Global Groupings Case Study - NAFTA

History, Development and Aims:

- Set up in 1994
- Made up of USA, Canada and Mexico
- Goal was to eliminate trade barriers and provide investment between all 3 member countries
- After establishment, half the tariffs on trade between Mexico and the USA were eliminated and those remaining are being phased out over a 15-year period
- 1965 - Mexican government set up 'Border Industrialisation Programme' which created favourable export platforms for US companies - encouraged international connections
- Relative decline in USA international competitiveness was a major factor leading to the formation of NAFTA, and due to:

• rise of Japan and recovery of Europe
• multilateralism --> free trade - so USA faced competition from revitalised economies of Western Europe and Japan
• lost out on its traditional industries such as cars, consumer electronics, textiles

- Employment grew largely in service sector through the 90s, but average wages were 77% that of manufacturing industry
- Established ease of transport between Canada and Mexico, e.g. CANAMEX corridor - series of highways

Pros of being part of NAFTA:

Social -

• mix of culture
• more jobs available means better quality of life for especially Mexican citizens

Economic -

• North American employment levels up 23% since 1993 - net gain of 39.7 million jobs
• merch trade among NAFTA partners > tripled - $946.1 billion in 2008
• trade between USA-Mexico > quadrupled ($1 trillion)
• USA service employment up >10 million
• since initiation the North American economy has doubled in size
• combined GDP surpassed $17 trillion in 2008, up from $7.6 trillion in 1993
• Mexico became one of the largest recipients of FDI among emerging markets, receiving $156 billion from NAFTA partners between 1993-2008
• an extra 10 million employed in services

Environmental -

• introduced $9 million annual budget for improvement schemes and protection towards the environment
• development on decreasing toxic products

Political -

• allows countries to maintain independence
• political 'voices' louder for Canada and Mexico due to being part of the trade bloc

Cons of being part of NAFTA:

Social -

• the migration rate from Mexico to the USA doubled since NAFTA establishment

Economic -

• Mexico saw a net loss of employment under NAFTA - around 600,000 gained in manufacturing, but at least 2 million lost in agriculture
• 1/2 population can't find formal employment in Mexico
• poverty and inequality rates only decreased slightly (mainly due to increased remittances)
• Mexico's wage gap with the USA got 6x bigger
• average wages in services 71% of that in manufacturing
• manufacturing companies leave USA for Mexico due to cheaper land and workforce
• most of the profits go back to US owned companies - 'maquiladoras' are US owned assembly plants set up in Mexico which employ Mexicans but export products mostly back to USA
• 1.5 million jobs lost in manufacturing in USA

Environmental -

• US companies clearing land in Mexico for factories
• industrial processes = more pollution
• Mexico has a poor record of  enforcing environmental laws - fears that Mexico may become a dumping ground for hazardous material
• Mexico's rivers and air are already being polluted

Political -

• USA has the most political control in NAFTA
• untrustworthy policies in Mexico due to US dominance in Mexican markets

Global Groupings Case Study - EU

Development of the EU:

- The 'European Economic Community' was set up by the 'Treaty of Rome' in 1957 to achieve economic and political cooperation after WW2
- Originally made up of 6 members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) whose aim was to bring economic cooperation through a common European market free of tariffs
- Denmark, Ireland and the UK joined in 1973 benefitting from:

• trading with each other without tariffs - boosting trade and wealth
• joint control of food production - ensuring fair food distribution
• EU regional policy - transfers funds to poorer areas to improve infrastructure and create jobs

- Greece, Spain and Portugal had joined by 1987 and the 'Single European Treaty' was signed with the aim of creating a 'single market' allowing the free flow of trade across EU borders
- In 1993, what began as a purely economic union evolved into an organisation spanning policy areas, from development aid to environment, and became the 'European Union'
- The free movement of goods, services, people and money was permitted across the EU
- Further expansion in 1995 saw Austria, Finland and Sweden become members
- More recently, Croatia was accepted into the EU in July 2013 - the 28th member
- Other countries seeking permission to join are Iceland, Turkey and other east European nation, who could become part of the EU by 2020


To what extent has the EU helped to...?

- Integrate European Economies

• via the introduction of the 'euro' - helps build a single market by easing trade and travel by eliminating issues of exchange rate
• problems with euro arisen so countries e.g. UK and Denmark not accepted it
• single market enables free circulation of goods, services, capital and people within EU
• common tariff on external trade so member countries more likely to interact with each others' economies rather than outsiders'
• development of infrastructure, such as transport, helps to connect economies of eastern countries with those of the west, by facilitating transport of goods and people
• it is argued that true integration of countries can only exist with a single EU government, however this has been previously rejected - 'Treaty of Lisbon' - creation of EU president in December 2007 rejected

- Develop the economies of Europe and other countries

• EU allocated funds to support underdeveloped regions and support them to conform to EU standards
• Poland - shift from state-controlled economy --> market-orientated, infrastructure funds to improve roads and particularly links to EU neighbours such as Germany
• 'European Development Fund' directs aid from EU to developing countries - in 2008-13 it was expected to allocate >10 billion euros of aid

- Increase globalisation

• companies can trade within EU with reduced tariffs and people work abroad - freedom of movement
• societies more multi-cultural due to movement of people
• greater polarisation in world between EU and countries which do not meet EU standards or are outside Europe - so limiting globalisation

- Ensure food security in Europe

• 'Common Agricultural Policy' aim to increase production whilst ensuring high standard of living for farmers, stabilising markets and ensure reasonable prices for customers
• considerable over-production was taking place
• criticised for undercutting farmers in developing countries

- Protect the environment

• policies addressing issues such as acid rain, thinning of ozone layer, air quality, noise pollution and waste and water pollution
• reaching group aims - 20% renewable energy and cut carbon emission levels in 1990 by 2020
• forestry expansion = success 

Make Europe a more peaceful place than it was in 19th and early 20th centuries

• peace created through Europeans adopting European identity over a national one
• although only 8% of Britons identify themselves as European
• no longer credible threats of war - positive influence on possibilities of war

Advantages and Disadvantages of being in the EU:

 

Should Britain stay in the EU?

 

 

Trade Blocs

Trade Bloc - a group of countries who agree to reduce/eliminate trade barriers among members

Preferential Trade Area - lowest form of trade bloc; countries agree to lower but not eliminate trade barriers

Free Trade Area - member countries eliminate barriers between each other but maintain separate policies for external countries - e.g. NAFTA (USA, Mexico, Canada)

Customs Union - eliminate internal barriers but agree on common external barriers - e.g. Russia, Belarus, Kazakhstan

Common Market - eliminate internal barriers, common external barriers and free movement of resources among member countries - e.g. Mercosur (South American Countries)

Economic Union - all of the above and adopt uniform set of economic policies - e.g. EU (adopting 'euro')

Full Integration - e.g. USA


Positives of grouping nations (using EU and NAFTA as examples):

- EU - freedom of people to live and work within trade bloc

• economically active population has plenty more employment opportunities
• facilitates emigration to another country

- Promotion of peace between its members

• EU's initial establishment as the 'European Economic Community' formed after WW2 for cooperation
• EU - no longer any credible threats of war between members due to social, economic and political cooperation

- Increased trade opportunities due to reduction of trade barriers

• lack of tariffs = country can more efficiently import goods as less money spent overcoming trade barriers
• Economies grow as money spent on economically developing the country/raising standard of living/developing production in other industries
• NAFTA - due to almost complete reduction of trade barriers, merchandise trade > tripled since establishment until 2008 - contributing to soaring GDP growth (surpassing $17 trillion in 2008)

- Less developed areas in international groupings benefit economically

• NAFTA - Mexico's growing economy opened country up to outside investment  and has become one of the largest recipients of FDI among emerging markets ($156 billion from NAFTA partners between 1993-2008
• EU Regional Fund allocates funds distributed to support underdeveloped parts of the EU - Poland benefitted and as a result been able to shift from state-controlled economy to more market orientated
• EU - areas in UK also benefitted from funds to improve local development - South Wales, Lake District, Cornwall

- EU - agreed policies to protect the environment

• in 2007 EU agreed to use 20% renewable energy and to cut carbon emissions by 2020
• forestry expansion scheme = success - increasing 10% in west and 15% in east

            - reduced  amount of CO2 released into atmosphere
            - creating more animal habitats
            - protecting existing forests from threat of logging



Negatives of grouping nations (using EU and NAFTA as examples):

- EU - problems due to uncontrollable migration - e.g. Poland --> UK migration in 2004

• shortage of economically active people in Poland - skilled workers moved where salary was higher ('brain drain')
• social tension in destination country
• shortage of work and housing in destination country

- obligation to share resources has damaged some economic sectors

• EU - UK sharing its traditional fishing grounds with France and Spain - fishermen argue there is "too many fishermen chasing too few fish"
• countries may have shared preferences in fish --> overfishing of one species --> threatened coastal ecosystem as food chains disrupted

- membership = expensive - UK contributions to EU about £12 billion a year

- pressure on countries to adopt centralised decisions

• EU's Social Chapter - which UK opted out of as they felt that workplace regulations should be negotiated between employer and employee, without European interference
• could lead to loss of sovereignty

Over time, the trade bloc may be strengthened as countries establish successful trade links between countries and less developed areas continue to grow through regional funds and well developed trade links. However countries may become increasingly aware of the fact that many of their regulations are being controlled centrally - leading to increasing separatist movements.