Free Trade Blocs

In addition to the European Union there a number of other multi-national free trade blocs. NAFTA (North American Free Trade Agreement), MERCOSUR and AFTA (ASEAN Free Trade Area) are the three largest after the EU. Below is a brief description of these blocs.

NAFTA

NAFTA is a free trade agreement involving Canada, Mexico and the United States. Of the free trade unions NAFTA is the most limited. It is restricted to eliminating tariffs, quotas and other trade impediments amongst the three countries involved. It has no governing structure, although there are boards set up to settle agreements. There is no common customs or tariff agreement for imported goods and services. No monetary union is in the works and there is no movement to making education or training of professions similar as in the EU. Most importantly, there is no free movement of citizens allowed. It is a very powerful trade bloc, nonetheless, because of the economic and political power of the United States. It involves about the same number of citizens as the EU, about 400 million, but it has a slightly higher total GNP, about 9 trillion dollars. It should be noted that NAFTA is in the process of becoming a free trade zone. It has not reached this goal entirely yet, as there are a number of industries that still receive protection such as citrus, lumber, and Mexican petroleum. For a look at the key provisions of NAFTA please look at a site maintained by the U.S. Embassy in Mexico. 

MERCOSUR

MERCOSUR is the trade agreement started by the two largest economies in South America, Argentina and Brazil, along with Uruguay, and Paraguay. Chile, the most advanced South American economy, and Bolivia are in the process of becoming members. There have been intensified discussions the past few years about bringing in Peru, Columbia and Venezuela. It is very possible that in ten years MERCOSUR will represent almost all of the South American countries.

MERCOSUR is presently a customs union in addition to a free trade zone. This means that there is a common tariff on all imports from outside. (The United States has been unhappy with the raising of tariffs on U.S. agricultural goods. This raises a potential problem with trade blocs. They favor the countries within them, but they also often raise tariffs or create obstacles to goods and services coming into them.)

There have been discussions of creating a common currency and of coordinating domestic and foreign policies within MERCOSUR, but at this point these things are only in the talking stage. You can find some important facts about MERCOSUR here.

AFTA

ASEAN started out primarily as a political organization and only lately has created AFTA. Indonesia, Malaysia, the Philippines, Singapore and Thailand were the original creators of ASEAN. Brunei and Vietnam, Laos, Myanmar and Cambodia have since been admitted as members. In effect, ASEAN, and AFTA, now represent Southeast Asia.

AFTA is essentially a free-trade zone in the making. It still is working out agreements amongst all ten countries to eliminate tariffs, quotas and other restrictions on trade. By 2001, 90 percent of a list of 9,000 manufactured and agricultural products are set to be under a 0-5 percent tariff. All products will fall under tariff range by 2002. It has concentrated lately on removing restrictions on capital and services, but it is behind the other trade blocs in these areas. ASEAN is a political organization of countries that are trying to protect themselves from their powerful neighbors—China, Japan and India. The countries of Southeast Asia are finding that economic integration is helping their political goals. For a brief look at AFTA, ASEAN and their relationships to the United States business community please look here.

Most agree that free trade agreements provide higher quality goods and services to consumers in all countries at lower prices.

This tends to be true for several reasons. First, competition increases. The elimination of tariffs, quotas, and other restrictions allow companies who were once prevented from doing business to compete on equal footing with national companies. Competition usually lowers prices and improves quality by itself. In the United States, for example, NAFTA, seems to be helping keep the prices of textiles, shoes, lumber and some agricultural goods low. While this is generally true, it is not true in all cases because some free trade blocs erect higher tariffs and other restrictions to goods and services from outside the countries in the bloc. For example, both the EU and MERCOSUR  have created higher tariffs for agricultural goods coming in from outside. This has kept food prices artificially high.

Secondly, the cost of production for goods and services tend to decline as companies take advantage of the lower costs of labor, cheaper natural resources and easier access to quality services and specialized knowledge. Dell Computer Corporation based in Texas, for example, uses low-cost Mexican labor to assemble many of its monitors. U.S. software and computer companies are helping to make many more Mexican companies efficient.

The free movement of knowledge is especially important. Free trade allows companies to set up subsidiaries in other countries where they can simply use their existing technology. It also allows businesses to create arrangements where their company can sell its knowledge easily to other businesses. A U.S. pharmaceutical company can now sell and produce medicines in Mexico and Canada, allowing consumers in those countries to take advantage of the medical discoveries made by a U.S. company. This same pharmaceutical company may well negotiate deals with Mexican or Canadian companies to market, package or distribute their products. A Canadian company that discovers a better engine for trucks can sell the engine or the knowledge to make the engine to companies in all three countries, thereby allowing a much larger number of people to take advantage of the discoveries and providing a greater incentive to creating discoveries in all countries.

Specialization is also increased in free trade zones. A larger market allows countries to spend their resources producing things that they do well, rather than inefficiently producing goods or services that other countries can provide at lower prices. (In economics this is called comparative advantage.) In the NAFTA for example, it seems clear that in the foreseeable future Mexico will be home to many assembly industries that use low-cost labor. Automotive and computer parts are two that come to mind as well as textiles (clothing). Citrus and produce might also be more likely to be grown in Mexico where the land is cheaper and winter freezes don’t interfere with growing seasons. Canadian and U.S. financial services and high-tech industries meanwhile are beginning to dominate some markets in Mexico. A country that specializes is much the same as a person who specializes. It becomes extremely good at what it does and therefore very productive. Productivity increases income.

Free trade zones also allow for economies of scale to take place. Canada might not have a large enough market to justify the creation of company that puts communications satellites into orbit around the earth to provide better Internet access. It might be able to do so if it can offer these services to consumers in Mexico and the United States. Similarly it may make sense to create a company that provides Internet access at $15 a month unlimited use if the company can make a one dollar a month profit off each account--- if the customer base is over a million. Companies can get discounts if they buy in large quantities. These factors allow the costs of providing services or producing goods to come down, thus allowing for reductions in prices to consumers.

This leads to the next two advantages to free trade. It tends to increase income and employment in all of the countries involved. It’s easy to see how many jobs have been created in Mexico by NAFTA. Now and in the future Mexicans will be receiving better employment opportunities by the factories that have been created by U.S. and Canadian firms seeking low-cost labor. As the income of Mexican workers has increased their consumption of goods and services produced in the U.S. and Canada has increased as well. U.S. banks, insurance companies, stockbrokerage firms and others have seen increases in purchases from Mexican consumers. More computers with processors and software made in the USA and Canada are being sold to Mexico. This has increased employment in high-paying jobs in Canada and Mexico. Those who have received these new jobs buy new homes, use more dry cleaning and home cleaning services. They frequent more restaurants and buy more services from local businesses. All of these activities create other jobs. In short, all countries tend to see an increase in income and employment over time.

These increases are not equal, however, some countries will benefit more than others in free trade agreements

Another advantage for consumers is that there is often a greater variety of goods and services available in free trade blocs. Products like beer, detergent, clothing, and machine tools are often produced in all the countries after the free trade agreement they are often stocked in many stores. Products like satellite hook ups for televisions, computers and telephones are usually made more available to developing countries. Internet service providers are now able to sell to larger markets and more consumers have opportunities to purchase or use these services.

A big advantage to poor countries in trade blocs is that they are usually recipients of large amounts of capital investments made by the wealthier countries. New buildings, technology, and sophisticated equipment are created by foreign investors or by businesses from the more developed countries in the trade blocs. The flip side to this is the opportunity for investment that the wealthier countries now have.

There are other long-term political and social benefits to trade blocs. As economies become more intertwined the political reasons for close cooperation within the bloc increase. Countries understand that they have a stake in each other and make greater efforts to get along. In that same vein, increased business contacts usually mean that people must learn the culture of their trading partners. Many must learn new languages and different business practices. In short, more people will come into contact with each other and will need to learn more about each other. This breeds increased understanding amongst people.

Possibly the greatest drawback to free-trade blocs is job and economic sector displacement. For many reasons, some industries will be shut down or forced to downsize because of increased competition from trading partners. These business sectors often employ large numbers of workers who find that their jobs no longer exist. This is an inevitable process in free-trade agreements. If some industries were not closed it would mean that there was little need for the agreement in the first place. The workers who lose their jobs are often without work for an extended period and when they do find work it may well be at a lower wage.

The closing of factories that were their lifeblood has devastated some communities. In the United States, for example, some automobile parts plants have moved to Mexico as have many textile factories in the southern states. Soon the citrus industry in Florida will face increased competition from Mexico and eventually from Central America. It may well have to sell many groves and shut down citrus processing plants. Many Mexican banks and insurance companies are now under pressure from northern financial institutions. Mexicans fear that large retail chains based in the USA will push many small family businesses out as they have done in the United States and Canada.

As stated above, this is an inevitable result of restructuring that occurs in free-trade pacts. This knowledge does not make it any easier for those who have lost their jobs or businesses, however.

The other major possible drawback to free-trade agreements is increased dependency. As countries become more specialized they become more dependent on their trading partners. This means that each country loses some control over its economy or sovereignty. Decisions by foreign businesses can greatly affect domestic economies. Many are made uncomfortable knowing that most of their food is now grown in other countries. A strike in automobile parts in Canada or Mexico can throw many thousands of U.S. workers out of work. If U.S. firms eventually supply most of the electrical power in northern Mexico what happens if there is a political rift between the two countries?

MERCOSUR countries were frightened by the near collapse of the Brazilian currency at the end of 1998. If the Brazilian economy went into a depression it would surely drag its trading partners along with it. The USA went out of its way to bail out the Mexican peso in 1994-5. It also pushed the IMF to help. With NAFTA, the United States and Canada did not want to see Mexico sink economically.

Imagine what will happen to Mexico the next time the United States and Canada go into recessions?

Weaker economies in trade blocs clearly have the most to gain…and to lose. They fear being swallowed by the more advanced countries. This is exactly what the Mexicans and Canadians fear about NAFTA. They fear that they will all eventually be working for Uncle Sam’s businesses. They may well be richer, but they will lose control of their economic lives.

There are also environmental concerns raised by these agreements. NAFTA, in particular, has little in it to prevent Mexican businesses from pouring their effluents into the water or air. Thus, as more manufacturing industries shift to production in Mexico, pollution in North America might well increase. This has also put U.S. and Canadian firms at a disadvantage when competing with Mexican firms since companies will have to pay for pollution control in the former countries and perhaps not in Mexico.

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