European Union and the NAFTA

Abstract

The paper addresses important concerns of the European Union and the NAFTA, NAFTA’s functional structure. A brief introduction if NAFTA and EU confront one another.

Executive Summary

Some would doubt that the formation of NAFTA was the American response to the European Single Act that formed the EU, which is made up of 27 countries. There is nothing to gain for both the blocs. However in some areas, “peaceful co-existence” and some form of “stricter ties” between the EU and NAFTA would prove to be beneficial for both.

Introduction

The NAFTA and the European Union comprising of 27 countries comprise the biggest blocs in the world. The two trade blocs are also highly interdependent through foreign direct investment. In 2007, stocks of FDI in the NAFTA were 1.25 trillion euros while relevant figure of the NAFTA in the EU bloc was about 1.15 trillion euros. In 2008, the value of exports of goods and services from the EU to NAFTA region amounted to 450.2 billion euros. While the value of import of goods and services to the EU from NAFTA bloc amounted to 362.1 billion euros. The main objectives of my paper are:

1) To compare the level of integration of
* Free Trade Area: No tariff between member countries and external trade barriers remain and vary from country to country
* Custom Union: No tariff between member
* Common Market: No tariff between member countries and external trade barrier and free movement capital and labor within the common market
* Economic Union: Common market, single currency, common monetary and fiscal policy

2) To compare the impact of integration

Both the EU and the NAFTA integration regime have related hopes for economic changes.

The integration blocs are a group that agrees to do:
* Eliminate/remove/abolish (internal) trade barrier
* Organize external trade barriers to establish union
* Allowing capital to move freely
* Allowing labor to move freely
* Manage indirect tax policy
* Direct policies
* By introducing a common currency
* Coordinate macroeconomic policies
* Coordinate foreign and defense policies

In recent years, regional trade blocs in different forms have increased and expanded. The EU has expanded to include several East European countries. Each of NAFTA countries has negotiated mutual free trade agreements with several countries. There are a few literatures on the consequences of 1) a free trade agreement between a major trading country of a big trade bloc such as NAFTA with EU or 2) a common and comprehensive free trade agreement between two major trade blocs. The EU: Regional integration with centralized institutions

The European Union was formed as a political partnership consisting 27 European countries. The EU was created after WW2. The first steps were to adopt economic cooperation. The basic idea was to trade with one another becoming interdependent and eventually reduces conflict. The EU put a social order in place, consisting of the: 1) allowing labor to move freely, 2) common competition rules, 3) unified and fair working conditions, 4) mutual environment, 5) estimating technical standards, and 6) transferring payments to match local growth and expansion.

Concept of Regional Economic Integration

National economic integration states that the countries of a physical and topographical area form a type of partnership. Regional economic integration can be mistook as an area where free trade can happen, a customs union, or a market that is common etc. NAFTA is an example of a free trade area. NAFTA included the US with Canada and Mexico. According to the NAFTA agreement, US, Canada and Mexico would work together to remove blocks to trade, and create and allow the movement of products and services, by supporting impartial competition in the free trade area. The European Union has a significant feature; the euro currency.

The then 11 member states launched the euro currency on January 1st 1999. At the beginning phase of the euro currency, it was sanctioned for transactions that did not require cash. The Euro was approved for equity and debt trading, bank transactions, business-to-business and payments by cheque. The euro transformed Europe (Warner, 1998) from “a jigsaw of costly protected markets into a vigorously competitive economic bloc, thereby enhancing international trade in the area”. The NAFTA: A Regional agreement without institutions

NAFTA represents a market of 379 million people with $6.5 trillion in production. The drive behind NAFTA was the establishment of a free trade area. Despite being a trilateral, it aimed at increasing international trade through the elimination of trade barriers. NAFTA could become more competitive in the world economy. The primary purpose of NAFTA is to assist the North American region in becoming more economically competitive with the rest of the world. It consists of US, Canada and Mexico. They set the rules regarding trade, investment and the provision of services. Despite the fact that free trade provides benefits, removing a trade barrier could cause damages to the shareholders and employees of the industry. The groups that get affected by foreign competition use politics to get protection from imports.

E.g. According to the U.S. International Trade Commission, US gaining from removing trade restrictions on textiles and apparel would have been nearly $12 billion in 2002. The EU has become more economically integrated by becoming a common market. This removes barriers to production, like capital and labor. As a common market, the EU manages individual nation’s tax, manufacturing, and agronomic policies. The EU nations have a single currency. The EU has free-trade agreements with other countries in the world. Under the terms of NAFTA, US, Canada, and Mexico segment tariffs on goods to reduce restrictions on trade in services and foreign venture.

Technology and Capital is another problem that NAFTA faces. The EU is different in the sense that all the member countries were developed nations. The evolution is homogeneous, while in NAFTA it’s not. NAFTA has not offered nor given any reparation, adjustments or any major infrastructure projects. The theory of Absolute Advantage and Comparative Advantage is apt for the EU. Some countries are more specialized on some products compared to other products. The member states of the EU balance out one another in both Absolute and Comparative advantage. These theories can’t be applied to NAFTA, as Mexico depends on the US for the imports. Even if Mexico has plenty of raw material and oil, the country is comparatively small for both US and Canada. The benefits and costs of fixing the exchange rate

There are a few significant economic costs of fixed exchange rates. The benefits from using fixed exchange rates comprise of likely decrease in the external risk on non-permanent deals. Further benefits results due to the increase in trade and which was found to be quite significant through foreign direct investment. Macroeconomic benefits occurring because of the removal of exchange rate can be vital. When fixed exchange rates are used and choices for fiscal procedure are narrowly defined, that the financial policy has to be associated with the currency and exchange rate.

Advantages and Disadvantages of using a Single Currency

Using a single currency has its own advantages and disadvantages. One such benefit would be the removal of some foreign exchange costs, and other charges of converting currencies. The presence of high indirect taxes in Canada may encourage the shipment of goods to US. This would be considered as avoiding to pay the taxes levied on any imports to Canada, even with the removal of charges associated with currency. Comparing the EU to NAFTA

There are major differences between the EU and what NAFTA faced. 1) In EU, all the member states traded with one another and were more dependent on one another in relation to international trade. 2) The EU adopted a single “new” currency, when compared to adopting a “current” currency in the NAFTA. NAFTA opposing EU

Both NAFTA and EU have similar drawback. That is the high labor costs when compared to third world countries or developing nations, where the cost of labor is far less. The main distinction between NAFTA and the EU is related to merger. The new and old members in the EU have reduced drastically. The distance between Mexico, US and Canada could exist.

Source: Anderson, Cavanaugh (2004).

NAFTA can’t be changed to reflect the EU. The EU was formed as the nations did not dominate. This option is neither feasible nor viable for NAFTA, as there is a fear of losing their control. NAFTA has to move forward. If it does not, it may lose its dominance as the world’s top economic power.

NAFTA and the EU represent more than half of the world’s output. Both trading blocs disapprove one another for protecting their own market, following partial trade practices and more importantly their attempting to shut down one another’s markets.

The EU will continue to expand their market. NAFTA has to defend itself. NAFTA could protect itself by expanding to the South and by making the intra-NAFTA economy stronger. Both options are not reasonable in the short term.

Conclusion

The largest trading block is NAFTA, as the economies and markets of US are relatively huge in comparison. At one point of time NAFTA has to enter into some kind of conflict with the EU. It is not necessary that this rivalry or confrontation has to be violent and harmful. Both NAFTA and EU would lose a lot, if they go against one another. Both NAFTA and the EU have to overcome obstacles to peacefully coexist. In many areas specific interests of both the NAFTA and the EU collide.

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