Lesson 2 - Page 3 - How do countries promote trade?

The global economy could not work without policies that promote the integration of economies across political borders. Economic integration reflects this process, and major trade blocs (countries trading or exporting in coalition with other countries who share similar economic goals) have developed. Since the end of the Second World War, several regional integration movements have emerged, most significantly among the so-called developed nations. Integration generally occurs between nations in the same region or hemisphere, and is a tangible sign of international trading cooperation. In addition, consumer preferences are likely to be similar, so marketing and distribution networks are easier to establish. However, trade patterns are now truly global as countries enact treaties to band together in trade or to expand trade relationships across the world.

Four levels of economic integration exist at the global scale. From least-to-most integrated, these are:

1. Free-trade zone. Its main purpose is to abolish tariffs between member countries. A tariff is a price (a form of tax) added to an imported good so that trade between nations is restricted in direct proportion to the tariff imposed. Each member country maintains its own tariffs towards nations outside of the free-trade zone. For example, the North American Free Trade Agreement (NAFTA) created a free trade zone including Canada, the United States, and Mexico. In Europe, the European Free Trade Association (EFTA) links Iceland, Liechtenstein, Norway, and Switzerland.

2. Custom union. Its main purpose is to establish a common policy on foreign trade. Member countries, in addition to having significantly waived tariffs barriers within their free-trade area, have the same tariffs structure with a series of tiered countries. For example, the Commonwealth of Independent States (CIS) custom union links Belarus, Kazakhstan, Russia, Kyrgyzstan, and Tajikistan.

3. Common market. Its main purpose is to abolish restrictions on the mobility of goods, labor, and capital between member countries. The European Community - precursor to the European Union - is an example.

4. Complete economic integration. Its main purpose is to establish common monetary and fiscal policies, thus implying some level of political integration between the concerned nations. This type of integration is taking place in the European Union, in spite of a number of internal objections.

To identify some of the economic effects of free trade, we will use the example of the North American Free Trade Agreement (NAFTA), signed in 1992 and implemented on January 1st, 1994. This agreement called for gradual elimination of import taxes and other barriers to trade between Canada, Mexico, and the United States.

As the NAFTA case will illustrate, free trade is politically controversial. One problem is that the benefits are national in scale (they help people all over the country), but the costs often have an impact at a local scale (in a specific town or city). For instance, free trade intensifies competition by removing protectionist tariffs on imported goods. In turn, local businesses are forced to compete with foreign-owned businesses. Sometimes this competition forces the closure of factories and leads to unemployment. When these workers lose their jobs, they spend less money in local stores, restaurants, and theaters. That can hurt people who work in those places, so they too have less money to spend.

Although the loss of a factory can have a big impact on a local community, its effect on the national economy is very small. In fact, many economists argue that NAFTA benefits more people nationally than it harms because increased competition lowers prices. Factories in the United States might be able to use Mexican oil or Canadian metals, and so on. Prices for many things will go down, because those things are more likely to be made in places where the factories can be efficient.

To explore the sides of this debate, Click here for an interactive presentation on NAFTA. The presentation will illustrate the economic network formed between Mexico, Canada, and the United States. It will also describe some of the economic effects of this free trade agreement and explain how these effects can be observed in the urban landscape.