Chapter 16: NAFTA, GATT, WTO: Are Trade Agreements Good For Us?


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Chapter 16NAFTA, GATT, WTO: Are Trade Agreements Good For Us?Chapter OutlineTHE BENEFITS OF FREE TRADEWHY DO WE NEED TRADE AGREEMENTSTRADE AGREEMENTS AND INSTITUTIONSECONOMIC AND POLITICAL IMPACTS OF TRADETHE BOTTOM LINENAFTA, GATT, and the WTONAFTA: North American Free Trade AgreementAn agreement between the United States, Canada and Mexico to have substantially free trade. (Some tariffs and quotas are permissible under certain circumstances.)GATT: General Agreement on Tariffs and TradeA multi-nation agreement specifying conditions under which tariffs, quotas and non-tariff barriers are permissible.WTO: World Trade OrganizationAn organization designed to settle trade disputes.The Benefits of Free TradeFree trade makes each trading partner better off than it would have been without trade.Countries export goods to other nations because the producing country can make the good at a lower opportunity cost than the importing country.A Simple Example Number of workers produces Amount of OutputHigh TechLow TechHigh SkillLow SkillHigh SkillLow SkillUS1produces 12 produce 11 produces 41 produces 3 Mexico3 produce14 produce 11 produces 31 produces1US exports high-tech products to Mexico and Mexico exports low-tech products to the US and both are better off than if they produced the goods themselves. Why Do We Need Trade Agreements?It is logical to ask “if trade is so good why do we need an agreement to engage in it?”The answer is that a country can make itself better off by engaging in Strategic Trade Policies designed to get more of the benefits from trade in a country than would exist under free trade.Countries that do this increase the gains from trade to themselves but it is less than the losses to everyone else.Example of Strategic Trade Boeing vs. AIRBUSBoeing had significant market power in the production of airliners prior to the existence of AIRBUS. Britain and France gave AIRBUS protection against Boeing’s exports to European airlines.In doing so they might have made themselves better off. Boeing was worse off by more than AIRBUS (and the European consumer and taxpayer) were made better off.What Trade Agreements Prevent (or discourage)TariffsA tax on imports.QuotasA limit on imports.Non-tariff barriersA regulatory means of limiting imports.Alphabet Soup: NAFTANorth American Free Trade AgreementCreates a (relatively) free trade zone in North America.Includes Canada, Mexico and the United States.PassageEnvisioned by President Reagan in the 1980’s.Negotiated by President Bush (G.H.W.) in the late 1980s and early 1990s.Enacted by President Clinton.Alphabet Soup: GATTGeneral Agreement on Tariffs and TradeCame into existence shortly after WWIIUruguay Round set the latest rulesA world agreement between more than 100 nations.NOT a free trade agreement It sets conditions under which tariffs, quotas and non-tariff barriers are acceptable. Alphabet Soup: WTOWorld Trade OrganizationSet up with GATT but had little power until the Uruguay Round of GATT.Serves as a “court” where countries can argue who is in the right in a trade dispute.Has no enforcement authority.The Battle in Seattle (and other similar protests)December of 1999 riots broke out in the streets of Seattle with protestors voicing displeasure atNAFTAWTOGlobalizationThe effect of trade on American jobs.The effect of trade on the environment, worker safety and child labor standards. Are Trade Agreements Working? The effects of these agreements are often overstated because trade was increasing before they were enacted.Trade agreements have (in isolation from the trend) increased trade somewhat, but have not had the Dramatically positive impacts envisioned by free-trade advocates.Dramatically negative impacts envisioned by detractors of globalization.The Politics of Free TradeThere are winners and losers from freer trade.The winners have tended to be people who are educated and highly skilled.The losers have tended to be people in manufacturing who have little education.More Politics of Free TradeFree trade’s winners are harder to identify that its losers.A person who loses a job when the plant they work for moves to a different country can easily identify themselves as a loser in free trade.People who are hired because of an increase in exports may not see the reason.People who are hired because of higher national incomes usually do not attribute their hiring to free trade policies. The Bottom LineTrade increases the GDP of the trading countries.Trade can hurt key constituencies with political power.Because the gains to the winners of free trade more then offset the losses to the losers, economists generally view free trade agreements as good. Economists suggest that the losers from free trade agreements (unemployed workers) can (and should) be compensated with retraining opportunities. The implementing legislation of NAFTA provides for this.