4673 Notes 3page 6 Of 6refresher Notes 3 Cross National Cooperatio ✓ Solved

4673 Notes 3 REFRESHER NOTES #3 – CROSS NATIONAL COOPERATION AND AGREEMENTS A. WORLD TRADE ORGANIZATION and GENERAL AGREEMENT ON TARIFFS AND TRADE I . General Agreement on Tariffs and Trade (GATT) 1. Formed in 1947 (under the United Nations) to abolish quotas and reduce tariffs among member countries 2. Fundamental principle – each member must open its markets equally to all other members 3.

Most-Favored-Nation (MFN) Clause a. Prohibited discrimination through its principle of “ trade without discrimination †b. Reduced tariffs automatically extended to all members 4. GATT did not cover trade in services. II.

World Trade Organization (WTO) 1. Formed in 1995 to replace GATT 2. Expanded GATT’s scope to include trade in services, investment, intellectual property rights, among other items. 3. In the US, the Most Favored Nation clause is known as Normal Trade Relations (NTR) B.

REGIONAL ECONOMIC INTEGRATION (REI) IMPORTANT NOTE: Geography is a primary driving force behind regional economic integration (REI) (a/k/a trading blocs) (e.g., notice that NAFTA/USMCA involves N. American countries, the E.U. involves European countries, etc.) I. Types of Regional Economic Integration 1. Free Trade Area (may be easily identified because “FTA†usually appears in the name (CAFTA, NAFTA, EFTA)). a. Features : (see next page) 1.

Free Trade Area (continued) a. Features i. No internal tariffs among member countries. ii. Each member sets its own tariff with non-members. b. Example – assume an FTA members US, Mexico, Canada, and Germany (non-member) i.

Trade between US, Mexico and Canada; no tariffs imposed. ii. Trade between US and Germany; US sets 15% tariff iii. Trade between Mexico and Germany; Mexico sets 10% iv. Trade between Canada and Germany; Canada sets 5% 2 . Customs Union a.

Features: i. No internal tariffs among members. ii. Common external tariff (i.e., each member must use tariff schedule set by the trading bloc when trading with non-members). b. Example – members are US, Mexico, Canada, and non-member Germany. The bloc has set an external tariff of 20% with non-members. i.

Trade between US, Mexico and Canada – no tariffs imposed. ii. Trade between US and Germany; US must use 20% tariff iii. Trade between Mexico and Germany; Mexico must use 20% iv. Trade between Canada and Germany; Canada must use 20% 3 . Common Market (see next page) 3 .

Common Market a. Features: i. No internal tariffs among members. ii. Common external tariff (i.e., each member must use tariff schedule set by the trading bloc when trading with non-members). iii. Free factor mobility – factors of production (labor, capital) move across members’ borders without restrictions (no tariffs, no visas required, etc.) 4.

Complete Economic Integration (This type is not in the book.) a. Features i. No internal tariffs among members. ii. Common external tariff (i.e. each member must use tariff schedule set by the trading bloc when trading with non-members). iii. Free factor mobility – factors of production (labor, capital) allowed to move across member borders without restrictions (no tariffs, no visas required, etc.) iv.

Common monetary and fiscal policy (e.g. the euro) v. Political integration b. Note: European Union is not yet at complete economic integration mainly due to lack of political integration. II. Effects of Integration 1.

Static effects a. Trade barriers fall (e.g. when an FTA is formed). b. Inefficient producers are no longer protected by trade barriers. Continued 1. Static effects (continued) c.

Due to competition, inefficient producers are replaced by efficient ones. d. Because the demand for goods made by inefficient producers is replaced by demand for goods by efficient producers, the overall level of demand stays the same (hence the term “staticâ€) e. Can develop when either trade creation or trade diversion occurs. 2 . Dynamic effects a.

Trade barriers fall. b. Volume of market potential increases (more countries/consumers now available). c. Production increases resulting in greater economies of scale. d. There is overall growth in the region. 3.

Trade creation a. Trade barriers fall. b. Companies now able to export to new markets without additional costs caused by barriers. c. New products now shipped to these markets. d. New industries develop as a result of new products entering market. e.

Example : Assume there are no computers in Country A. When Country A joins the FTA, computers from Country B are exported to A. As a result, other industries (computer repair shops, retail outlets, software developers, etc) are created in Country A. 4. Trade diversion – see next page 4.

Trade diversion a. Occurs when companies trade with inefficient member countries instead of efficient non-members when trade barriers fall. b. Example : Assume Mexican producers now trade with efficient producers in Germany. Mexicans must pay high tariffs to Germany. Mexico forms FTA with US but US producers are inefficient.

However, Mexican trade is diverted from Germany to US because costs are lower due to absence of trade barriers. C. THE EUROPEAN UNION NOTE: Although it is important to know the history of the E.U., only focus on the primary E.U. bodies/institutions and their functions. Some information added from E.U. website (europa.eu) I. Organizational Structure of the E.U.

1. The European Commission a. Provides political leadership of the E.U. b. Roughly similar to Executive Branch/Presidency of the US. c. Functions i.

Proposes legislation for the E.U. and submits such legislation to the Council of the European Union and the European Parliament. ii. Acts as Guardian of the treaties (e.g. they make sure members apply the Union’s treaties). iii. Negotiates, manages and executes the Union’s policies and international trade agreements 2. The European Council/Council of the European Union (formerly The Council of Ministers) a. Roughly similar to US Senate. b.

Functions – see next page b. Functions (of Council) i. Serves as joint decision-makers along with the European Parliament ii. Approves, amends, or ignores proposals submitted by the Commission. 3.

European Parliament a. Roughly similar to US House of Representatives. b. Functions i. Approves, amends, or ignores legislative proposals submitted to it by the European Commission. ii. Controls and approves E.U. budget and spending (jointly with the Council). iii.

Supervises the executive decisions of the E.U. iv. Serves as decision-makers (i.e., enacts E.U. laws) along with the Council of the European Union Decisions made using: · Co-decision or "ordinary legislative procedure" – decisions made jointly with the Council. · Assent · Granted (or declined) by Parliament to the Council before Council’s proposals can be put in place (e.g., allowing other countries to join the E.U.) · Parliament can’t change the proposal. · Must be by majority vote in Parliament · Consultation – Council consults with Parliament on proposals the Council receives from the Commission I. Organizational Structure of the E.U. (continued) 4. Court of Justice of the European Communities. a.

Interprets and ensures treaties are correctly applied. b. Primarily involved with economic issues. c. Acts as appeals court for firms, individuals and organizations fined by the Commission. II. Monetary Union: The Euro 1.

Established by the Treaty of Maastricht (. Member countries must meet certain criteria of the European Monetary Union before being able to adopt the euro. III. Schengen Agreement (. Facilitates free movement of people in Europe (i.e., allows crossing borders without going through border checks) 2.

Threatened by terrorism and migration IV. Transatlantic Trade and Investment Partnership (T-TIP) – trade agreement being discussed between the U.S. and the E.U. V. Brexit – agreement being negotiated formalizing Britain’s exit from the E.U. D.

NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) I. Members include US, Mexico, Canada II. Areas Covered (this is not in the text) 1. Market access – covers topics such as tariff and non-tariff barriers; rules of origin 2. Trade rules – covers anti-dumping legislation, health and safety standards, subsidies 3.

Services - provides for the same safeguards for trade in services (consulting, engineering, software development), etc. Continued II. Areas Covered by NAFTA (continued) 4. Investments – establishes investment rules governing minority interests, portfolio investments. Protects investments made by any company incorporated in any NAFTA country regardless of the company’s country of origin.

5. Intellectual property – NAFTA members pledge to protect intellectual property rights while ensuring that the enforcement doesn’t itself become a barrier to trade 6. Dispute settlement – provides a process for settling disputes in order to discourage member countries from taking unilateral actions against an offending member (i.e. in case of disputes, member countries must follow the established settlement process and not act on their own). III. Rules of Origin and Regional Content Rules 1.

Rules of Origin require that to be eligible for NAFTA preferential treatment (i.e. reduced or no tariff barriers), goods must “have been the subject of substantial economic activity in the free trade area†(i.e., a significant portion of the cost of production of the item must have been incurred in the region). 2. Regional content rules (a/k/a Regional Value Content Requirement or local content rules) state specific percentages of production costs which must be incurred in the region for the product to be considered North American. (e.g. for most products, at least 50% of the cost/value must be from NAFTA countries). E. UNITED STATES-MEXICO-CANADA AGREEMENT (USMCA) (2017 to present) (Not in textbook.

Source of information: US Trade Representative (ustr.gov) I. New FTA proposed to replace/supersede NAFTA. Signed by U.S., Mexico, and Canada II. Some provisions 1. Gives U.S. greater access to Canadian markets (e.g., dairy products) 2.

Increased NAFTA regional content rules on some products (e.g., automobiles from 62.5% to 75%) Continued II. Some provisions of USMCA (continued) 3. Requires 30% of work on automobiles manufactured in N. America to be made by factory workers earning US per hour by 2020; increasing to 40% by 2023. 4.

Members must review agreement every 6 years. Agreement expires after 16 years but can be renewed for additional 16-year periods. 5. Introduces enhanced protection for “digital trade†(e.g., stronger protection for e-books, online consumer protection, etc.). F.

CENTRAL AMERICAN-DOMINICAN REPUBLIC FREE TRADE AGREEMENT (CAFTA-DR) Note: This information is not in the text. Source of information: U.S. Dept of Commerce I. A free trade area among U.S., El Salvador, Guatemala, Honduras, Costa Rica, the Dominican Republic, and Nicaragua. II.

Approved by the US Congress in July 2005 and signed into law (in the US) August 2005 III. Approved by El Salvador (3/1/06), Honduras and Nicaragua (4/1/06), Guatemala (7/1/06), the Dominican Republic (3/1/07) IV. Passed in Costa Rica (January 1, 2009). OMIT “IMPACT OF NAFTA†to the end of the chapter. 4673 Notes 2 REFRESHER NOTES #2 – GOVERNMENTAL INFLUENCE ON TRADE A.

CONFLICTING OUTCOMES OF TRADE PROTECTIONISM I. Protectionism 1. Defined as : Governmental actions (i.e., mainly restrictions) aimed at limiting international trade. 2. While protecting local industries, often results in increased prices for local consumers B.

ECONOMIC RATIONALES (REASONS) FOR GOVERNMENT INTERVENTION I. Fighting Unemployment in domestic industries. 1. Aim : to protect jobs in some industries (e.g., Gov’t may wish to protect domestic steelworkers. 2.

Achieved by limiting imports. 3. Could backfire if it leads to loss of domestic jobs in other peripheral industries (e.g., if, due to reduction in imports, the volume of shipping decreases; therefore, affecting dock workers). 4. Other countries may retaliate when threatened with trade restrictions (e.g., China).

II. Protecting “Infant Industries†1. Infant Industry Argument: Government should protect an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own 2. Problem w/Infant Industry Argument a. There will be a lack of incentive for protected producers to become competitive and efficient. b.

Difficult for gov’t and other entities to predict which industry will become successful. c. Once implemented, difficult to remove government support. III. To Develop Industrial Base – see next page B. ECONOMIC RATIONALES (REASONS) FOR GOVERNMENT INTERVENTION (continued) III.

To Develop Industrial Base (continued) 1. Aim: To protect manufacturing sectors due to their higher potential for growth as opposed to agricultural sectors. 2. Prices for manufactured goods typically rise faster than agricultural goods. 3.

Methods used to develop industrial base a. Surplus agricultural workers – i. Concept: relocating workers from (rural) agricultural industries to (urban) industrial and manufacturing industries. ii. Potential problems: · May be difficult for relocated workers to find jobs, shelter, etc., in city. · May be easier to improve agricultural production methods than to switch industries. · Technological advancements in manufacturing has led to reduced need for unskilled workers. b. Promoting investment inflows – Foreign firms will invest (using FDI) in a country if the gov’t uses import restrictions to lock them out (e.g., Japanese auto makers building manufacturing plants in the U.S. when U.S. govt threatened to restrict imports). c.

Diversification (of products) – Encourage the production of other goods in order to reduce the dependence on one primary product (e.g., government encourages production of electronics to reduce dependence on wheat farming). d. Growth in manufactured goods – OMIT e. Import Substitution and Export-led Development – see next page e. Import Substitution and Export-led Development (continued) i. Import substitution : When gov’t restricts imports, domestic producers are encouraged to manufacture goods at home that were formerly imported. ii.

Export-led development · Concept: gov’t provides assistance to private industry to increase exports. · Can be the result of a successful import substitution program (e.g., Taiwan, S. Korea). IV. To Manipulate Economic Relationships with Other Countries using: 1. Balance-of-trade adjustments – running trade deficits or surpluses (e.g., through currency adjustments; monetary and fiscal policy) 2.

Comparable access/Fairness argument – the argument that countries are entitled to equal access to the markets of their trade partners 3. Import restrictions – threatening to limit imports (e.g., may lead to voluntary export restraints ) 4. Export restrictions a. Restricting exports from their country forces up world prices for such exports. b. Used if shortage of domestic supplies c.

Only feasible if the country has a monopoly or near-monopoly of that good (e.g. OPEC). 5. Prevent dumping – Occurs when producers sell goods in a foreign market at prices below cost or below their home country price. OMIT “Prevention of Foreign Monopolies†and “Optimum-tariff Theory†C.

NON-ECONOMIC RATIONALES (REASONS) FOR GOVT INTERVENTION I. To Protect or Maintain “Essential†Industries 1. Essential-industry Argument – gov’t should protect “essential†industries from imports during peacetime to avoid dependence on foreign suppliers during war (e.g., U.S. defense industry). 2. Achieved by limiting competition or ownership by foreign companies in domestic industries.

II. To Promote Acceptable Practices Abroad 1. By limiting trade with “unfriendly countriesâ€. 2. Achieved by imposing export restrictions on domestic producers through embargoes.

III. To Maintain Spheres of Influence – Gov’t will use trade restrictions etc., to force other countries to comply (e.g., Caribbean Basin Initiative). IV. To Preserve National Culture – Imports of culturally influential goods (music, film, etc.) restricted to protect the culture from outside influence. D.

INSTRUMENTS OF TRADE CONTROL I. Tariff Barriers 1. Directly affect prices 2. Tariff a. Defined as: a fee imposed on goods entering, leaving or passing through a country. b.

Types include: i. Specific duty – tariff imposed on a per-unit basis (e.g., 0 on each computer). ii. Ad valorem duty – tariff imposed as % of item’s value. iii. Compound duty – tariff imposed using a combination of specific and ad valorem duty. Continued b.

Types (of tariffs) include (continued) : iv. Export tariff – imposed on goods leaving the country. v. Transit tariff – imposed on goods passing through the country. vi. Import tariff – imposed on goods entering the country. I.

Non-tariff Barriers (may affect price or quantity) 1. Non-tariff barriers affecting price a. Subsidies – a direct payment by gov’t to its domestic producers (e.g., gov’t pays portion of production costs of wheat producers). b. Aid and loans – government aid/loans with conditions attached (e.g., funds must be spent domestically). c. Customs valuation – amount of duty assessed and the methods used by customs officials to determine this amount.

2. Non-tariff barriers affecting quantity a. Quota i. Defined as: limit placed on the quantity of an item imported or exported. ii. Types include: · Voluntary export restraints (VER) – one country asks another to voluntarily restrict exports or else face restrictions (e.g., U.S. with Japanese auto manufacturers). · Embargoes – prohibits all trade b.

“ Buy Local†legislation – restrict gov’t purchases to domestic goods only. Problem is trying to classify global products as “domestic†or “imported†Continued 2. Non-tariff barriers affecting quantity (continued) c. Standards and labels – standards (e.g., labeling requirements, additional emissions control systems, testing raise the cost of production d. Specific permission requirements – governments may require that importers: i.

Obtain import or export licenses (i.e., government permission prior to importing (or exporting) goods). ii. Follow foreign exchange control procedures (i.e., importers must apply to government agencies to secure the foreign exchange needed to purchase imports). e. Administrative delays – delays due to bureaucratic “red tape†(e.g., clearing customs, government inspections). OMIT from “Reciprocal Requirements†to the end of the chapter.

Paper for above instructions

Introduction

Globalization has reshaped how nations interact with one another, necessitating frameworks such as the World Trade Organization (WTO) and various Regional Economic Integration (REI) agreements, including the North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA). This paper explores the fundamental principles of international trade agreements and regional economic integration, including their structures, functions, and impacts on global trade.

I. The World Trade Organization and GATT

A. General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) was established in 1947 as one of the initial mechanisms for regulating international trade. Its primary purpose was to abolish quotas and reduce tariffs across member countries, aligning with the fundamental principle of nondiscriminatory trade (Baldwin & Martin, 1999).
One of the core ideas within GATT is the Most-Favored-Nation (MFN) clause. This mechanism ensures that any trade benefits extended to one member must be extended to all others, prohibiting discriminatory practices in international commerce (Hoekman & Kostecki, 2009).
However, GATT had limitations, particularly its lack of coverage for trade in services and intellectual property rights.

B. World Trade Organization (WTO)

In 1995, the WTO was established to replace GATT, expanding its scope and functions significantly. Unlike GATT, the WTO includes provisions for trade in services, investment, and intellectual property rights (Mathis, 2009).
One of its significant principles is the enforcement of the MFN clause, often referred to in the U.S. context as Normal Trade Relations (NTR) (Krueger, 1999). The WTO also provides a structured dispute resolution mechanism, allowing member countries to address trade disagreements formally.

II. Regional Economic Integration (REI)

A. Types of Regional Economic Integration

Regional Economic Integration refers to the process of countries within a geographical region increasing their economic ties. The complexity of these agreements can be categorized into several types:
1. Free Trade Area (FTA): In an FTA, member countries eliminate tariffs among themselves but maintain their individual tariffs against non-member countries. Examples include the North American Free Trade Agreement (NAFTA) and the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) (U.S. Trade Representative, 2022).
2. Customs Union: A customs union combines the features of an FTA but also establishes a common external tariff against non-members. For example, the European Union (EU) operates as a customs union.
3. Common Market: A common market goes further by allowing the free movement of factors of production, such as labor and capital, across member borders, in addition to no internal tariffs and a common external tariff (McCarthy, 1999).
4. Complete Economic Integration: Although not yet achieved by the EU, this level involves not only harmonization of tariffs but also shared monetary and economic policies, requiring significant political integration (Baldwin, 2006).

B. Effects of Integration

1. Static Effects: When trade barriers fall, inefficient producers often fail to survive the subsequent competition, leading to market reallocation without a significant increase in overall demand—a phenomenon known as "static" trade creation.
2. Dynamic Effects: The liberalization of trade can generate growth through increased market potential, enhancing economies of scale and fostering economic growth across regions (Krugman, 1991).

III. The European Union (EU)

A. Organizational Structure

The EU comprises various institutions that govern its operations:
1. The European Commission: Acts as the executive body, proposing legislation and ensuring compliance with EU treaties (Council of the European Union, 2021).
2. The European Council: Functions like the U.S. Senate, making joint decisions with the European Parliament on legislative proposals.
3. The European Parliament: Similar to the U.S. House of Representatives, it has the role of approving budgets and legislative proposals (European Union, 2023).

B. Monetary Union and the Euro

The introduction of the euro as the single currency reflects a deeper level of economic integration among members, established through the Maastricht Treaty (Giavazzi & Spaventa, 2005).

C. Schengen Agreement and Mobility

The Schengen Agreement facilitates free movement across member borders, allowing individuals to travel without border checks, although recent geopolitical events have posed challenges to this open mobility (Schengen Agreement, 2020).

IV. NAFTA and the USMCA

A. Overview of NAFTA

NAFTA, established in 1994, was a landmark agreement between the U.S., Canada, and Mexico aimed at fostering economic cooperation and trade liberalization (U.S. Trade Representative, 2022).

B. Key Provisions and Changes Implemented by USMCA

The USMCA, which replaced NAFTA, introduced tighter regulations on labor, provided greater market access for U.S. agricultural products in Canada, and enhanced protections for digital trade (U.S. Trade Representative, 2022).

C. Rules of Origin

Both NAFTA and USMCA have established Rules of Origin to ensure that a certain percentage of the value of goods comes from member countries to qualify for tariff-free access, ensuring that trade benefits are preserved for member economies (Dunning & Lundan, 2008).

Conclusion

Cross-national cooperation through agreements like the WTO, GATT, and various regional trade agreements, including the EU and NAFTA/USMCA, plays a significant role in shaping global trade dynamics. As countries navigate the complexities of international trade, such frameworks facilitate smoother economic interactions and foster growth. However, ongoing challenges, including geopolitical tensions and the need for political integration among trading blocs, will demand continued adaptation and cooperation.

References

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