Articles
Free Trade Blocs in the World (Since the 1950s)
By Dr. Olga Magdalena Lazín
New trade blocs have come to define themselves in terms of inter-bloc trading, not intra –bloc, as had dominated thinking from the 1950s through the 1970s.
Now in 2009, we have Mexico signing an FTA agreement with Brazil., this year. The Free trade agreement has been signed in New York.1 It is hard to imagine how Brazil has side-stepped MERCOSUR (Mercado Comun del Sur) in reaching this agreement. MERCOSUR has been from established from its inception the counterbalance to NAFTA (the North American Free Trade Agreement,) signed in 1992, under the Clinton administration.
I will take up here the following free trade blocs: European Union (comprising 27 countries), NAFTA, Mercosur, the Viségrad countries, and The Economic Cooperation in the Black Sea, and TL-CAN.
The technology revolution made it possible to break isolation of police states all over the world. Fax, cell phone and Internet have helped break up totalitarian systems.
Marketization and privatization are preconditions of a mature civil society.
As economic questions have come to dominate political ones,2 the rejection of the old command economy in all East Central European countries has taken place. The major alternatives today are marketization and privatization. There is still widespread acceptance of the interventionist role of the state, not only in the social, but also in the economic areas, as the state is still perceived as the main author of economic changes and not the enterprises themselves.
Contrary to the belief that the global economy ignores 'marginal' countries serious strides have been made in the economic integration in the region by the spread of global telecommunications.
Most (except for Albania) East Central European countries have joined a free trade bloc.
In this thesis I will delve into the actual major free-trade blocs namely: NAFTA and the European Union compared, MERCOSUR and CEFTA (Central Eastern European Free Trade) also known as the Visegrad countries.
Emerging World Trade Blocs: The North American Free Trade Area and the European Union Compared
The European Union is becoming the blueprint for free trade in the world. In the Europe of tomorrow, France intends to set an example of social and political model in the necessary adaptation to the world as it is by "deepening" and "widening" in the same time.
On EU institutions the real battle will be between small and big countries, as Britain, France, Spain and Germany want to redress the over-representation of the small countries.
The European single-currency, the euro is came into being as scheduled by 1998. By 2002 the euro will be fully deployed in all member countries.
There are signs that budget deficits will be a problem for Germany and France for 1997 under the Maastrich criteria for entry of 3% of GDP.
Receiving millions from the Brussels pot are Greece, Portugal, Ireland and parts of Spain and Southern Italy. The beneficiaries of the Union grant system (any region of the EU where the income per head of population is under 75% of the average has a claim on the grants available) will than be Hungary, the Czech, Slovak Republic and Poland.
If the number of countries will be big enough to make the euro possible, Europe would be fit for globalization despite unsolved problems with its social security systems.
As the world moves into large trade blocs, the two most important to date are the North American Free Trade Area (NAFTA) and the European Union (EU), formerly known as the European Community. To begin, this study compares the key legal and policy aspects of the two blocs and outlines the salient features of each. The remainder of the essay presents quantitative data on NAFTA and the EU as well as additional relevant data on Japan, Eastern Europe, and other world trade units. The analysis focuses first on population, GNP, GNP/C, and exports, as measured by export share of GNP. The EU and NAFTA are then compared with respect to economic strength, geographic coverage, and competitive potential.
In 1994 twelve countries belonged to the EU: Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, and the United Kingdom. Joining January 1, 1995, were Austria, Finland, and Sweden. In a nationwide vote Norway's population rejected its government's late 1994 bid to become the sixteenth member.
Here is a list of European Union countries:
CANDIDATE COUNTRIES TO ENTER
Iceland is being ‘pushed’ feverishly into the EU, in order to be saved from the devastating economic effects on the country buy the global recession.
NAFTA comprises the United States, Mexico, and Canada. Argentina, Costa Rica, Chile, Colombia, Venezuela, and other Western Hemisphere countries are seeking membership.
Free Trade "Fever" With the process of "globalization" in which national trade and finance seek to form mutually beneficial alliances, free Trade agreements among nations are reaching a fever pitch. The magnets and models for free trade are NAFTA and the EU.
Countries either seek to join NAFTA and the EU or follow these models in forming their own free trade agreement (FTA) leading to a free trade area (FTA, depending on the context). In the Western Hemisphere most countries want to join NAFTA, except Brazil, which is leading a movement of its partners in the misnamed Mercado Comun del Sur (Mercosur). As of January 1, 1995, MERCOSUR became almost a full customs union, and seeks by the year 2005 to create a FTA such as NAFTA. MERCOSUR does not expect to become a common market such as the EU until the first or second decade of the twenty-first century. In the meantime, it might better be called the
"Mercado del Sur, " omitting the concept of "Comun."
A common market is much more ambitious than a FTA. It goes beyond free trade and investment flows to require all member countries to live under the same laws and regulations. The EU has been successful in providing for educational and labor mobility among its members. Yet the EU includes aspects that have yet to be achieved: a common currency, foreign policy, military command, and police activities (see Figure B:l).
Although there is much discussion of FTAS, comparative analysis of the provisions that govern them is almost nonexistent. Furthermore, there is little consistently comparable data on the size of FTAs in terms of their population, wealth, per capita wealth, and trade flows among partner countries and with other FTAS.
This study presents baseline data essential for understanding how the EU and NAFTA models differ in purpose and size.
The provisions of the EU and NAFTA are summarized in Figure B:l. The NAFTA model mainly involves freeing trade and investment flows, although it also provides, in a limited way, for the movement of professionals among its three countries. Meanwhile, the EU, knowing that it is losing markets in the member countries of the North American Free Trade Area, now seeks to recover access to these markets by signing free trade agreements. In February 1995 the EU authorized negotiation with Mexico to create an EU-Mexico FTA. (For details, see the preceding chapter in this volume, "Mexico as Linchpin for Free Trade in the Americas.")
Tables Bl, B2, and B3 present data on population, GDP, GDP/C, and export share in GDP for the EU, Eastern Europe, and NAFTA. Table B4 shows population, GDP, and GDP/C for major world trade blocs. Table B5 indicates the relative importance of the major trade blocs, using the United States as a reference point. Table B6 profiles the economies of the United States, Japan, Germany, the United Kingdom, Canada, and Mexico, according to selected indicators.
One of the members of the EU, reunited Germany has the largest population (81 million inhabitants). Italy and the United Kingdom follow, virtually tied at 58 million. Germany's population is 207 times that of Luxembourg, the smallest European country, with a population of 389,000. And Germany's GNP is 134 times that of Luxembourg (Table Bl).
Given such disparities in population size, is it "fair" that voting rights in the EU give undo weight to small countries? (For shares of voting rights, see Appendix A.) Despite its small population, Luxembourg has the highest GNP/C in the EU (US$ 35,260) and the highest export share of GNP (94 percent). Spain, in contrast, has a larger population (39 million) but the EU's lowest export share of GNP (17 percent). Clearly, weighted voting rights are not as arbitrary as first glance might have us believe. In any case, countries with the largest populations together constitute a "qualified" (decisive) majority. In 1994 it took 23 "minority"' votes to block the majority. It now takes 26 votes to constitute a blocking minority.'
Six countries in Eastern Europe seek to join the EU: Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic. Among these, Poland has the highest GNP (US$ 75 billion), much higher than EU member Ireland (US$ 42 billion). Poland, however, is weak in exports, which amount to only 19 percent if its GNP. Hungary's GNP/C is 54 percent higher than that of Poland, owing to its previous leadership position among the former Communist countries in carrying out economic reforms (Table B2).
The relationship of Poland to "smaller” countries is interesting. Although Poland has four times the population of Bulgaria (9 million), it has the lowest export share of GNP (19 percent). Bulgaria has the second largest export share of GNP (45 percent), after the Czech Republic, which leads both Poland and Bulgaria in export share of GNP (58 percent) and also in GNP/C (US$ 2,440) compared with the rest of the Eastern European countries.
With regard to Romania and the Slovak Republic, the two poorest countries seeking to join the EU, the lackluster economic performance of Romania is particularly noteworthy. Romania's GNP (US$ 24.9 billion) is more than double that of the Slovak Republic (US$ 10 billion), yet the two countries export the same percentage of GNP (28 percent). Romania's trade with Eastern Europe collapsed in 1991 along with the Council of Economic Assistance for Eastern Europe (COMECON) trading organization.
Subsequent growth in trade with the West has been slow, and current-account deficits of more than US$ 1.2 billion have been recorded each year from 1991 through 1994. Romania's population is four times larger than that of the Slovak Republic (5.3 million).
The legacy of high inflation and modest growth accounts for the Romanian currency's minimal purchasing power. It is unlikely that Romania will become a full member of the EU within the next ten years .3
How can the Slovak Republic, with its small population and weak economy, hope to compete in an expanded EU? Although its population is only 5 million and its GNP is only US$ 10 billion, the Slovak Republic has the same high level of exports relative to GNP as the Romania.
The Five Constituencies of the European Union
Given the disparities in population, GNP, GNP/C, and export share of GNP, the countries of the EU form five "constituencies" (see Figure B: 2).
1. The "Core": France and Germany. Belgium, the Netherlands, and Luxembourg, too close geographically and too small economically to avoid being drawn into the orbit of power, are appendages of the Core. (In 1951 France and Germany founded the European Coal and Steel Community, the precursor of the EU, to rebuild war-torn Western Europe.)
2. The "Free Traders": Great Britain and Denmark (members of the EU since the early 1970s). Britain is leading the way toward establishing a common market for goods, services, capital, and people while trying to prevent the rise in Europe of any singularly powerful country.
3. Greece, Portugal, and Spain: These poorer, newly democratic members seek to modernize their economies to protect against a resurgence of authoritarian rule. The admission of these countries into the EU in the 1980s widened the gap between
Rich and poor countries, the latter including Ireland and to some extent Italy.
4. Eastern Europe: the Czech Republic, Hungary, Poland, and Romania. The countries of Eastern Europe freed themselves from Russian rule after 1989 and view admission to the EU, proposed for 2000 by Germany, as insurance against the resurgence of Russian authority in the region.
5. European Free Trade Association (Austria, Finland, Norway, and Sweden): These countries, except Norway, have realized that they can not afford to be left out of an expanding EU. Austria may even become part of the Core constituency. For at least the next decade Norway has petroleum and fish for export to non-EU countries, giving the country a feeling of confidence that it does not need its neighbors as much as they need it. Furthermore, the fact that Norwegians defeated by slightly more than 50 percent the government initiative to join the EU can be traced to the votes of the relatively large agricultural and fishing populations, both fearful of submitting to common market policy that would limit food production subsidies and open Norwegian fishing beds to the EU. The urban sector, some of which also voted against joining the EU for fear of losing social benefits, has been disadvantaged by Norway's failure to join the EU, and some large Norwegian manufacturing companies are relocating their main offices to the EU, thus weakening the drive to modernize the economy.5
In view of the diversity of the five groups, disunity in the Union comes as no surprise. Two coping models have emerged to manage the divergent interests: (1) the British model seeks to give more or less equal weight to the concentric circles depicted in Figure B:2, encouraging cooperation among the diverse constituencies; (2) the German-French model favors moving forward with monetary union and a unified foreign policy focused on the center circle in Figure B:2, the Core. The notion that Britain may resist France and Germany and refuse to join the EU monetary union prompted this comment in The Economist:
If Britain stays out, only to change its mind later [as it did about the EU], its leaders may seem as silly as Churchill now seems, for this comment on the founding of the European Coal and Steel Community 43 years ago: "I love France and Belgium but we must not allow ourselves to be pulled down to that level.” 6
Population totals (Table B4) for NAFTA and the EU are now about the same: NAFTA, 363.3 million; EU (15 countries), 368.8 million (1992 data). Within the EU, Germany's economy is the strongest, followed by France and Italy. Among all countries in the two trade blocs, the United States has the highest GNP and the highest GNP/C within NAFTA. Overall, Luxembourg has the highest GNP/C.
With respect to export share of GNP, Mexico ranks lowest in NAFTA (14 percent) and Greece places last in the EU, with 23 percent. Even Romania and the Slovak Republic rank above Mexico, with 28 percent each.
The index calculated in Table B5 shows the relative economic strength of major trading units. For example, Mexico has one third of the population of the United States, but Mexico's export share of GNP is only 5 percent of the U.S. export share of GNP. The table also shows why Japan, a single country that has established a web of trade dependency worldwide, is often seen as the economic "enemy" of both NAFTA and EU. Japan's GNP/C is 21 percent higher than that of the United States. Many countries have formed implicit trade blocs to compete with Japan and its accumulation of world trade capital. NAFTA gives the United States, Canada, and Mexico the opportunity to expand international trade at Japan's expense.
In the Western Hemisphere, the GNP of the United States far exceeds that of other countries of the hemisphere, with the exception of Canada, whose GNP is 84.3 percent of the U.S. total (Table B5). Although the population of the EU is 48 percent larger than the U.S. population, its GNP/C is only 89 percent of the U.S. figure.
Mexico has established itself as the linchpin for free trade in the America S7 despite the fact that its population is only one-third that of the United States, its GNP 5 is percent of the U.S. amount, and its GNP/C 15.3 percent of the U.S. figure. The NAFTA framework, along with the "defeat" of the Chiapas rebels in the August 1994 national elections, has increased the attractiveness of Mexico for U.S. investment.
Mexico's new free-trade pact with Nicaragua provided for new jobs and investment. The pact provided Nicaragua access to 90 million dollars in credit programs to promote trade between Mexico and Central America, including expansion of Nicaragua's export beef industry.3
Most recently trading options with Italy and the European Union were discussed. These will go into effect in 1998.
Mexico being the most aggressive "free-trader" in the hemisphere, it has been prevalent the country’s insertion in the digitalized commercialization and updating its telecommunications infrastructure. Parallel with the rapid development of telecommunications technology, Mexico’s civil society is benefitting tremendously, as most NGOs are hooked to the world.
The Mercosur free trade bloc of South America also expects to sign a preferential trade agreement with Mexico by years end (The News, "Mexico Pact Raises Nica Export Quotas", September 21, 1997)
Mexico and Israel plan to sign a free trade agreement by early 1999 (The News, "Mexico Pact Raises Nica Export Quotas", September 21, 1997, p. 32.)
The index of population and economic strength in Table BS shows that in relation to the GNP/C of the United States, Mexico ranks higher than Mercosur by 3.5 percent, while Germany, with a population about equal to the U.S. population, has 95.7 percent of the U.S. GNP/C, raising the average for the EU to 80 percent of the U.S. GNP/C. This analysis is carried a step further in Table B6, adapted from a comparison published regularly by the New York Times of NAFTA (Canada, Mexico, and the United States), the EU (represented by Britain and Germany), and global competitors (represented by Japan).
The bottom line for global competition is shown in the manufacturing wage gap (Table B7). The Western European countries with the highest average hourly wage in manufacturing (1993 data) are forced to complete under the burden of a wage of US$ 21.
In Japan and the United States the figure is $16. The Asian "tigers" (Taiwan, Singapore, South Korea, and Hong Kong), however, average about US$ 5 per hour. These data illustrate Mexico's status as an attractive locale for the establishment of manufacturing plants,
with its US$ 2.41 hourly manufacturing wage. Likewise, Eastern Europe, where the hourly manufacturing wage is US$ .90, is Mexico's future counterpart for the EU. Germany has already moved important manufacturing funds into Romania, for example, but the EU has yet to establish a formal relationship with Eastern Europe comparable to Mexico's position in NAFTA. In general, Eastern Europe (except the Czech Republic) awaits the opening of its economies, which remain largely nonmarket (see Appendix B).
NAFTA is more equitably positioned in terms of internal wage gap between countries than is the EU. For NAFTA, the U.S. manufacturing wage rate is 6.8 times higher than the Mexican rate. For the EU, the present gap between the highest wage (Western Germany) and the lowest one (Portugal) is 5.4 percent, but the potential gap, once the EU expands into Eastern Europe, is 36.6-an amount equal to the difference between Western Germany and Bulgarian wages. Equity is not the only issue, however; in this case, inequity may help Eastern Europe attract capital in the competition for ever cheaper manufacturing sites in an era of globalization.
Under the NAFTA model, the process of opening markets to free trade will occur over 15 years (Table B8). Eastern Europe, in contrast, faces a much more difficult mission of nearly immediate integration into the EU. In keeping with the gradual removal of trade barriers, Mexico has eliminated duties on all U.S. and Canadian products not made in Mexico, that is, on 43 percent of its purchases from Canada and the United States.
Although the data suggest that Mexico purchases most of its goods from the United States (63.4 percent in 1992) and very little from Canada (1.0 percent), the reality is that much of the Canada-Mexico trade is "lost" statistically when it passes through the United States, where the transactions become incorporated into U.S. trade data. (See the preceding chapter in this volume.)
Under NAFTA the United States immediately eliminated duties on nearly 50 percent of Mexican imports and Canada did away with tariffs on 19 percent of its imports from Mexico, including a complete opening to Mexican textiles (thread, cloth, and clothing), which in 1992 reached about US$ 17 million in value. (Mexican textile exports to the United States were 56 times greater.)
Conclusion
When NAFTA and the EU are compared with respect to their framework and policies, geographic scope, and leadership, three significant points emerge.
1. Unlike NAFTA, the EU allows individuals, both workers and students, to move about freely among the member countries. In addition, a goal of the EU is eventual unification under one currency, a common foreign policy, and military coordination.
2. NAFTA has the potential to expand beyond Mexico into Latin America. The United States and Mexico have extensive trade experience in the region, in comparison with the EU's lack thereof in Europe. Also, Mexico has entered into several multilateral and bilateral agreements that make expanded trade possible, making serious breakthroughs around the globe. Canada has far to go however, in establishing trade relations beyond those with the United States. And both the United States and Canada face formidable competition from Japan. Under Mexico's leadership in bringing about the integration of the Americas, however, NAFTA is well positioned to compete with the EU, as it takes its first serious steps to develop relations with MERCOSUR.
3. One country, the United States, functions as the "core" for NAFTA, whereas France and Germany comprise the EU core.
Meanwhile, expansion of the EU into Eastern Europe is delayed not only by the slow process of creating market economies with modern laws and credit systems but also by Russia's argument that inclusion of former Warsaw Pact countries in NATO could signal a new Cold War.
The European Union is becoming the blueprint for free trade in the world. In the Europe of tomorrow, France intends to set an example of social and political model in the necessary adaptation to the world as it is by "deepening" and "widening" in the same time.
On EU institutions the real battle will be between small and big countries, as Britain, France, Spain and Germany want to redress the over-representation of the small countries.
The European single-currency, the euro is coming into being as scheduled by 1998.
It has been decided in April 1998 how many member countries would be included in the first round of the monetary union. Hungary has been the first to be accepted. There are signs that budget deficits will be a problem for Germany and France for 1997 under the Maastricht criteria for entry of 3% of GDP.
Receiving millions from the Brussels pot are Greece, Portugal, Ireland and parts of Spain, Southern Italy, Hungary, and Romania. The beneficiaries of the Union grant system (any region of the EU where the income per head of population is under 75% of the average has a claim on the grants available) will than be the Czech, Slovak Republic, Poland, Romania, and Hungary. Romania joined in January 1st, 2008, in an effort to integrate the Eastern European region.
If the number of countries will be big enough to make the euro possible and that Europe would be fit for globalization despite unsolved problems with its social security systems.
2 Iván, Berend, Central and Eastern Europe 1944-1993 Detour From the Periphery to the periphery , Berkeley, University of California, 1993, p. 218.
3 “Nicaragua Signs Free Trade Agreement,” Mexico City News, September, 1997. |
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