Cross-National Cooperation And Agreements

Cross National Cooperation and Agreements

4673 – Notes 3 REFRESHER NOTES #3 – CROSS NATIONAL COOPERATION AND AGREEMENTS Important: The primary driving force behind regional economic integration (REI) (a/k/a trading blocs ) is geography (e.g., NAFTA involves N. American countries, the EU involves European countries, etc.) A. GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) I. Major Factors 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 – prohibited discrimination through its principle of “ trade without discrimination ” – reduced tariffs were automatically extended to all member nations. 4. GATT did not cover trade in services. B. WORLD TRADE ORGANIZATION (WTO) I. Major Factors 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) C. TYPES OF REGIONAL ECONOMIC INTEGRATION (REI) I . Free Trade Area (may be easily identified because “FTA” usually appears in the name (CAFTA, NAFTA, EFTA)). Features are: 1. No internal tariffs among member countries. 2. Each member sets its own tariff with non-members. 3. Example – see next page I . Free Trade Area (continued) 3. Example : a. Assume FTA members (US, Mexico, Canada), and Germany (non-member). b. Trade between US, Mexico and Canada – no tariffs. c. Between US and Germany – US sets 15% tariff d. Between Mexico and Germany – Mexico sets 10% e. Between Canada and Germany – Canada sets 5% II. Customs Union 1. No internal tariffs among members. 2. Common external tariff: each member must use tariff schedule set by the trading bloc when trading with non-members. 3. Example a. Assume members are US, Mexico, Canada and non-member Germany. b. The bloc has set an external tariff of 20% with non-members. c. Trade between US, Mexico and Canada – no tariffs. d. Between US and Germany – US must use 20% tariff e. Between Mexico and Germany – Mexico must use 20% f. Trade between Canada and Germany – Canada must use 20% III. Common Market 1. No internal tariffs among members. 2. Common external tariff: each member must use tariff schedule set by the trading bloc when trading with non-members. 3. Free factor mobility – factors of production (labor, capital, etc.) allowed to move across members’ borders without restrictions (no tariffs, no visas required, etc.) IV. Complete Economic Integration – see next page IV. Complete Economic Integration 1. No internal tariffs among members. 2. Common external tariff 3. Free factor mobility – factors of production (labor, capital) allowed to move across member borders without restrictions (no tariffs, no visas required, etc.) 4. Common monetary and fiscal policy (e.g., the euro) 5. Political integration NOTE – European Union is not yet at complete economic integration category mainly due to its lack of political integration. D. EFFECTS OF INTEGRATION I . Static Effects 1. Trade barriers fall (e.g. when an FTA is formed). 2. Inefficient producers are no longer protected by trade barriers. 3. Due to competition, inefficient producers are then replaced by efficient ones. 4. 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 “static”). II. Dynamic Effects 1. Trade barriers fall. 2. Volume of market potential increases (more countries/consumers now available). 3. Production increases resulting in greater economies of scale. 4. There is overall growth in the region. III. Trade Creation 1. Trade barriers fall. 2. Companies now able to export to new markets without additional costs caused by barriers. 3. New products may now be shipped to these markets. 4. New industries may develop as a result of these new products entering the market. 5. Example – see next page. III. Trade Creation (continued) 5. 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. IV. Trade Diversion 1. Occurs when companies trade with inefficient member countries instead of efficient non-members when trade barriers fall. 2. Example : Assume Mexican producers now trade with efficient producers in Germany. The Mexicans must pay high tariffs to Germany. Mexico forms FTA with US but US producers are inefficient. Mexican trade gets diverted from Germany to US because costs are lower due to the absence of trade barriers. E. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) I. Areas Covered by NAFTA 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. 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.) E. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) (continued) II. 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 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 many products, at least 50% of the cost must be from NAFTA countries). III. NAFTA Special Provisions These were included in NAFTA because of US concerns regarding conditions in Mexico. 1. Working conditions and labor standards in Mexico have to meet standards. 2. Environmental conditions in Mexico must meet standards. F. CENTRAL AMERICAN-DOMINICAN REPUBLIC FREE TRADE AGREEMENT CAFTA-DR) Source of information: U.S. Dept. of Commerce I. CAFTA-DR – a free trade area between the US, 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).

Paper For Above instruction

Cross-national cooperation and agreements have become fundamental components of the global economic landscape, driven primarily by geographical considerations and the pursuit of economic advantages through regional integration. The evolution from traditional trade frameworks like GATT to modern organizations like WTO exemplifies the progression toward comprehensive international trade regulations designed to promote fair and equitable commerce among nations. These agreements and regional trade blocks serve to eliminate tariffs, reduce trade barriers, and facilitate cooperation on standards, intellectual property, and dispute resolution to foster economic growth and stability.

The General Agreement on Tariffs and Trade (GATT), established in 1947, laid the groundwork for reducing tariffs and quotas among member nations, emphasizing non-discrimination through the Most-Favored-Nation (MFN) clause. This principle mandated that trade benefits granted to one member be extended to all, thereby minimizing unequal treatment. GATT's scope was limited, excluding trade in services, which prompted its successor, the World Trade Organization (WTO), formed in 1995, to expand trade regulation to include services, intellectual property rights, and investment. The WTO’s broader scope facilitates a more integrated global trading system that aims to resolve disputes and enforce fair trade practices effectively (World Trade Organization, 2021).

Regional economic integrations are categorized into various types, each progressively more integrated. A Free Trade Area (FTA), exemplified by NAFTA and CAFTA, removes internal tariffs among member countries but allows each to set its tariffs with non-member nations. In a Customs Union, members maintain a common external tariff, exemplified by the European Union’s customs policies. Moving further, a Common Market removes internal tariffs, implements a shared external tariff, and allows free movement of factors of production like labor and capital, fostering a more unified economic space (Kenen, 2017). Complete Economic Integration bestows a full monetary and fiscal policy union, along with political integration, exemplified by the theoretical European Federation, although the EU remains primarily an economic union with partial political integration (European Commission, 2023).

The economic effects of regional integration are significant, comprising static and dynamic benefits. Static effects involve the reduction of trade barriers, leading to increased competitiveness and efficiency as inefficient producers are replaced by more efficient ones—these shifts sustain overall demand levels. Dynamic effects include market expansion, economies of scale, and regional growth, which collectively bolster production capacity and employment. However, trade diversion can occur when trade shifts from more efficient non-members to less efficient members due to preferential tariffs, potentially undermining the benefits of free trade (Viner, 1950).

The North American Free Trade Agreement (NAFTA), a landmark regional agreement, exemplifies a comprehensive framework covering market access, trade rules, services, investments, intellectual property, and dispute resolution. NAFTA incorporates rules of origin and regional content rules, requiring that a significant portion of a product's production costs must be incurred within member countries to qualify for preferential tariff treatment. These provisions aim to prevent third-party countries from exploiting trade preferences, ensuring that trade benefits remain within the participating nations (Office of the United States Trade Representative, 2020).

Furthermore, NAFTA addressed US concerns regarding labor and environmental standards by stipulating that conditions in Mexico meet certain standards, thereby attempting to balance economic benefits with social and environmental responsibility. Similarly, the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) extended these principles to Central American and Caribbean nations, fostering regional economic development and cooperation.

In conclusion, cross-national cooperation through agreements like GATT, WTO, NAFTA, and CAFTA-DR represents an intricate web of economic and political strategies. These frameworks aim to reduce barriers, promote fair competition, expand markets, and address social and environmental standards, ultimately contributing to regional stability and economic growth. As global interconnectivity deepens, understanding the nuances of regional integration becomes crucial for policymakers, businesses, and scholars seeking to navigate the complexities of international trade.

References

• European Commission. (2023). The European Union: An overview. https://ec.europa.eu
• Kenen, P. B. (2017). The theory of optimal currency areas. In Economic and Monetary Union. Cambridge University Press.
• Office of the United States Trade Representative. (2020). NAFTA at 25: An overview. https://ustr.gov
• World Trade Organization. (2021). Understanding the WTO: Objectives and functions. https://wto.org