Differences Between Eu And Nafta Economics Essay

With the development of worlds economy, all countries in the world are naturally to trade with others especially their neighbours. As a necessary way to trade, regional economic integration becomes more important in the post-war period. “Regional economic integration is agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other” (Lecture 10). There are nearly 180 regional trade groups in the world, and every regional trade agreements must be informed to the WTO (Morrison, 2002).

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The European Union (EU) is one of the regional economic groups in the world. There are 27 member states in EU and all of them located in Europe. From 1957 to 2007, the European Union has experienced six expand, and over the last sixty years, the European Union has become one of the most economically and politically integrated regions in the world (EU website). However, in North America, the North American Free Trade Agreement (NAFTA) also formed its unique global trading bloc. The NAFTA was founded in 1994, comprises the US, Canada and Mexico. The purpose of NAFTA is eliminating the trade barriers of member countries (Office of the US Trade website). Although EU and NAFTA are important integrated regions in the world, at the same time, there are some common points on their trading blocs. However, some differences are founded between EU and NAFTA for the different situation of trade areas. In this essay, the specific differences will be analyzed between EU and NAFTA in the first part. Then, there are three same points of EU and NAFTA in the second part of main body. The conclusion will be given in the end.

The differences between EU and NAFTA have four points. The first point is that the different of nature. The EU is the world’s most powerful international organizations, approaching a unified federal state in terms of trade, agriculture and finance, so the political system of EU is different from other major trade bloc. In the European Union, it has its own law, currency, policy and flag. All the member countries must abide by the rules of EU including the government. Compared with EU, NAFTA has different nature. North American Free Trade is a free trade agreement with some labor and environmental agreements. It just an agreement on economics Instead of rules above the national government and law. The members of NAFTA have their own currencies and laws, and they are all depended. On the other hand, the composition of the member states is different. There are 27 countries in EU, and all the countries are developed countries. It means that the EU is a highly developed economy although some of countries are very small. In contrast, the NAFTA only has three member countries including two developed countries and a developing country. It is the first regional economic integration in the world that consists of developed country and developing country. The composed of two different way also lead to the different of integrated nature between the EU and the NAFTA.

The second difference is the level of economy. According to the statistics database form WTO, the GDP of the EU in 2011 is 17,584,434 million dollars. The export and import of the EU are the largest in the world in 2011 (WTO website). That looks a huge data, but there are 27 countries in the EU and each country’s average figure is not big. However, the GDP of NAFTA in 2011 is 15,094,000, almost equal to the EU’s (WTO website). Although there are just three countries in the NAFTA, the competitiveness can be comparable with the European Union. Specifically, in contrast to the EU, NAFTA has a greater advantage. The GDP of America is 10 times that of Mexico, which means the gap is bigger between the rich and poor than the EU members. The biggest advantage of regional economic integration is trade complementary between the members of region. It could bring the most benefit to both sides. For the European Union, the member states are all developed countries, the level and situation of development is resemblance. So the formation of the trade complementary space is little, and trade opportunity is relatively small. Yet for the North American Free Trade Area, the member states are obvious economic conditions. As a developed country, the United States and Canada can take advantage of its advanced technology and knowledge intensive industry, through the flow of goods and capital to further strengthen their dominant position in Mexico; and developing country, which is Mexico, can use their cheap labors to further reduce the cost of products. Then try to develop its labor-intensive products and export these products to the United States and Canada. At the same time, the United States can get huge investment and technology transfer in order to promote the adjustment of its industrial structure, according to this situation, the United States enable to speed up the upgrading of domestic products (The NAFTA website).

The third difference is the level of Regional Economic Integration. There are five levels which are free trade area, customs union, common market, economic union and political union respectively (Morrison, 2006). A political union is the highest extend of national integration, free trade area the lowest. Each level of REI merges previous level’s properties. For the EU and NAFTA, they belong to different level.

The European Union is defined as an economic union that is the fourth level of Regional Economic Integration. “Economic integration whereby countries remove barriers to trade and the movement of labor and capital, erect a common trade policy against nonmembers, and coordinate their economic policies is called an economic union” (Wild, 2002). In 1959, the EU begun to eliminate internal tariffs, and this process was finished in 1967. At the same time, the EU wants to set up a common external tariff. So far, the EU in the WTO counsels as a region instead of separate counties. For example, the EU has the free flow of products and factors of production between members, a common external trade policy that established in 1967 and a common currency that is EMU. Moreover, the EU also has the harmonized tax rate, establishes the common fiscal policy and monetary which is Euro. All of them show that the European Union has arrived at the level of economic union, and gradually evolved to the political union.

However, the NAFTA belongs to the first level, free trade area which is the lowest level of the regional economic integration. “Economic integration whereby countries seek to remove all barriers to trade between themselves, but each country determines its own barriers against nonmembers” (Wild, 2002). Because of the factor of geography, Canada and the United States are the largest trade partners with each other. In 1989, these two countries want to build a free trade area that the goal was eliminate all trading tariffs. At the same time, Mexico joined the WTO and wanted to expend its trading. In 1994, the NAFTA formed. Although the North American Free Trade Area eliminates trade barriers, which means it can provide the convenience of trade and promote the economic communication for member countries, the level of NAFTA still stay in the lowest level. It is different from the European Union which has a series of common policy, the NAFTA only realize to eliminate barriers to the goods and services trading. Although there is a superpower that is the United States to be a leader in the NAFTA, it is not unified the tax rate and currency, etc. The member countries in the NAFTA still use their own economic and currency policy. In this case, although the North American free trade area belongs to the economic integration, it is just the first level in the REI.

The last difference is the effects of regional economic integration between the EU and the NAFTA. There are two parts about the effects, first is trade effects and the second is FDI effects. In this essay, it is mainly to introduce the trade effects.

Trade Creation

“Production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration” (Daniels, 2011). For the European Union, all the member states are developed countries and the strength is similar while the price of products made in developed countries usually high. When the tariff is cancelled, member states could import goods with a low price instead of the experience products that indigenous manufactured. But due to the cost of goods generally high, even the importing country imports products from other member states and forms the trade creation, the price relative to themselves is still high. This situation shows that the trade creation can bring advantages relatively small in the European Union. However, for the NAFTA, Mexico, which is a developing country, the cost of products is usually lower than the developed counties. When free trade area founded, the United States and Canada enable to import the low cost products into their market. Using this method, the developed countries can save their resources and labor force. Then, it can reduce the cost of domestic production while the developing countries enable to expand their import and export trade and give play to their own advantage. Thus it can be seen, in the trade creation, the NAFTA have more advantages than the EU.

Trade Diversion

“Trade shifts to counties in the group at the expense of trade with countries not in the group, even though the nonmember companies might be more efficient in the absence of trade barriers” (Daniels, 2011). As said before, the cost of product in developed countries is higher than the developing countries. Although there is no trade barriers between the EU members, it is unadvisable that give up to import goods form other developing countries while choose to cooperate with the states in the free trade area. In this case, even if a tariff restriction, the price of goods from other developing countries is lower than the developed countries’. So the trade diversion effect is not suitable for the EU. In contrast, the NAFTA had more advantages. For example, assume that an American company is importing the same goods from Mexico and China. And there is a free trade area between US and Mexico but without China. This American company must be likely to import goods from Mexico than China because there are no trade barriers in the NAFTA and the traffic is more convenient. This is the trade diversion and could bring more economic benefit for the member states in a tree trade area.

Whether the trade creation or the trade diversion, the function is to get better economic effect and expand their market size.

These are the difference between the EU and the NAFTA above; however, there are three common points of EU and NAFTA. Firstly, unlike other global trading bloc, EU and NAFTA have their own geographical attributes. All the members of EU are located in Europe and the member countries of NAFTA including the United States, Canada and Mexico are neighbours. These countries have convenient transportation and it is easy to trade. Other trade groups such as ASEAN and APEC do not have the geographical attributes.

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Secondly, the reason why these two trading bloc formed is basically the same. After World Warâ…¡, there are two superpowers formed in the world, the United States and the Soviet Union respectively. Europe do not want be controlled by the US and responded to the threat of the Soviet Union when the cold war started. Thus, the European Community was established in 1965 that is the predecessor of the European Union. Similarly, with the growth of EU and the rise of Japan, the position of the United States on world economic and trade is decreased. In order to keep its own economic status, the United States proposed to establish the North American Free Trade Area. In a word, whether the EU and NAFTA, the cause of the establishment is for the cooperation of economy and trade, In order to protect and expand its economic interests in international trade.

Thirdly, both the European Union and the North American Free Trade Area is the product of regional economic integration. Since the 1950s development, after twenty years of rapid development, regional economic integration has been improved in the 1990s. The process of regional economic integration promotes the regional international economic organization’s establishment and development. A large number of important regional and international economic organizations are economic integration organizations such as EU and NAFTA. Although the EU and NAFTA located different areas, the purpose of them which is the REI’s purpose is the same. Regional economic integration reflects the development of international economic and political are towards the direction of equality and democracy.

Regional economic integration is a procedure that states in a geographic area cooperates with another country to decrease or remove barriers to the international movement of goods, people, or capital. The goal of countries experience economic integration is not only to raise international trade and investment but also to enhance living standards for the people (wild, 2003). That is the goal of the EU and the NAFTA. Although there are differences between these two groups, for instance, the different economic levels, integration levels and effects, it is no doubt that the important role of the EU and the NAFTA in the economic integration. In a word, whether the EU and NAFTA, also other economic organizations, it has its own functions in the process of regional economic integration and make a contribution of trading between all member states.