Introduction
The
growth of the regional trading blocs or the commonly known as Regional
Integration Agreements (RIAs) is one of the major developments in the international
economic relations and is not a new concept. Countries have entered into
Regional Integration agreements for economic, political and security purposes. After
the world war two, superior nation states notably relaxed the trade barriers
among themselves. Most of developed and developing countries are members of one
or many RIAs. The regional agreements can be different, but all have one thing in
common, where the objective was decided as to reduce the barriers to trade
between member countries. Four types of
regional integration agreements are described prior to the analysis on two
selected entities.
·
Free Trade Area:
Trading nations agree to remove all tariff and non-tariff barriers among
members. But members can adhere with their own trade restrictions against the
outsiders
·
Customs Union:
two or more partners agree on to remove tariff or non-tariff barriers between
them, however, when applying trade restrictions against non-members, they have to
agree on a common structure
·
A common market:
members share free movement of goods & services among themselves, common
trade restrictions against non-members, free movement of factors of productions
across nation borders within the bloc
·
Economic Union:
common economic policies are shared in the region
Above
forms are different from each other in many ways, but what is common among them
was the main objective of eliminating the trade barriers among the member
states. However, in times, there was a need for an effective integration, which
can go beyond more than reducing tariffs and quotas, also can go beyond
traditional trade policies. This kind of a deep integration was first actively
driven by the European Union (EU). Then there was another development to
initiate Trade blocs where both high-income states and developing countries are
equally partnered. A good example for this was the extension of U.S – Canada
Free Trade Area towards Mexico through NAFTA in 1994. Therefore, my analysis on
Regional Integration is based on comparison between EU and NATFA as two
different regional entities.
History
of the European Union and the NAFTA
European
Union
In
1952, the basis of the European Union began with the signing of the Treaty of
Paris, establishing the European Coal and Steel Community (ECSC), to regulate
European industry & improve commerce, post WWII. Five years after, 6
members singed Treaties of Rome forming European Economic Community (EEC) and
European Atomic Energy Community. In 1967, ECSC, EEC, and EuroAtom
merged to form the basis of the European Community. In 1992, the Maastricht
Treaty was ratified, and formed the European Union currently with 27 members,
and also with a combined population of
nearly 500 million and a GDP of 20% of the total GDP of the world, EU has today
become a strong political entity.
The objectives of the formation of EU as pictured in the Treaty of Rome[1];
The objectives of the formation of EU as pictured in the Treaty of Rome[1];
·
Elimination of tariff, quotas and other
barriers on intra-community trade
·
Having a common internal tariff on
imports from the rest of the world
·
Allowing the free movement of factors of
production within the community
·
Harmonizing of taxation and monetary
policies and also social security policies
·
Adopting a common policy on agriculture,
transport and competition in industry
North
American Free Trade Agreement
NAFTA’s
historical background is a different approach. There wasn’t any military
conflicts among the members, therefore, there weren’t political reason but an
economic base encouraged the FTA. Canada, Mexico and the United States
governments singed the North American Free Trade Agreement, in order to
establish trilateral trade bloc in North America in 1994. NAFTA plays a very
important and influential role in the world economic affairs today, foreseeing
it beyond a primary free trade agreement (FTA). North America has become a
primary region for security and political reasons as well as economic
advantages.
Compare
and Contrast
1. Common
objectives: Eliminating restriction on Trade barriers
“Economic
integration” is understood as “a process of eliminating restrictions on
International
trade, payments, and factor mobility”[2] and this was the objective of both NAFTA and
the EU. Both NAFTA and the EC Treaty include these basic objectives such as the
removal of trade and investment barriers. NAFTA Article 102 states “eliminate barriers to trade in, and facilitate the
cross-border movement of goods and services between the territories of the
Parties;”[3]
While, EU also focused on common action to eliminate the barriers which
divide Europe, at the treaty. It cited in the Article 21 (e) “encourages the
integration of all countries into the world economy, including through the
progressive abolition of restrictions on international trade”[4]
Due to regional
trade liberalization, both EU and NAFTA are developing an important comparative
cost advantages and economies of scale. According to the both modern and
classical trade theory “regional trade – is welfare-increasing, because it
allows to exploit comparative cost advantages and economies of scale”[5]. As EU
profits from some highly developed countries has the comparative cost advantage
and economies of scale. If this is applied to NAFTA, the United States produce
animal products, grains and oilseeds more efficiently than Mexico, while Mexico
can produce vegetables, fruits and fresh
flowers more efficiently and have the comparative advantage. However, NAFTA
doesn’t only focus on the areas common for FTA, but also includes the subjects
that go beyond trade in goods and tackles matters demarcate the economic
relationships between parties as Treaty of Rome.
2. Different
Forms of entity
However, when
analyzing the two entities, the most significant difference between the two is
that which the EU has achieved its status as a common market, while NAFTA plays
a role only as FTA.
EU as was
created as a Customs Union then removed barriers to the mobility of
labor, capital and services then formed a Common Market (1958) with
below aims[6];
·
A customs union with a common external
tariff;
·
Free movement of goods, persons,
especially employed persons, services and, to a certain extent, capital
·
Elimination of quantitative restrictions
(quotas) and measures having equivalent effect.
The EU is the only major regional agreement
that gives all citizens right of residence and employment in all member
countries. Just like national citizenship, Citizenship of the union is also
defined. According to Article 17 of the ECT, every person holding the
nationality of a Member State is a citizen of the Union. The achievement of EU
on people movement is the introduction of “Schengen Area”, which is an
important development for internal market, which came into force on 26 March
1995.
And then,
established a common currency & common economic policies which led to an Economic
and Monetary Union. On 1 January 1999, the euro became the official
currency of the participating Member States within ‘Eurozone’ and it also facilitates trade between
those countries and gives them a common goal. However, out of 27 countries only
17 states are using Euro as an Economic and Monetary Union (EMU)
In
contrast, NAFTA has only achieved the free movement of goods and services among
the members. According to the NAFTA Article 1210(3), its State nationals are
not granted with the right to labor migration. Parties agreed only to surrender
their sovereignty in those areas. However, the agreement facilitates the movement
of professional services providers among member states. NAFTA doesn’t have its
objectives for the formation of a customs union or common market with full labor
mobility and not willing to share a common trade policy. NAITA's negotiators
were only willing to form an RTA. One reason which can be taken up for the
restriction on the labor migration is the long history of the illegal migration
streamed from Mexico to the U.S. In
contrast, when the EEC was founded it had the objective of forming something
deeper than an FTA. It worked towards and oversaw economic and political
integration. One of the main goals of the EEC Treaty was the establishment of a
customs union and also to come to a common agreement on tariff for the goods coming
from non-Member States.
Though NAFTA is
only a free trade area, what is special about NAFTA’s membership is that it
consists of three member states, including Mexico, which is an emerging market,
and the other two are highly industrialized countries. In his working “Economic
Interests and Regional Trading Arrangements: The Case of NAFTA” (2003) Kerry A.
Chase stated that this combination of a low wage country and two highly
developed markets suggest a potential for economic interdependence, as it
allows the member states to concentrate either on capital intensive (Canada,
USA) or on labor intensive (Mexico) production (Chase, 2003).
On the other
hand, EU has also expanded the regionalism as it enhanced the single market
programs to it’s neighboring countries which were Non-EU Members by signing of
European Agreements with Eastern European countries in 1995.
Another
important difference between these two entities is the historical and political
status behind their negotiations. NAFTA did not intend to achieve a political
integration. Likewise, NAFTA's structure is significantly different from EU. As
discussed earlier, NAFTA was not convinced for freedom of movements of people
and it was created for the trade liberalization not as a social agreement.
1. Harmonization
NAFTA Parties
weren’t willing to give in their sovereignty unlike the EU. Accordingly, NAFTA
doesn’t allow decision-making power to harmonize or modify existing law. In
response to the myths vs. reality 2008, NAFTA emphasized “It respects the
unique cultural and legal framework of each of the three countries and allows
them to maintain their sovereignty and independence[7].”As
NAFTA doesn’t allow its institutions the power to produce binding decisions,
resolutions and regulations not even to its main body Free Trade Commission, which is in charge of
fulfilling the Treaty's objectives
In contrast, the
European Union was from the beginning supranational. The Treaty of the European
Community allows necessary powers to the Council, Commission, Parliament &
Court of Justice to implement its provisions, and also to harmonize the
domestic legislation of the member States in areas mentioned by the Treaty.
However, when taking NAFTA, it was always been criticized for possessing a weak
enforcement and harmonization powers. NAFTA doesn’t allow it’s institution to
exercise such power.
Global
Financial Crisis and Eurozone Debt Crisis; NAFTA Vs EU
This global financial crisis (GFC)
is considered by many economists as the worst financial crisis since the great
depression occurred in 1930. This was a result following the collapse financial institutions, the bailout of
banks by national governments, and downturns in stock markets around the world.
The impact of GFC on NAFTA is enormous.
Trade between Nafta partners was decreased significantly during the crisis, as
the US fell and the trading partners Canada and Mexico were influenced. U.S
exports to Canada and Mexico recorded up to $452 billion in 2007, however was
declined to $397 billion in 2009, due to 2008 financial crisis. Exports from
Canada and Mexico to the U.S. was also down to $438 billion in 2009. The U.S
trade deficit with Mexico during 1994- 2010 was $97.2 billion, while displacing
682,900 U.S. jobs, out of which 116,400 occurred after 2007, due to financial
crisis. [8]
Over the past
few weeks, the Eurozone is facing a
sovereign debt crisis threatening the
economic stability in Europe and beyond. No matter what steps
have been taken to control this crisis, the future of the euro, shared by only
17 EU member states still a concern. Markets lost the assurance on Greece as
they could re-pay the debts since 2010.Crisis spread to Greece, Ireland, and
Portugal which were later received financial assistance from the EU and the
International Monetary Fund (IMF).As a result of the global financial and
economic crisis, the EU-27’s GDP fell
from EUR 12 495 000 million in 2008 to EUR 11 791 000 million in 2009.[9]The eurozone economy is forecast to contract
this year as its debt crisis continues to bite. The European Commission's spring forecast confirmed its prediction of a
0.3% contraction in 2012 in the economies of the 17 countries that use the
euro.[10]
According
to the congressional research service, the current eurozone is facing four
major economic challenges;[11]
·
high debt levels and public deficits in
some Eurozone countries
·
weaknesses in the European Banking
System
·
economic recession and high unemployment
in some Eurozone countries
·
persistent trade imbalances within the
Eurozone
[1]
International Economic Relations, Gautam Murthy
[2]
International Economics, Robert J. Carbaugh
[3]
Article 102, Paragraph a, NAFTA
[4]
Article 21 (e), Treaty of European Union
[5]
Explaining regional integration outcome, W. Matti,1999
[6]
Principles and general completion of the internal market, Facts sheet on the
European Union , 2007
[7]
Myths Vs Reality, NAFTAnow.org
[8]
Advantages and disadvantages of NAFTA. U.S. Economy
[9]
Eurostat 2011
[10]
BBC Business News, www.BBC.co.uk
[11]
The Eurozone Crisis; Overview and issues for congress, Congressional research
service
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