in case NAFTA fails & still applies to CAN & US subject to: a. Addition of Mexico of FTA b. Provisions of CAN_US FTA modified & new provisions added d. 6 OBJECTIVES e. Objective 1: ELIMINATE TRADE BARRIERS & FACILITATE CROSS-BORDER MOVEMENT OF GOODS/SERVICES f. Effects: gradual & comprehensive elimination of trade barriers of BOTH goods/services i. ALL import tariffs eliminated on 99+% of goods , 50% eliminated IMMEDIATELY, rest over 15yrs ii. Trade MORE than TRIPLED, US$2.6+b daily g. Objective 2: PROMOTE CONDITIONS OF FAIR COMPETITION h. Effects: established harmonized trade rules & uniform customs procedures, SIDE AGREEMENTS increased uniformity & standardization at regional level for labour laws, envr protection, immigration i. Conflict: 3 issues (labour, envr, immigration) on trade policy was reignited by NAFTA ii. Effect: political opposition forced Canada, Mexico & US to attach Labour Side-Agreement to Nafta, requiring 3 countries to enforce their own labour laws esp respecting child labour, min wages & workplace safety iii. NAALC raised public profile of major labour rights issues incl. pregnancy-based discrimination, secret ballot voting & protection of migrant workers. Mexico: 1/5 workers employed by export iv. Envr groups feared that polluting US & Canadian firms would move to Mexico  envr side-agreements concluded v. Immigration – illegal immigrants support US economy by buying goods/services & helping keep prices low with plentiful cheap labour, BUT some argue US shouldn’t ignore illegal behaviour as this suppresses wages for legal workers. LARGELY UNSUCCESSFUL (border too long, economic incentive too high, nearly half enter legally but overstay) i. Objective
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