Important International Bodies and Agreements

The North American Free Trade Agreement (NAFTA)

NAFTA is a 1994 agreement to removes taxes on products traded between North American countries (US, Canada and Mexico).

Learning Objectives

Discuss the goals of ways that the North American Free Trade Agreement (NAFTA) serves its members

Key Takeaways

Key Points

  • NAFTA protects copyright, patents and trademarks between the three countries. It was updated with the North American Agreement on Environmental Cooperation, which helped reduce pollution and set more environmental regulations.
  • Since NAFTA took away taxes between products traded between the US, Canada and Mexico, Mexico has been buying more products from the US.
  • Some say NAFTA has been positive for Mexico, which has seen poverty rates fall and real income rise, while others argue that NAFTA has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from the US.

Key Terms

  • maquiladora: Mexican factories that take in imported raw mateirals and produce goods for export.
  • foreign direct investment: Direct investment into production in one country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

NAFTA

The North American Free Trade Agreement (NAFTA) is an agreement between Mexico, the United States and Canada. The agreement was signed by US President George H.W. Bush, Canadian Prime Minister Brian Mulroney, and Mexican President Carlos Salinas on December 17, 1992 in San Antonio, Texas, and took effect on January 1, 1994.

A flag that's made up of the three countries in NAFTA - the US, Mexico, and Canada.

NAFTA: NAFTA is an agreement between the US, Mexico, and Canada, as represented by the 3 flags in its logo.

The bill removed taxes on products traded between the three countries. It also protects copyright, patents, and trademarks between those countries. It was updated with the North American Agreement on Environmental Cooperation, which helped reduce pollution and set more environmental regulations. It was also updated with the North American Agreement for Labor Cooperation, which helped people fight for better labor conditions.

Effects

Since NAFTA took away taxes for products traded between the US, Canada, and Mexico, Mexico has been buying more products from the US. It saved U.S. companies the cost of selling products to Mexico, and saved Mexican companies the cost of buying items from US companies.

A benefit of the bill is that labels on products exchanged between the three countries come in French, English and Spanish. That way, Mexicans and Americans who speak Spanish can read the Spanish label, Americans and Canadians can read the English label, and Canadians who speak French can read the French label.

NAFTA also encourages more immigration from Mexico to the US. Since small businesses can no longer be protected by tariffs, many small business owners in Mexico cannot compete with the prices of subsidized products from the US. As a result, many Mexicans have gone to the US looking for work. Some believe that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise.

Others argue that NAFTA has been beneficial to business owners in all three countries, but has had negative impacts on farmers in Mexico. Mexican farmers have seen food prices fall due to cheap imports from US agribusiness, while US workers in manufacturing and assembly industries have lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the US and Mexico.

Goals of NAFTA

NAFTA was created to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA immediately eliminated tariffs on more than one-half of Mexico’s exports to the US and more than one-third of US. exports to Mexico. Within 10 years of implementation, all US-Mexico tariffs would be eliminated except for some US agricultural exports that were to be phased out within 15 years. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products.

In the area of intellectual property, the North American Free Trade Agreement Implementation Act made changes to the copyright law of the US, foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright (within NAFTA) on certain motion pictures which had entered the public domain.

Trade

The agreement opened the door for free trade, ending tariffs on various goods and services, and implementing equality between Canada, the US and Mexico. Since the implementation of NAFTA, the countries involved have been able to do the following:

  • The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009 (the latest data available).
  • Foreign direct investment of Canada and Mexico in the US (stock) was $237.2 billion in 2009, up 16.5% from 2008.
  • Income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994.
  • To alleviate concerns that NAFTA would have negative environmental impacts, in 1994 the Commission for Environmental Cooperation (CEC) was given a mandate to conduct ongoing ex-post environmental assessment of NAFTA.
  • Agriculture is the only section that requires three separate agreements between each pair of parties. The Canada–US agreement contains significant restrictions and tariff quotas on agricultural products, whereas the Mexico–US pact allows for a wider liberalization within a framework of phase-out periods.
  • Mexico has gone from a minor player in the pre-1994 US export market to the 2nd largest importer of U.S. agricultural products.
  • According to the Department of Homeland Security Yearbook of Immigration Statistics (2006), 73,880 foreign professionals were admitted into the US for temporary employment under NAFTA.

The European Union (EU)

The European Union (EU) was established in November 1993 and is an economic and political union of 27 member states.

Learning Objectives

Describe the economic, political and legal methodology of the European Union

Key Takeaways

Key Points

  • The EU has developed a single market through a standardized system of laws which apply in all member states.
  • EU policies aim to ensure the free movement of people, goods, services, and capital; enact legislation in justice and home affairs; and maintain common policies on trade, agriculture, fisheries, and regional development.
  • The euro is designed to build a single market by eliminating exchange rate problems, providing price transparency, creating a single financial market and low interest rates, providing a currency used internationally, and protecting against economic fluctuations through internal trade.

Key Terms

  • tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
  • GDP: A measure of the economic production of a particular territory in financial capital terms over a specific time period.
  • Euro Zone: The eurozone is an economic and monetary union of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The European Union

The European Union (EU) was formally established when the Maastricht Treaty—whose main architects were Helmut Kohl and François Mitterrand—came into force on November 1, 1993. The European Union is an economic and political union of 27 member states which are located primarily in Europe. Its de facto capital is Brussels. In 2004, the EU saw its biggest enlargement to date when Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined its ranks. On December 9, 2011, Croatia signed the EU accession treaty making it the 28th member state as of July 2013.

The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank. The European Parliament is elected every five years by EU citizens.

The EU has developed a single market through a standardized system of laws which apply to all member states. EU policies aim to ensure the free movement of people, goods, services, and capital; enact legislation in justice and home affairs; and maintain common policies on trade, agriculture, fisheries, and regional development.

With a combined population of over 500 million inhabitants, or 7.3% of the world population, the EU generated the largest nominal world gross domestic product ( GDP ) of 17.6 trillion US dollars in 2011. This figure represented approximately 20% of the global GDP when measured in terms of purchasing power parity.

The Eurozone and Economy

In 2002, EU notes and coins replaced national currencies in 12 member states. Since then, the eurozone (or Euro Zone) encompasses 17 countries. The monetary policy of the eurozone is governed by the European Central Bank.

A map that highlights which countries are in the Eurozone.

Eurozone Countries: Adopted in 2002, the euro promotes a single market within 17 countries in the European Union.

The euro is designed to help build a single market by easing travel of citizens and goods; eliminating exchange rate problems; providing price transparency; creating a single financial market, price stability, and low interest rates; and providing a currency used internationally and protected against shocks by the large amount of internal trade within the eurozone. It is also intended as a political symbol of integration and stimulus for more.

Of the top 500 largest corporations measured by revenue, 161 have their headquarters in the EU. In 2007, unemployment in the EU stood at 7% while investment was at 21.4% of GDP, inflation at 2.2%, and current account balance at −0.9% of GDP. In other words, there was slightly more importing than exporting in the EU. As of August 2012, unemployment in the EU stood at 11.4%.

Political and Legal

The EU operates solely within those competencies conferred on it by the treaties and according to the principle of subsidiary (which dictates that action by the EU should only be taken where an objective cannot be sufficiently achieved by a member state alone). Laws made by the EU institutions are passed in a variety of forms. Generally speaking, they can be classified into two groups: those which come into force without the necessity for national implementation measures, and those which require national implementation measures.

On December 1, 2009, the Lisbon Treaty entered into force and reformed many aspects of the EU. In particular, it changed the legal structure of the EU, merging its three pillars system into a single legal entity provisioned with legal personality, and created a permanent President of the European Council.

The Internal Market

The single market involves the free circulation of goods, capital, people, and services within the EU, and the customs union involves the application of a common external tariff on all goods entering the market. Once goods have been admitted into the market, they cannot be subjected to customs duties, discriminatory taxes or import quotas, as they travel internally. The non-EU member states of Iceland, Norway, Liechtenstein, and Switzerland participate in the single market but not in the customs union.

Free movement of capital is intended to permit movement of investments such as property purchases and the buying of shares between countries. The free movement of persons means that EU citizens can move freely between member states to live, work, study, or retire. This required the lowering of administrative formalities and recognition of professional qualifications of other states.

The free movement of services and of establishment allows self-employed persons to move between member states to provide services on a temporary or permanent basis. While services account for 60% to 70% of GDP, legislation in the area is not as developed as in other areas.

The Common Market of the Southern Cone (MERCOSUR)

Mercosur is an economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela created in 1991 to promote free trade.

Learning Objectives

Identify the purpose of the formation of the Common Market of the Southern Cone (MERCOSUR) and its objectives.

Key Takeaways

Key Points

  • Its purpose is to promote free trade and the fluid movement of goods, people, and currency. The official languages are Guaraní, Portuguese, and Spanish.
  • Intra-Mercosur merchandise trade grew from $10 billion at the inception of the trade bloc in 1991, to $88 billion in 2010.
  • With a population of more than 270 million people, and a GDP of the full-member nations in excess of $3 trillion a year, Mercosur is the fifth-largest economy in the world, just behind the European Union.

Key Terms

  • tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
  • trade bloc: is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.
  • GDP: A measure of the economic production of a particular territory in financial capital terms over a specific time period.

MERCOSUR

Mercosur is an economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Established in 1991 by the Treaty of Asunción, it was later amended and updated by the 1994 Treaty of Ouro Preto.

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Mercosur Member Countries: Mercosur has five full member countries (Argentina, Brazil, Paraguay, Uruguay, Venezuela), and two associate members (Bolivia and Chile).

The purpose of Mercosur is to promote free trade and the fluid movement of goods, people, and currency. The official languages are Guaraní, Portuguese and Spanish. Mercosur acts as a full customs union and works toward a continuing process of South American integration into the Union of South American Nations. The program also proposed the Gaucho as a currency for regional trade.

The founding of the Mercosur Parliament was agreed at the December 2004 presidential summit.

Objectives

  • Mercosur seeks the free transit of produced goods, services, and factors among the member states. Among other things, this includes the elimination of customs rights and lifting of non- tariff restrictions on the transit of goods or any other measures with similar effects.
  • Mercosur seeks to fix a common external tariff (CET), adopt a common trade policy with regard to nonmember states or groups of states, and coordinate positions in regional and international commercial and economic meetings.
  • Mercosur seeks to coordinate macroeconomic and sector policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states.
  • Mercosur seeks to commit to the integration process by making the necessary adjustments to member state’s laws in pertinent areas. The common market will allow (in addition to customs unification) the free movement of manpower and capital across the member nations. Because member states will implement the trade liberalization at different speeds, during the transition period the rights and obligations of each party will initially be equivalent but not necessarily equal.

Trade and Economy

Intra-Mercosur merchandise trade (excluding Venezuela) grew from USD 10 billion at the inception of the trade bloc in 1991, to $88 billion in 2010; Brazil and Argentina accounted for 43% of this total. The trade balance within the bloc has historically been tilted toward Brazil, which recorded an intra-Mercosur balance of over $5 billion in 2010. Trade within Mercosur amounted to only 16% of the four countries’ total merchandise trade in 2010, and trade with the European Union (20%), China (14%), and the United States (11%) was of comparable importance.

Exports from the bloc are highly diversified, and include a variety of agricultural, industrial, and energy goods. Merchandise trade with the rest of the world in 2010 resulted in a surplus for Mercosur of nearly $7 billion; trade in services, however, was in deficit by over $28 billion.

The bloc comprises a population of more than 270 million people, and the combined Gross Domestic Product of the full-member nations is in excess of $3 trillion a year according to the International Monetary Fund (IMF), making Mercosur the fifth-largest economy in the world. It is the fourth-largest trading bloc after the European Union.

The Asia-Pacific Economic Cooperation (APEC)

APEC is a forum for 21 Pacific Rim countries that seeks to promote free trade and economic cooperation throughout the Asia-Pacific region.

Learning Objectives

Discuss the purpose of the Asia-Pacific Economic Council (APEC)

Key Takeaways

Key Points

  • APEC includes newly industrialized economies and members account for approximately 40% of the world’s population, approximately 54% of the world’s gross domestic product and about 44% of world trade.
  • Established in 1989 in response to the growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in other parts of the world.
  • APEC works to raise living standards and education levels through sustainable economic growth and to foster a sense of community and an appreciation of shared interests among Asia-Pacific countries.

Key Terms

  • free trade: international trade free from government interference, especially trade free from tariffs or duties on imports
  • trade bloc: is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

Asia-Pacific Economic Cooperation (APEC) is a forum of 21 Pacific Rim countries that seeks to promote free trade and economic cooperation throughout the Asia-Pacific region. APEC includes newly industrialized economies and its members account for approximately 40% of the world’s population, approximately 54% of the world’s gross domestic product and about 44% of world trade. APEC currently has 21 members, including most countries with a coastline on the Pacific Ocean. However, the criterion for membership is that the member is a separate economy, rather than a state. As a result, APEC uses the term member economies rather than member countries to refer to its members.

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APEC’s 21 Members: APEC’s 21 members have a Pacific Coastline and a separate economy.

Reasons for Establishment

  • Established in 1989 in response to the growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in other parts of the world.
  • In response to fears that highly industrialized Japan would come to dominate economic activity in the Asia-Pacific region.
  • To establish new markets for agricultural products and raw materials beyond Europe (where demand had been declining).

Goals

During a meeting in 1994 in Bogor, Indonesia, APEC leaders adopted the Bogor Goals that aim for free and open trade and investment in the Asia-Pacific by 2010 for industrialized economies and by 2020 for developing economies. In 1995, APEC established a business advisory body named the APEC Business Advisory Council (ABAC), composed of three business executives from each member economy.

APEC works to raise living standards and education levels through sustainable economic growth and to foster a sense of community and an appreciation of shared interests among Asia-Pacific countries.

APEC carries out work in three main areas:

  1. Trade and Investment Liberalization: According to the organization, when APEC was established in 1989, average trade barriers in the region stood at 16.9 percent, but was reduced to 5.5% in 2004.
  2. Business Facilitation: Between 2002 and 2006 the costs of business transactions across the region was reduced by 6%, thanks to the APEC Trade Facilitation Action Plan (TFAPI). According to a 2008 research brief published by the World Bank as part of its Trade Costs and Facilitation Project, increasing transparency in the region’s trading system is critical if APEC is to meet its Bogor Goal targets. The APEC Business Travel Card, a travel document for visa-free business travel within the region is one of the concrete measures to facilitate business.
  3. Economic and Technical Cooperation: APEC is considering the prospects and options for a Free Trade Area of the Asia-Pacific (FTAAP), which would include all APEC member economies. Since 2006, the APEC Business Advisory Council, promoting the theory that a free trade area has the best chance of converging the member nations and ensuring stable economic growth under free trade, has lobbied for the creation of a high-level task force to study and develop a plan for a free trade area.

Criticism

APEC has been criticized for failing to clearly define itself or serve a useful purpose. According to the organization, it is “the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region” established to “further enhance economic growth and prosperity for the region and to strengthen the Asia-Pacific community”. However, whether it has accomplished anything constructive remains debatable, especially from the viewpoints of European countries that cannot be part of APEC.

The World Trade Organization (WTO)

The WTO was formed in 1995 and has 157 member countries working together to supervise and liberalize international trade.

Learning Objectives

Review the purpose and status of the World Trade Organization (WTO)

Key Takeaways

Key Points

  • The WTO provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements signed by representatives of member governments.
  • The General Agreement on Tariffs and Trade (GATT) preceded the WTO, but after about 40 years, its members concluded that it was straining to adapt to a new globalizing world economy. As a result, in 1994 members agreed to create the WTO at in the last round of GATT negotiations in Uruguay.
  • The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to domestic agricultural sector and the support of international liberalization of fair trade on agricultural products remain the major obstacles in the Doha Development Round.

Key Terms

  • protectionism: A policy of protecting the domestic producers of a product by imposing tariffs, quotas or other barriers on imports.
  • accession: The act by which one power becomes party to engagements already in force between other powers.

The World Trade Organization (WTO) was officially formed on January 1, 1995 under the Marrakesh Agreement, with the goal of supervising and liberalizing international trade between participating countries. The WTO provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements signed by representatives of member governments. The organization is attempting to complete negotiations on the Doha Development Round, which was launched in 2001 with an explicit focus on addressing the needs of developing countries. As of June 2012, the future of the Doha Round remains uncertain.

A map that shows the countries in the WTO.

World Trade Organization: The WTO has managed international trade negotiations among its members since 1995.

WTO Predecessor

The General Agreement on Tariffs and Trade (GATT) was established after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation Well before GATT’s 40th anniversary, its members concluded that the GATT system was straining to adapt to a new globalizing world economy. As a result, the WTO was formed in the final Uruguay Round of GATT in 1994. The WTO has supervision over the GATT treaties as well as 60 other agreements made during the Marrakesh Agreement.

Functions

The most important functions of the WTO are as follows:

  • Oversees the implementation, administration, and operation of the covered agreements.
  • Provides a forum for negotiations and for settling disputes.
  • Reviews and propagates national trade policies.
  • Ensures the coherence and transparency of trade policies through surveillance in global economic policy-making.
  • Assists in developing, least-developed, and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training.
  • Regularly assesses the global trade picture in its annual publications and research reports.
  • Cooperates closely with the IMF and the World Bank.

Members and Observers

The WTO has 157 members and 27 observer governments. WTO members do not have to be full sovereign nation-members. Instead, they must be a customs territory with full autonomy in the conduct of their external commercial relations. Iran is the biggest economy outside the WTO. Most observers must start accession negotiations within five years of becoming observers. Fourteen states and two territories so far have no official interaction with the WTO.

The Doha Development Round

The Doha negotiations round was to be an ambitious effort to make globalization more inclusive and to help the world’s poor, particularly by slashing barriers and subsidies in farming. The initial agenda comprised both further trade liberalization and new rule-making, underpinned by commitments to strengthen substantial assistance to developing countries. According to a European Union statement, “The 2008 ministerial meeting broke down over a disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the precise terms of a ‘special safeguard measure ‘ to protect farmers from surges in imports. ” The position of the European Commission is that “The successful conclusion of the Doha negotiations would confirm the central role of multilateral liberalization and rule-making. It would confirm the WTO as a powerful shield against protectionist backsliding. ” An impasse remains and as of June 2012, agreement has not been reached, despite intense negotiations at several ministerial conferences and at other sessions.

Major Obstacles

The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to the domestic agricultural sector (requested by developed countries) and the substantiation of the international liberalization of fair trade on agricultural products (requested by developing countries) remain the major obstacles. These points of contention have hindered any progress to launch new WTO negotiations beyond the Doha Development Round.

Agreements

The WTO oversees about 60 different agreements which have the status of international legal texts. Some of the most important agreements are as follows:

  • Agreement on Agriculture has three central “pillars”: domestic support, market access, and export subsidies.
  • General Agreement on Trade in Services was established in 1995 to extend the multilateral trading system to service sector, in the same way as the General Agreement on Tariffs and Trade (GATT) provided such a system for merchandise trade.
  • Agreement on Trade-Related Aspects of Intellectual Property Right sets down minimum standards for many forms of intellectual property (IP) regulation.
  • Agreement on Technical Barriers to Trade ensures that technical negotiations and standards, as well as testing and certification procedures, do not create unnecessary obstacles to trade.
  • Agreement on Customs Valuation adopts the “transaction value” approach and prescribes methods of customs valuation that members are to follow.