The NAFTA and the EU: The Global Balance - Research Paper Example

? The NAFTA and the EU: The Global Balance Economic distance since World War II has decreased among countries because of the technological changes, but also because of the increased political cooperation among countries (Wallace, 1994, p. XVIII). Result was free trade areas (FTA). Some also led to a deeper economic integration, such as the European Union (EU). On the other hand, The North American Free Trade Agreement (NAFTA), which is the outgrowth of previous trade agreements between the US and Canada, and the USA and Mexico, has not led to a common macroeconomic or fiscal policy. NAFTA was created as a counterbalance to the EU on the global scene, with the USA as its leader. NAFTA was an outgrowth of previous trade agreements and history between the USA, Canada and Mexico. Mexico and the USA announced the creation of NAFTA in 1990, and Canada joined a year later. NAFTA entered into force in 1994. It can be argued that its existence was almost inevitable due to the geographic proximity of the three countries and their political and economic history. The three countries are natural trading partners (Bilal, 2001). Thus, though they had other options, such as the US – Israel Free Trade Agreement, the Common Market of the South (MERCOSUR) for Mexico and US – Canada Free Trade Agreement (CUSFTA) for Canada, their geographic proximity and history made this agreement an attractive option. Mexico and the USA already had a history of migration flows from Mexico to the USA, and the USA was a major source of foreign direct investment (FDI) for Mexico (Hufbauer & Schott, 2005, p. 1 -2). The USA was also a largest source of FDI for Canada. According to Hufbauer & Schott (2005), Canada also saw a benefit in joining NAFTA so as not to lose any of the benefits from the 1989 CUSFTA. In short, Canada and Mexico saw and economic benefit in accessing the US markets (Wolinetz, 2003, p.4). Moreover, NAFTA was a result of increased economic interdependence as a result of globalization. According to Hufbauer and Schott (2005), US trade with Mexico and Canada increased drastically even before NAFTA was discussed as an option (p. 2). NAFTA only sped up the process. Chase (2009) argued that NAFTA and the EU arose out of the need of multinational companies for opened boundaries, which witnessed increasing scale of production and needed a cheap way to sell their products. Mexico for example benefitted because NAFTA enabled the then current government to open up the economy to the global markets in order to produce economic growth in the economy (Hufbauer & Schott, 2005, p. 3). Thus, it seems that NAFTA was a result of globalization and increased interdependence. Abbott (1999) argued that The NAFTA was also created to counterbalance the growing EU influence. The EU, which will be discussed later, has over the years become one of the influential global players, jeopardizing the US interests. However, the creation of NAFTA and its growing influence has jeopardized the EU interests. As a result, the EU has attempted to reduce the US influence by strengthening its ties with Mercosur and Mexico. NAFTA’s structure is small. It is composed of three councils, an intergovernmental Free Trade Commission (FTC), a Council for Environmental Cooperation (CEC), and a Commission for Labor Cooperation (CLC), which bring together cabinet level officials to deal with disputes and implement NAFTA provisions. Disputes can also be resolved in trade tribunals (Wolinetz, 2003, p. 4). But unlike the EU, NAFTA has no common macroeconomic policies or a common currency. NAFTA only limits the sovereignty of local and federal governments with regard to the labor and environmental laws, and other areas of economic policy, since companies can complain if they are discriminated against or if their activity is limited (Wolinetz, 2003, p. 4). Unlike NAFTA, the structures of the modern EU were created because of security reasons. After World War II, European democracies were in ruins and, under the leadership of the USA; the economic growth encouraged by economic integration was seen as an economic and political solution that would restore balance (Wallace, 1994, p. 2). In 1951, the European Coal and Steel Community linked Germany and France. Then in the 1960’s the European Economic Community (EEC) was created, which established a free trade area and customs union (Wolinetz, 2003, p. 2). By 1992 Maastricht Treaty on the European Union, countries already shared foreign policy, defense, boundary control, policing, law and policies on redistribution of revenues and expenditures (Wallace, 1994, p.29). Without the EU, countries such as Belgium would be too small to exert any type of influence in the international arena. The EU is a multilevel system of governance. According to Wolinetz (2003), the EU member-states pool their sovereignties in a wide range of policy areas and form majority of laws together. Though some countries are smaller and less powerful than others, no country is allowed to dominate. Lawmaking is composed of three branches: the Commission, Council of Ministers and European Parliament. The Commission proposes legislation and the other two vote. Another important institution is the European Court of Justice, which is “the fabric of European law which member-state courts apply in their adjudication.” (Wolinetz, 2003, p. 3). Boltho and Eichengreen (2008) argued that the EU was the most efficient solution. They named several possible scenarios to justify their argument. Some of the possible scenarios could have been, under the leadership of the allied victors after World War II, an assimilation of German military into allied forces or a possibility of trading largely with the USA. Germany would have been economically and politically isolated. However, neither of these possibilities, according to the authors, would have led to the level of economic growth in the EU that has actually been observed. NAFTA provided all three economies with an economic benefit. US FDI increased in both countries. Economic growth rates in the period 1994 – 2003 were 3.6% for Canada, 3.3% for the USA and 2.7% for Mexico (Hufbauer & Schott, 2005, p. 2). Mexico benefitted economically the least, though this could be debated, as NAFTA membership enabled Mexican government to obtain money needed to overcome the 1994 peso crisis. Mexico benefitted politically. The Mexican peso crisis of 1994 – 1995 destabilized the Mexican economy, but because of their membership in NAFTA, they obtained a $50 bn loan from the USA. They also had to abide by the NAFTA rules, which required fiscal and monetary reforms (Tornell & Esquivel, 1997, p. 26 – 27). As a result, the economy recovered, they repaid the debt and went through with the reforms. The government also became more scrutinized by the outsiders, which according to Hufbauer & Schott (2005), led in 2000 to a first peaceful transition of government in modern Mexico (p. 14). Canada’s environmental laws became stricter. Because the USA is the most powerful member country in NAFTA, its laws and preferences are dominant. Bedros (2009) argued that the USA had stricter environmental regulations even before NAFTA. Once NAFTA was formed, Canada increased environmental standards in order to remain competitive and attract companies from the USA. Canadian sovereignty became limited with regard to laws such as environment. The EU member countries also had to compromise their sovereignty. Every member of the EU, as already mentioned before, must participate in common decision making. Whether it is the education, agriculture, or even foreign policy, no EU member can decide alone on issues that will affect other countries as well. Yet, there is space for sovereignty as well. Greece is an example of a country that became unable to pay its debts in the wake of the current global recession. Greece became over indebted, but tax revenues decreased as the economy slowed down (Giles, 2011). As a result, the credit rating of an entire country dropped drastically. Yet, most other countries in the EU are not faced with such a grave problem, because the EU countries are not forced to have exact economic policies. The EU is one of the major global economic powers, slowly taking over the USA on the global scene. Even though China and India are rising, the EU lost only 1.3 percentage points in their share of the global markets, standing at 19.5% (European Commission, 2008, p.3). The US share decreased by 4.4 percentage points to 13% and China overtook the US with a market share of 14.1 %( European Commission, 2008, p.3). The EU took over the US with regard to high – tech exports and services; it also became a largest investor as well as a receiver of investments (European Commission, 2008, p.4). In both trading blocs the consumers benefitted. Within a trading bloc, tariffs are lower than outside. As a result, goods sold within the bloc are cheaper, more diverse and consumers benefit by being able to buy more at a lower price. Moreover, Vogel (1995) argued that safety standards increase, providing a better quality of goods. This paper has already mentioned how environmental standards in Canada increased due to NAFTA obligations. Moreover, as already mentioned, the EU has since the creation of NAFTA increased trade with Mexico. Overall, increased trade and competition between blocs has benefitted the consumers with regard to quality, price and diversity. Moreover, as trade increases, income too increases for an economy as a whole, providing at least some consumers with a higher disposable income which is then spent on additional consumption. Though large and economically powerful, the EU has turned to the World Trade Organization (WTO) when in need of a solution. With regard to the WTO, the EU is its largest member. With 27 member countries, it is more powerful than any of their members would be alone (European Union – Delegation of the European Union to Japan, 2008). Yet, the EU has turned to the WTO while resolving conflicts. In 2010, the EU complained about the generic drugs coming from Brazil (WTO, 2012). Likewise, both the USA and Canada have put forth complaints about the EU or the EU member country. In the latter case, the EU acted on behalf of that country, providing their members with a more powerful voice. NAFTA membership sometimes created problems with regard to the WTO rules. In 1995 Canada started implementing the tariff requirements under the WTO, but the USA complained because Canada had an obligation to NAFTA, which is a closed trading area that discriminates against non – members (Gantz, 1999, p.1060). Canada also requested consultations with regard to the US implementation of tariffs on sugar for the same reason in 1995. A year later Mexico filed a request for consultations to the WTO because of the US tariff – rate quota on Mexican tomatoes (Gantz, 1999, p. 1067). In short, all countries came into conflict with each other, sometimes because of the conflicting rules in the WTO and NAFTA, where latter favors discrimination against non – members. Both blocs have created more trade and provided their members with political and economic influence. Burfisher et al. (2001) argued that NAFTA created net trade, where member countries did not decrease their trade levels with non – members, at the same time having increased trade among each other (p. 140 – 141). As shown in the case of WTO, the EU membership provided a more powerful voice in the WTO for countries such as Italy or Belgium. NAFTA membership made Mexico a more attractive trading partner. However, the challenges the USA is faced with are many. The USA has been one of the major players after the World War II. The EU structures were created under the leadership of the USA, NAFTA as well. However, the USA is now faced with a rising China, growing India and an ever more powerful EU. NAFTA has strengthened the ties between the three countries, but it has also made its weakest member, Mexico, more attractive to the EU. In response to NAFTA, the EU also increased its cooperation with MERCOSUR and other countries, which is evident in its increased trade and takeover in exports of services and high – tech products. To sum, NAFTA and the EU have made their countries much more influential in world politics and global economy. NAFTA members gained economically from their alliance, and EU members gained not only because the EU provides them with a much more powerful voice in the international institutions such as the WTO, but also because it protects them against the influence of NAFTA. The USA has since recently been a world leader, supporting globalization, but its ability to compete has diminished. The 21st century is a challenge for the USA, as its power and influence are fading. References Abbott, F.M. (1999). The North American Integration Regime and its Implications for the World Trading System. The Jean Monnet Center for International and Regional Economic Law and Justice. Retrieved from: http://centers.law.nyu.edu/jeanmonnet/papers/99/990201.html Bilal, S. (2001). Trade blocs. In R. Jones (Ed.), Routledge Encyclopedia of International Political Economy, London and New York: Routledge. Bedros,F. (2009). Harmonization of Environmental Standards and Convergence of Environmental Policy in Canada: the NAFTA Context. Foreign Affairs and International Trade Canada. Retrieved from: http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/bedros.aspx?lang=en&view=d Boltho, A. & Eichengreen, B. (2008).The Economic Impact of European Integration. C.E.P.R. Discussion Papers, 6820. Burfisher, M.E., Robinson, S., & Thierfelder, K. (2001). The Impact of NAFTA on the United States. Journal of Economic Perspectives, 15 (1), 125–144. Chase, K. (2009). Trading Blocs: States, Firms, and Regions in the World Economy. University of Michigan: The University of Michigan Press. European Union - Delegation of the European Commission to Japan (2008). Retrieved from: http://www.deljpn.ec.europa.eu/union/showpage_en_union.external.wto.php European Commission (2008). Global Europe. Retrieved from: http://trade.ec.europa.eu/doclib/docs/2008/october/tradoc_141196.pdf Gantz, D.A. (1999). Dispute Settlement under the NAFTA and the WTO: Choice of Forum Opportunities and Risks for the NAFTA Parties. AM. U. INT'L L. REV., 14, 1026 – 1106. Giles, C. (2011,September 16). Eurozone: A Nightmare Scenario. The Financial Times. Retrieved from: http://www.ft.com/intl/cms/s/0/80094624-e076-11e0-bd01-00144feabdc0.html#axzz1kPAj4EyN Hufbauer, G.C., & Schott J. (2005). NAFTA Revisited: Achievements and Challenges. Retrieved from: http://bookstore.piie.com/book-store/332.html Tornell, A. & Hernandez, G.E. (1997). Regionalism versus Multilateral Trade Arrangements. NBER-EASE, 6. Vogel, D. (1995). Trading Up: Consumer and Environmental Regulation in a Global Economy. Cambridge: Harvard University Press. Wallace, W. (1994). Regional Integration: The West European Experience. Washington D.C.: The Brookings Institution. World Trade Organization (2012). Chronological list of disputes cases. Retrieved from: http://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm Wolinetz, S.B. (2003). Comparing Canada, the European Union, and NAFTA: Comparative Papers and Constitutional Conundrums. Jean Monnet/Robert Schuman Paper Series, 3 (4). Paper Outline I. Thesis: NAFTA was created as a counterbalance to the EU on the global scene, with the USA as its leader. II. NAFTA outgrowth of previous agreements and history III. NAFTA is also a result of globalization IV. NAFTA created to counterbalance the EU V. NAFTA structure weak and superficial VI. EU created for security reasons, unlike NAFTA VII. The EU is a multilevel system of governance. VIII. There was no alternative to the EU that would be as economically profitable IX. Economic benefits of NAFTA X. Mexico benefitted politically, also underwent political reforms XI. Canada’s sovereignty challenged with regard to environmental laws XII. The EU members also compromise their sovereignty XIII. The EU still leaves space for sovereignty, example of Greece XIV. The EU taking over the US in the global markets XV. Consumers benefit from competition XVI. The EU resolves international conflicts at the WTO a. Smaller EU countries benefit from the protection the EU grants them XVII. NAFTA members in conflict with the WTO rules because of NAFTA rules XVIII. Summary: both blocs benefitted their members XIX. However, there are many challenges the USA must face with, in particular the EU XX. Conclusion: NAFTA and the EU have made their countries much more influential in world politics and global economy, supporting globalization, but the US ability to compete has diminished. Read More