Limits to the Economic Integration - Term Paper Example

Limits to the Economic Integration School Introduction This report offers the readers to have a view of a comprehensive study regarding the economic integration. What is economic integration? What the extent of economic integration is? What are its outcomes? All these are very important questions to consider. However, the main idea of this report is whether there are limitations to economic integration. This report analyzes and explains the main theme by considering the North American Free Trade Agreement (NAFTA) with a vast research work as well as allows you to read about the benefit and negatives of economic integration. Economic integration The amalgamation of economic policies among various states through the full or partial elimination of tariff and non-tariff restraints on trade that take place among them before their integration is known as Economic integration. It is an economic arrangement among various regions aiming at the elimination or reduction of trade barriers and the management of fiscal and monetary policies. The purposes of economic integration include reduction of costs for both producers and consumers, and to increase trade among the countries that take part in the contract. There are a variety of economic integration levels. They include free trade areas (FTA), preferential trade agreements (PTA), common markets, customs unions and monetary and economic unions. The trade barriers vanish with the economies becoming more and more integrated. Political and economic coordination among the member countries also surge due to economic integration.  Integration of economies of two or more states results in diminishing of short-term benefits arising due to tariffs and the other trade barriers. Simultaneously, the governments of the member countries become lesser and lesser powerful in making adjustments aimed to benefit themselves with the economies getting more integrated. Being integrated, a country can be lead to greeter long-term benefits in times of economic growth; however, an economy can get worse and worse while being integrated in times of poor growth. NAFTA Background The North American trading bloc or the North American Free Trade Agreement originated as a free trade agreement among Canada and the United States. This Agreement created a free trade area extending to the Arctic Circle from the Rio Grande. This agreement is said to be the largest mutual trade relationship. The time when U.S. and Canada were shaping the U.S./Canada FTA, Mexico was restructuring its style to international trade. Thereafter, some major factors urged Mexico to join the General Agreement on Tariffs and Trade (GATT). After a few years, Mexico decided to join U.S. and Canada in free trade. Hence, on August 12, 1992, the United States, Mexico and Canada announced to form a free trade zone which was named as the North American Free Trade Agreement. It extends from Arctic Circle towards the borders of Mexico with Guatemala and Belize. NAFTA is known as the largest trilateral relationship of trade throughout the world. Limits to economic integration The recent researches made for the identification of limits to economic integration argue that the borders are a significant barrier to international trade compared to intra-national trade. Understand the reasons for the effects of these borders and if they can be reduced or vanished in the future is very important. The border effect can be described for many aspects of trade. Let’s have a look at these aspects as they affect the member countries of NAFTA: Trade in goods The Canadian and American economies were already quite well integrated earlier to the NAFTA; therefore, no great leap was seen in trade between the two member countries. However, between 1993 and 2012, American trade with Mexico surged by 506% as compared to 279% with non-members of NAFTA. America, in 2011, traded as much with Mexico and Canada as it traded with BRIC countries (Brazil, Russia, India, and China), combined with South Korea and Japan. Industries from cars to aerospace have created supply restraints back and forth across the borders of North America. About 40% of the imports from Mexico in the U.S., and 25% of the imports from Canada in the U.S., created itself in the United States. The early spur to this study came from McCallum (1995). He reported some results suggesting that the Canadian provinces are more probable to trade among themselves more than twenty times than wish to trade with U.S. after having controlled the main economic trade determinants. Subsequently, a significant proof of considerable border effects in North America has been found, with inner trade being on average higher by a ten factor than trade with NAFTA members, yet that the amount of this effect dropped during the 1990s Nitsch (2000). In a research of trade among the United States, Wolff (1997) finds a proof of border effects inside the US. These studies were all based on the application of gravity model of global trade runs to fix the standard of border-free, perfect, integration. The border effect is consequential as the degree to which cross-border trade is lesser than inner trade inside a country or state after having controlled the economic aspects that determine the degree of exchanges; the costs of trading and income (economic mass), as measured by distance. The attendant of the border effect for the size of trade in merchandises is that there are more significant and lengthier lasting price variances between countries than among different locations inside countries for similar packages of merchandises that the distances cannot explain. Engel and Rogers (1996) found that the prices of products among US and Canadian cities are thoroughly more flexible than prices among equidistant cities inside each country. Later work by Engel and Rogers (1999) with using the European data proves that overpassing national borders adds substantial volatility to comparative city prices. Thus borders are quite material for customer prices. Engel and Rogers (1999) has found considerable changes in the size of this border effect for different European countries and that the homegrown currency pricing with changing nominal exchange rates explain a lot of the difference. However, substantial border effects still remain after taking into consideration the exchange rate variability. Capital Flows The North American Free Trade and Canada-US agreements have really removed most hurdles to cross-border extensions and occupations inside North America, with a few prominent exceptions. Most chief sectors are greatly integrated, with the most significant companies operating in all three countries. Sectors those were still not greatly integrated in 2012 were banking, healthcare, telecoms, airlines, and broadcasting mainly for the fact that these areas were "ring-fenced" in the contracts, or are subject to other lawmaking hurdles. The energy sector in Mexico is also ring-fenced by requirements in the Mexican establishment that defend Pemex, the state oil company, from privatization. By comparison, the U.S. lacks any big government energy company, and the attempt to form one (Petro-Canada) by Canada was short-lived. NAFTA: The Problem It is well said that, in the 21st century, for a nation to flourish, it must be a dynamic contributor in the international economy and an open market for the products of the world. However, with the dropping of trade limitations comes economic suffering for some employed Americans (Carville, 1993).    Economic adversity and attendant nervousness because NAFTA creates a feeling amongst some people that United States is losing control of its economic fate. NAFTA combined a big Third World nation with the United States at that time when plentiful Americans were down for their jobs and factories were already heading towards south of the border. At that matching time, those companies forced by United States environmental rules to expend millions on cleaning worry about opposing with Mexico, with its miss or hit environmental regulations (White House Walks the NAFTA Tightrope, 1993). All of these doubts, joined with defense trimming and economic rearrangement associated with the end of the cold war; worsen such potential economic needs as worker dislocation, the removal of the whole of industries, the loss of jobs, as well as the ecological dissimilarities between the countries. Problems Affecting Employment At the core of potential negative impact of NAFTA on U.S. employment is the dissimilar wage rates among the Mexico and U.S. In Mexico, wages are as low as 57 U.S. cents per hour for inexpert labor and a normal of 3.80 U.S. dollars per hour for expert labor (Mexico, The Free-Trade Debate Is Clouding The Facts, 1993). Due to these comparatively low wages as that of U.S. standards, there is fear that jobs may overflow to Mexico as NAFTA’s result causing the following major problems: Worker Displacement - Displacement arises when an employee must get enhanced, different, or new skills to uphold a present job, or he must ensure a distinct job in his/her company. This may need reskilling, occasionally at the expense of the worker, lengthy periods of time in between the jobs, and probably entering a new job at a lower level compared to the worker engaged at the earlier job.  Loss of Job - Job loss arises when the company is incapable to compete in the global market or improves plant and equipment to compete more efficiently, thereby requiring fewer workers for the same productive tasks. In short, the worker is discharged from the company. This situation may occur in those businesses and industries that are labor concentrated rather than capital concentrated. Labor concentrated entities may experience growing difficulty opposing against the comparatively lower Mexican wage amounts. Given this generality, it is rational to conclude that businesses in such labor-concentrated industries as glass products, furniture, textiles, and shoes may undergo loss of jobs in Mexico, while such capital concentrated industries as plastics, chemicals, metals, telecommunications, and pharmaceuticals may be anticipated to fare well in the era of NAFTA (One America, 1992). Loss of Industry - Industry loss arises when organizations are incapable to compete with foreign rivals because of their lower cost arrangements. In such circumstances, management may choose to close a business or to move it from its homegrown country to an overseas country and reflect it as an asset in plant and equipment in the homegrown country a sunk cost that is to be abandoned. That choice is made at ease when the wage rates are lesser in the overseas country; when pensions and health care costs are lower; the cost of capital will be low; the alien government will provide a welcoming atmosphere that may include promising tax dealing or government arranged sponsoring; the work force in the alien country is attractive, well educated, keen to work, or agreeable to training; the foreign country will offer a pleasing climate and an refining set-up; the economic and political structures of the foreign country are stable; and hence the foreign country will offer access, as in the instance of Mexico, to an unsaturated and large market, and from Mexico, a doorway to the remaining of the Latin America. All these factors encourage industry losses and are the very material concerns for employees and unions in the U.S. Problems Concerning the Environment  During the NAFTA argument, the border between U.S. and Mexico was said to be a "two-thousand mile Love Canal" due to the dreadful environmental circumstances in the industrial zone of maquiladoras along the border (Miller, 1993). At that site, open sewers, open burning, toxic dumping, and industrial runoff are the law rather than being the exception. Attendant with these atmospheric misuses is the stated use of out-of-date technologies by the electric power industry of Mexico in order to cover cost (Posztor, 1993). The lax environmental situations along with the U.S./Mexican border, joined with lax environmental morals throughout Mexico, motivated U.S. environmental clusters to seek legal compensation against NAFTA (Greens Win A Review Of Trade Agreement, 1993). It resulted in a court order in June 1993 that required the United States government to file an atmospheric effect statement on the potential properties of NAFTA (Davis & Nomani, 1993). However, the Clinton administration appealed the order for the reasons of the legal standing of the environmental groups to file the suite and on grounds that the decision was an unlawful interference with the power of the President. In response, a U.S. Circuit Court of Appeals made a judgment that the NAFTA contract was a Presidential act not reviewable by the courts, hence voiding the previous order for an atmospheric effect statement and allowing the final passage of NAFTA (NAFTA Clears Hurdle In Court, But Faces Tough Battle In Congress, 1993). References James Carville, "Help Those Whom NAFTA Will Hurt," The Washington Post, July 25, 1993, p. C7.  "White House Walks the NAFTA Tightrope," Wall Street Journal, March 15, 1993, p. 1. "Mexico: The Free-Trade Debate Is Clouding the Facts," Newsweek, August 30, 1993, p. 42. "One America," The Wall Street Journal Reports, September 24, 1992, pp. R1 - R28. Cyndee Miller, "U.S. Companies Eager to Head South," Marketing News, May 10, 1993, pp. 1 and 10, for reference to the environmental conditions along the U.S./Mexican border. For an explanation of maquiladoras see Gaberiel Szekely and Oscar Vera, "What Mexico Brings to the Table," The Columbia Journal of World Business, Summer 1991, pp. 28 - 36. Andy Pasztor, "Power Plants In Mexico Cast Pall Over NAFTA," Wall Street Journal, September 8, 1993, p. B1. "Greens Win A Review Of Trade Agreement," Financial Times, July 1, 1993, p. 2. Bob Davis and A. Q. Nomani, "Federal Judges Ruling Could Be Death Blow To Free-Trade Accord," Wall Street Journal, July 1, 1993, p. A1 and A5. "NAFTA Clears Hurdle In Court, But Faces Tough Battle In Congress," Wall Street Journal, September 27, 1993, pp. A3 and A4. McCallum, J (1995), ‘National Borders Matter: Canada-US Regional Trade Patterns’, American Economic Review, 85, 615-623. Nitsch, V (2000), ‘National Borders and International Trade: Evidence form the European Union’, Canadian Journal of Economics, 33, 1091-1105. Wolff, H (1997), Patterns of Intra- and Inter-State Trade, Working Paper 5939, NBER, Cambridge, MA. Read More