ECONOMICS, IB7012-8-6 IB7012
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Date Created: 04/12/16
NORTHCENTRAL UNIVERSITY ASSIGNMENT COVER SHEET Student: THIS FORM MUST BE COMPLETELY FILLED IN Follow these procedures: If requested by your instructor, please include an assignment cover sheet. This will become the first page of your assignment. In addition, your assignment header should include your last name, first initial, course code, dash, and assignment number. This should be left justified, with the page number right justified. For example: Save a copy of your assignments: You may need to resubmit an assignment at your instructor’s request. Make sure you save your files in accessible location. Academic integrity: All work submitted in each course must be your own original work. This includes all assignments, exams, term papers, and other projects required by your instructor. Knowingly submitting another person’s work as your own, without properly citing the source of the work, is considered plagiarism. This will result in an unsatisfactory grade for the work submitted or for the entire course. It may also result in academic dismissal from the University. IB70128 Richard Thompson, PhD Global Economic Environment Assignment 6 Faculty Use Only your paper addresses all parts of the question, provides accurate information, and uses some good, specific information and supporting references, particularly for the last part of the question, which analyzes the specific examples of integration in Europe, Asia, etc. The main issue I think is related to some additional content that I thought you should have included in the first part of the question. There are two main things I thought you should have added: (1) the different types/levels of economic integration: Free Trade Area, Customs Union, etc. (see my sidebar comment); and (2) the Static Effects of trade include Trade Creation and Trade Diversion (Carbaugh, 268) which should have been discussed. Other than that, your analysis is clear and CharpiaJBTM7300–1 2 accurate and you demonstrate good, accurate understanding of concepts. Let me know if you have questions about this. Excellent Good Fair Poor Unacceptable Completeness All required All or Most Some Some Few required parts required parts required parts required parts parts completed completed completed completed completed Understandin Deep Good Some Some Little g understandin understandin understandin understandin understandin g of materials g of readings g of readings g of readings g of readings Expression – Very clear, Mostly clear, Somewhat Difficult to Difficult to language and effective, & effective & clear, understand understand APA scholarly; scholarly; effective & and and very few or few errors scholarly; unscholarly; unscholarly; no errors some errors several errors many errors Dr. Richard Thompson Grade: A Date: 4/11/16 3 Introduction This purpose of this week’s assignment is to provide an indepth examination of the various types of economic integration, and explore the potential effects of each process. The European Union (EU), North American Free Trade Agreement (NAFTA), and other multilateral trade agreements provide the vehicles by which to integrate regional economic trade. To provide a further understanding of the concept of economic integration, the following areas will be discussed: (a) goals, impetus, and types of economic integration, (b) effects (static and dynamic) of regional trading arrangements, (c) pursuing economic integration in the EU, (d) North American Free Trade Agreement, (e) Free Trade Area of the Americas (FTAA), (f) AsiaPacific economic cooperation, and (g) transition economies. Goals, Impetus, Economic Integration Regional trading agreements incorporate goals, impetus, and various types of economic integration. Each aspect is incorporated to motivate individuals and governments to expand economic growth. Expanded regional markets are attractive to foreign investors and allow economies to grow and focus on learningbydoing while growing noneconomic objectives (Carbaugh, 2013). Noneconomic objectives such as immigration management and security are just a few of the initiatives that can be secured once the economy is stabilized. While larger economies can focus upon expanding their economies by creating and producing goods, smaller nations may focus on acquiring trade agreements. Trade agreements are initiated with larger nations in order to expand and stabilize the region as well as other agreements within their region. By joining organizations such as the World Trade Organization (WTO), NAFTA, and APEC, a certain level of stability for smaller nations can be recognized (Carbaugh, 2013). 4 Another important factor to analyze is the impetus or driving forces behind joining regional trading agreements. A primary motivator is the desire to grow a nation’s economy and not be overlooked or left out of potential contracts. A country that remains on the outside may have less opportunities to participate in trade as the other counties that do, participate are more willing to trade with one another. One example of this concept can be shown is in Russia’s drive to become part of the WTO. The Russian government was reluctant to join the WTO and be subject to a given set of rules and regulations. Russia’s economy continually suffered from slow economic growth and by joining the WTO, opportunities to expand were made possible. As of 1998, Russia’s government realized that acquiring a membership into the WTO was certainly going to be more effective than being on the outside. Once the members of the Russian government decided to move into the WTO, the country’s strategy to ensure acceptance had to change (Carbaugh, 2013). With acceptance, Russia’s economy will become more stable and competitive in the world market place, specifically developing growth in the oil market. While entering into a free trade agreement with other countries provides opportunities for certain types of products, there are other industries that are negatively affected. In Russia, the negatively affected industries are subject to higher levels of competition which include construction materials and textiles (Carbaugh, 2013). Effects of Regional Trading Arrangements Static effects of regional trading arrangements are apparent as efficiency and consumer welfare are reviewed. Overall, free trade promotes economic growth and countries can enjoy growth from both static and dynamic effects. The dynamic effect is in theory acquiring overall 5 gains of static effects by reallocating preexisting resources (Carbaugh, 2013). By encouraging change and by utilizing resources in a varied matter, inclusive of labor and materials, a nation can not only alter its current capability to incorporate different markets, but it can improve them as well. This increased capability from a given resource can, in the longrun, increase a nation’s level of growth (Tumwebaze & Ijjo, 2015). Dynamic effects are identified primarily when it comes to longrun growth rates within a nation. The reason this effect can be seen in longrun situations is because one effect can cause a cumulative effect. As each situation builds upon one another, it only compounds the issue at hand. For example, we can take a look at the effects of placing a tariff on particular types of goods. While the static effect may show that a country receives a tariff for oil, the additional income can in the shortterm, shrink a country’s deficit and increases overall GDP. The problem with this concept is the potential negative dynamic effects can be not only caused but compounded. By placing a tariff on oil exports, the other nations may end up finding a cheaper source, potentially decreasing sales (Carbaugh, 2013). This could also lead to lower employment rates or lower wages. Overall, a lower employment rate or wage rate reduction decreases the individuals rate of spending, and in turn could effect other industries. To prevent compounding or dynamic effects from taking place in this type of scenario, regional trade should be taken under consideration. Economic Integration in the EU Another area to analyze as we review free trade arrangements is economic integration in the European Union (EU). As of 1957, the EU was comprised of 6 nations which expanded to 27 nations as of 2007 (Carbaugh, 2013). World War II was not only a devastation for individuals, nations, and economies as well. Directly after the war nations surrounding Germany 6 began to feel the impact of the high levels of spending conducted in wartime. The initial thoughts after the war were to place tariffs and restrict trade to keep the funds inside the individual country. The tightening of a nation’s borders was believed to reduce external competition as well as protect jobs. While locking out competitors and reducing international trade seemed like a good idea at the time, the opposite was actually found to be true. As of the 1950s, various countries within Europe found this theory to be false. The nations then began to remove those barriers and expand trade and in turn developed the EU with the Treaty of Rome in 1957. The intent and overall goal of this treaty was to liberalize trade and provide peaceful transactions between European nations. While this was the first step in the right direction, the next step required barriers to be broken down even further. In order to do so, the EU initiated a free trade area as of 1968. The EU free trade agreement has made significant progress in the way business is conducted, which ended up increasing the overall value of industrial trade. The agreement then led to a customs’ union which placed a tariff on those who were not a part of the union. By joining the union, the members have certainly found the benefit to doing so. While those countries on the outside maintained their independence, they ended up suffering a loss by doing so (Carbaugh, 2013). As nations chose to further develop trade among it’s fellow union members, the nations signed The Maastricht Treaty to further enhance and expand growth. The standardization that is provided by the Maastricht Treaty provides uniformity, price stability, lower longterm interest rates, stable exchange rates, and sound public finances (Carbaugh, 2013). This treaty not only aligns each of the adjoining members banking systems, but standardizes the monetary system, bringing the Euro into existence in 1991 (Carbaugh, 2013). Prior to this period, each nation held 7 its own currency, which was not as beneficial to the individuals or to nations. To demonstrate why the change was needed, we can take into consideration the benefits to an individual that travels extensively. An example of how this treaty provides a benefit can be seen as individuals travel from country to another. During travels the currencies must be exchanged. As an individual does so, the value can easily increase or decrease the value of the “dollar”. By standardizing the currency, one can travel from one location to another within the EU and can have peace of mind that the Euro is consistent from one location to the next. NAFTA Benefits and Costs The North American Free Trade Agreement (NAFTA) is an agreement that was established between the U.S., Mexico, and Canada in the 80’s and 90’s. The U.S realized the benefits of securing a free trade agreement between neighboring countries after looking at the example set by the European Union (Carbaugh, 2013). The benefits realized by helping Mexico expand its economy through free trade were more significant than not entering into an agreement. The U.S. government discovered that it would benefit by utilizing Mexico’s cheap labor pool, while Mexico would benefit from the investment and expertise the U.S. provides. While the opening of a larger market allowed Mexico to increase the size of its market, it experienced set backs as well. The agricultural producers of rice, beef, pork, and poultry claim they have been negatively affected by the agreement. As the U.S. is able to maintain an effective transportation system and better technology, while implementing extensive subsidies, it becomes difficult to compete with the United States (Carbaugh, 2013). Canada on the other hand, had differing benefits and concerns. Initially, the Canadian government had concerns that the social welfare program would be affected by the agreement. 8 They were concerned that by providing free healthcare and an above average minimum wage they would be seen as uncompetitive. Lucky for the Canadians, their welfare system was not as affected as once believed and their reputation to be a member of the international trade communication remained in tact. In addition, Canada also benefits by having equal access to Mexico’s market which they hope will be just as influential as they move to other areas within Central America. Overall, the one problem with NAFTA was that as it opened up doors for all parties, Mexico still remained at a disadvantage. With issues of corruption, a weak government and a less than effective infrastructure, Mexico will continue to remain at a disadvantage. Free Trade Area of the Americas The Free Trade of the Americas (FTAA) concept is an expansion to NAFTA that is inclusive of all countries in North, South, and Latin America with the exception of Cuba. The agreement has been under negotiation for some time and has currently stalled (Bouzas, 2007). The negotiations that are taking place are not likely to be agreed upon as the Americas have different goals and political agendas, and increasing tensions among the involved nations. The disputes that took place during the 2005 Summit, ended in strong opposition between Brazil, Venezuela, and the U.S. The differences in opinion and separation has led to further opposition involving of Mexico, Colombia, Ecuador, and Bolivia. The extreme separation of political agendas has now ended in a battle that may keep the FTAA from coming to fruition (Grinberg, n.d.). AsiaPacific Economic Cooperation The AsiaPacific Economic Cooperation (APEC) is a forum that member AsiaPacific countries utilize to promote growth. This is done by leveraging trade and accelerating regional 9 economic integration (Carbaugh, 2013). Unlike the other trade agreements described above, APEC is a forum that was established in 1989 which would decrease customs intervention, align the regulation of the 21 member governments, and standardize procedures to transport goods more quickly across borders. APECs goal is to reduce costs by standardizing procedures and utilizing bilateral trade as well as the reduction of tariffs to increase trade in the AsiaPacific region (Shepherd, 2016). Transition Economies Transition economies are those economies that are moving from a centrally planned economy to a market economy (Carbaugh, 2013). Eastern Europe boasts a number of countries that are noted as doing well in their transition. A few of the noted countries include the Czech Republic, Lithuania, Estonia, Georgia, Hungary, Slovenia, and Bulgaria. Each country has grown in a successful manner by becoming open to trade and limiting the role of the government when it comes to the economy. In addition, the countries have developed strategies to increase the flexibility of labor markets, implemented ways to protect property rights, and taken a stand against corruption. As economies begin to move towards a more marketoriented approach, it is important to note that labor and employment rates are changing as well. An issue that remains within the marketoriented transition is underemployment and unemployment. The transition is not set to create additional jobs, but rather improve on the ones that do exist as firms change, restructure, and grow (Bah & Brada, 2014). Conclusion Overall, the purpose of this week’s assignment was to analyze the various types of trade agreements throughout the world. Trade agreements are in many circumstances very effective at 10 increasing levels of trade throughout the world. After the formation of the EU, the U.S. made the decision to follow the EUs example and implement NAFTA. While both agreements have proven to be successful, the Americas have been unable to enter a similar agreement. The FTAA has been under negotiation for many years, but has yet to sign off on agreeable terms. While the Americas have not been able to agree, the APEC countries have found a different way to conduct business, through a forum. One can see the way of the future is through trade agreements, and because of this fact, many nations are transitioning to a marketoriented economy. 11 References Bah, E., & Brada, J. C. (2014). Labor markets in the transition economies: An overview. European Journal of Comparative Economics, 11(1), 353 Bouzas, R. (2007). The "new regionalism" and the negotiation of a free trade area of the Americas. International Negotiation, 12(3), 333345. doi:10.1163/138234007X240664 Carbaugh, R. (2013). International economics. (14th ed.) Florence, KY: Southwestern Grinberg, N. (n.d). Where Is Latin America going? FTAA or "twentyfirstcentury socialism"? Latin American Perspectives, 37(1), 185202. Kowalski, T. (2012). The economic and monetary union countries vs. the global crisis. Poznan University of Economics Review, 12(2), 1948 Shepherd, B. (2016). Full length article: Did APEC's trade facilitation action plans deliver the goods? Journal of Asian Economics, 43111. doi:10.1016/j.asieco.2016.01.003 Tumwebaze, H. K., & Ijjo, A. T. (2015). Regional economic integration and economic growth in the COMESA region, 19802010. African Development Review, 27(1), 6777. doi:10.1111/14678268.12123
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