Ing. Tomáš Dudáš, PhD.

Introduction
Tomáš Dudáš
University of Economics – Faculty of
International Relations

Classes: World Economy, FDI, American

Economy, Comparation of Economic Systems...

Email: dudas@euba.sk
Basic description of the
subject
The aim of this subject is to give the students
knowledge about the various forms of
economic integration in the world economy –
most notably about NAFTA, EU, MERCOSUR,
ASEAC, APEC, G8, G20 and others

Literature – assorted readings presented by

the lecturer
Basic description of the
subject
Written assignment – the students are obliged
to present a paper (5-7 pages) about a topic
presented by the lecturer (30 % of the total
points)

Exam – written exam with open essay

questions (70 % of the points)
Main topics covered
Introduction – the economics of economic
integration
Economic integration in North America –
NAFTA
Economic integration in South America –
MERCOSUR, Andean Pact
The role of the European Union in the world
economy
Main topics covered
Economic integration in Asia – ASEAN, APEC
and other organizations
Economic integration of Africa – a continent of
failures
The role of organizations on global level – G7,
G20, UN and others
Conclusion and revision
Introduction
The world economy is a complicated system

Globalization

Multilateralism vs. regionalism

Global free economy vs. regional economic
integration
Economic integration
Any type of arrangement in which countries
agree to coordinate their trade, fiscal, and/or
monetary policies is referred to as economic
integration. There are several different
degrees of integration.

Economic integration emerged after WWII

Preferential trade agreement
(PTA)
Weakest form of economic integration
 It is a trading bloc which gives preferential access
to certain products from the participating countries.
This is done by reducing tariffs, but not by
abolishing them completely
A PTA can be established through a trade pact
The line between a PTA and a Free trade area (FTA)
may be blurred, as almost any PTA has a main goal
of becoming a FTA in accordance with the General
Agreement on Tariffs and Trade.
Example – EU and ACP countries
Free trade agreement
Form of economic integration, when a
designated group of countries agree to
eliminate tariffs, quotas and preferences on
most (if not all) goods and services traded
between them
Members of the FTA do not have common tariff
rates
To avoid evasion (through re-exportation) the
countries use the system of certification of
origin most commonly called rules of origin,
where there is a requirement for the minimum
extent of local material inputs and local
transformations adding value to the goods
Examples – NAFTA, CEFTA, EEA
Customs union
A customs union is a is a type of trade bloc
which is composed of a free trade area with a
common external tariff.
The participant countries set up common
external trade policy, but in some cases they
use different import quotas
Examples – MERCOSUR, CARICOM
Single market
A common market is a type of trade bloc
which is composed of a customs union with
common policies on product regulation, and
freedom of movement of the factors of
production (capital and labor) and of
enterprise.
The goal is that the movement of capital,
labor, goods, and services between the
members is as easy as within them.
For both business within the market and
consumers, a single market is a very
competitive environment, making the
existence of monopolies more difficult
Example - EU
Economic and monetary
union
An economic and monetary union is a type of
trade bloc which is composed of a single
market with a common currency.
 It is to be distinguished from a mere
currency union (e.g. the Latin Monetary
Union in the 1800s), which does not involve a
single market.
 This is the fifth stage of economic
integration. EMU is established through a
currency-related trade pact.
Example - EMU
 Levels of Economic Integration

Free Movement of Factors Harmonization* of All

Free Trade Common
of Production (Example: Economic Policies - Fiscal,
Type of Bloc among the External
free labor movement Monetary, etc. (Example:
Members Tariffs
between countries) common currency)
Free-trade
✔
area
Customs
✔ ✔
union
Common
✔ ✔ ✔
market
Economic
✔ ✔ ✔ ✔
union

*If the policies are not just harmonized by separate governments, but have a
unified government with binding commitments on all members, then you reach
political integration and have “full economic integration”.
Effects of Economic
integration
Trade creation
When a customs union is formed, the member
nations establish a free trade area amongst
themselves and a common external tariff on non-
member nations.
As a result, the member nations establish greater
trading ties between themselves now that
protectionist barriers such as tariffs, quotas, and
non-tariff barriers such as subsidies have been
eliminated.
The result is an increase in trade among member
nations in the good or service of each nation's
comparative advantage.
Effects of Economic
integration
Trade diversion
 When a country applies the same tariff to all nations, it will
always import from the most efficient producer, since the more
efficient nation will provide the goods at a lower price.
 With the establishment of a bilateral or regional free trade
agreement, that may not be the case. If the agreement is
signed with a less-efficient nation, it may well be that their
products become cheaper in the importing market than those
from the more-efficient nation, since there are taxes for only
one of them.
 Consequently, after the establishment of the agreement, the
importing country would acquire products from a higher-cost
producer, instead of the low-cost producer from which it was
importing until then. In other words, this would cause a trade
diversion.
North American Free Trade
Agreement (NAFTA)
NAFTA is an agreement signed by the
governments of the United States, Canada,
and Mexico creating a trilateral trade bloc in
North America.
The agreement came into force on January 1,
1994. It superseded the Canada-United States
Free Trade Agreement between the U.S. and
Canada.
In terms of combined purchasing power parity
GDP of its members, as of 2008 the trade
block is the largest in the world and second
largest by nominal GDP comparison (444
million people).
Economy of USA
Largest economy in the world
GDP – 14,26 billion USD (2008 est.)
GDP/c – 46 900 USD (2008 est.)
GDP growth – 1,1 % (2008 est.)
GDP composition 1,2 % - 19,2 % - 79,6 %
Labor force – 154,3 million
Unemployment – 9,8 % (september 09)
Inflation – 0,4 % (august 09)
Economy of USA
Population below poverty line – 12 %
Distribution of family income (Gini index) – 41

Main export partners - Canada 20.1%, Mexico

11.7%, China 5.5%, Japan 5.1%, Germany
4.2%, UK 4.1% (2008)
Main import partners - China 16.5%, Canada
15.7%, Mexico 10.1%, Japan 6.6%, Germany
4.6% (2008)
Economy of Canada
One of the largest countries in the world, but
the population is only 33 millions
GDP – 1,3 billion USD (2008 est.)
GDP/c – 39 800 USD (2008 est.)
GDP growth – 0,4 % (2008 est.)
GDP composition 2,0 % - 28,4 % - 69,6 %
Labor force – 18,2 million
Unemployment – 8,7 % (august 09)
Inflation – -0,8 % (august 09)
Economy of Canada
Population below poverty line – 10,8 %
Distribution of family income (Gini index) – 32

Main export partners - US 77.7%, UK 2.7%,

Japan 2.3% (2008)
Main import partners - US 52.4%, China 9.8%,
Mexico 4.1% (2008)
Economy of Mexico
Mexican economy is a developing country –
poor compared to the partners in NAFTA
GDP – 1,563 billion USD (2008 est.)
GDP/c – 14 200 USD (2008 est.)
GDP growth – -6,4 % (2009 est.)
GDP composition 3,8 % - 35,2 % - 59,0 %
Labor force – 45,3 million
Unemployment – 4,0 % (October 08)
Inflation – 4,5 % (09 forecast)
Economy of Mexico
Population below poverty line – more than 40 %
Distribution of family income (Gini index) – 48

Main export partners – US 73.1%, Canada 6.2%,

Germany 1.9% (2008)

Main import partners - US 55%, China 7.1%,

South Korea 5.2% (2008)
Background and
negotiations
The US and Canadian economy became more and more
integrated during the second half of the 20th century
In 1988 Canada and the United States signed the
Canada-United States Free Trade Agreement.
The American government then entered into negotiations
with the Mexican government for a similar treaty, and
Canada asked to join the negotiations in order to
preserve its perceived gains under the 1988 deal.
The international climate at the time favoured expanding
trade blocs, and the Maastricht Treaty which created the
European Union was signed in 1992.
Background and
negotiations
Following diplomatic negotiations dating back
to 1991 between the three nations, the
leaders met in San Antonio, Texas, on
December 17, 1992, to sign NAFTA. U.S.
President George H.W. Bush, Canadian Prime
Minister Brian Mulroney and Mexican
President Carlos Salinas

Before the negotiations were finalized, Bill

Clinton came into office in the U.S. and Kim
Campbell in Canada, and before the
agreement became law, Jean Chrétien had
taken office in Canada.
Main measures
Market access for goods
Elimination of duties on thousand of goods
Special rules and reductions for agricultural,
automotive, textile and apparels goods
Special commitments concerning
telecommunications and financial services

Protection for Foreign Investment

Main measures
Protection for Intellectual property
Easier access for business travelers
Access to Government Procurement
Rules of Origin
Side Agreements
North America Agreement on Environmental
Cooperation (NAAEC)
North America Agreement on Labour
Cooperation (NAALC)
Comparison with the EU
European Union
Politic, economic and social
integration
Free movement of people
Common money market
27 « equal » countries
Same commercial aim : a huge market for growth
NAFTA
Only trade and investments
Easier movement only for business
travelers
Control of frontiers and customs
Common money market is a « long,
very long term proposal »
US as a leader
NAFTA - effects
Increase of trilateral trade

Maquilladoras became the landmark of Mexico

Environment - great concerns, studies show no

serious threat for the environment in North America

Agriculture – maybe the most controversial issue

Effects
MEXICO Positive effects Negative effects
-Poverty rates fall -2 million jobs lost for
-Real income rise Mexican farmers
-Maquiladoras (+15,5% -Rising inequalities
) - Increases in pollution
-Automobile industry due to NAFTA in metals
- 24500 Mexicans sector, petroleum
admitted to Canada sector and
and US for temporary transportation
employment equipment sector

CANADA Positive effects Negative effects

- 65000 Canadians -Possible destruction of
admitted to US for Canadian ecosystem
temporary employment and water supply
- NAFTA effects on
Canadian lawmaking
(taxation)
Effects
US Positive effects Negative effects
-Automobile industry -Lost jobs for US
-25000 US citizens workers in
admitted for temporary manufacturing and
employment in Canada assembly industries
-Pollution increased in
transportation
equipment sector
Maquiladora
A maquiladora or maquila is a factory that imports
materials and equipment on a duty-free and tariff-free
basis for assembly or manufacturing and then re-
exports the assembled product, usually back to the
originating country.
Currently about 1.1 million Mexicans are employed in
maquiladoras
The majority of maquiladora employees are women -
women will typically work for cheaper wages, and are
easier for male employers to direct
As of 200&, maquiladoras still accounted for 45
percent of Mexico’s exports
NAFTA – Critique and
reality
Critique: After 14 years, we know NAFTA has not
achieved its core goals of expanding trade and
investment between the U.S., Canada, and Mexico.

Fact: From 1993 to 2007, trade among the NAFTA
nations more than tripled, from $297 billion to $930
billion. Business investment in the United States has
risen by 117 percent since 1993, compared to a 45
percent increase between 1979 and 1993
NAFTA – Critique and
reality
Critique: NAFTA has cost the U.S. jobs.

Fact: U.S. employment rose from 110.8
million people in 1993 to 137.6 million in
2007, an increase of 24 percent. The average
unemployment rate was 5.1 percent in the
period 1994-2007, compared to 7.1 percent
during the period 1980-1993.
NAFTA – Critique and
reality
Critique: NAFTA has reduced wages in
Mexico.

Fact: Mexican wages grew steadily after the
1994 peso crisis, reached pre-crisis levels in
1997; and have increased each year since.
Several studies note that Mexican industries
that export or that are in regions with a higher
concentration of foreign investment and trade
also have higher wages.
NAFTA – Critique and
reality
Critique: NAFTA has done nothing to improve the
environment.

Fact: NAFTA created two binational institutions
unique to the agreement which certify and finance
environmental infrastructure projects to provide a
clean and healthy environment for residents along
the U.S.-Mexico border. To date, they have
provided nearly $1 billion for 135 environmental
infrastructure projects with a total estimated cost of
$2.89 billion and allocated $33.5 million in
assistance and $21.6 million in grants for over 450
other border environmental projects
NAFTA – Mexican
perspective
Workers in maquilladoras:
-Majority displaced workers from the south
-Settle in colonias
-Majority of workers 16-25 yrs old
-66% female workers
-Subject to sexual harassment and rape
-Fired when worker becomes pregnant
 “They don’t
treat us like
workers,
they treat us
like slaves”
The future of the NAFTA ?
Obama’s opinion during his campaign against Clinton :
« devastating », « a big mistake »

Obama’s opinion during his campaign against McCain :

« this trade zone has a mild, positive effect on the US
economy »

Since his election, he asked for a re-negotiation

about environmental and labor topics, but will
Mexico and Canada agree ?