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World Trade Blocs Compared Unique Comparison

Apr 08, 2018

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    Emerging World Trade Blocs: The North American

    Free Trade Area and the European Union

    Compared By

    Olga M. Lazin, UCLA

    STATISTICAL ANALYSIS

    Let us compare for the early 1990s:

    (a) the 15 countries comprised in the European Union (data for which hereinclude three countries that are to join in January 1995),

    (b) the six Eastern European countries likely to join the European Union in

    the long term under the Europe Agreement,(1)

    (c) the EU constituencies; 27 countries to date

    (d) EU and NAFTA countries compared,

    (d) major world trading blocs, especially Mercosur which is being courtedby both NAFTA and EU, and

    (f) the NAFTA schedule for managing the opening of duty-free trade by

    item for each of the three countries.

    Data on the major trade blocs are included in order to show the context in

    which NAFTA and EU discuss expansion. The Europe Agreement to unite

    the continent east and west was signed on October 5, 1992, at Luxembourg;

    and the EU's negotiations to develop a special relationship with Mercosur

    have acquired importance by mid-1994 as Mercosur debates how closely to

    try to relate to NAFTA.

    Comparison is presented in five tables. Tables 1, 2, and 3 cover population,

    GNP, GNP/C, and export share in GNP for the EU, Eastern Europe, and

    NAFTA. Table 4 covers the same data for major trade blocs. Table 5 shows

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    the relative importance of the major trade blocs, using the USA as reference

    point. Table 6 presents the current situation of economic blocs as through

    statistics for six countries, Japan standing as its own economic bloc.

    Table 1 allows us to examine the ranges in country size for population.

    Reunited Germany has the largest population, 81 million. Italy and the U.K.

    follow as the second and third largest countries, virtually tied at 58 million

    persons. Germany's population is 207 times larger than the smallest

    country--Luxembourg has only 389,000 persons. In terms of GNP, Germany

    is 134 higher than that of Luxembourg

    Given such disparities in size, is it "fair" that the EU member countries have

    disproportionate voting rights which are weighted in favor of small

    countries? (For shares of voting rights, see Appendix A.) One good

    argument for such weighting is that Luxembourg has the highest GNP/C of

    EU's (US$ 35,260) and the highest export share in GNP (94%). Spain has a

    larger population (39 million) but has EU's lowest export share in GNP

    (17%). Such complexities explain why weighted voting rights are not as

    arbitrary as first glance might have us believe. In any case big countries have

    enough votes that it takes the votes of many small countries to reach the

    present blocking minority of 23 votes, a total which once the EU reaches 15

    countries will be 26 votes. (2)

    Table 2 shows ranges in size for the six countries of Eastern Europe seekingto join the EU. Poland has the highest GNP (US$ 75 billion), much higher

    than that of EU member Ireland (US$ 42 billion). Unfortunately Poland is

    weak in exports, which amount to 19% of its GNP. Hungary's advantage is

    due to its earlier leadership among the former communist countries in

    carrying out economic reform, its GNP/C being 54% higher than that of

    Poland.

    The relationship of Poland to "smaller" countries is interesting. Although

    Poland has 4 times the population of Bulgaria's 9 million, Poland has thelowest export share of GNP. Bulgaria has the second largest export share in

    GNP (45), after the Czech Republic, which leads both in export share in

    GNP (58) and also in GNP/C (US$ 2,440) as compared to the rest of the

    Eastern European countries.

    With regard to the two poorest countries seeking to join the EU, the poor

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    economic performance of Romania is noteworthy. The Romanian GNP is

    hardly double that of the Slovak Republic (US$ 10 billion), yet the two

    countries are equal in GNP export share (28%). Romania's trade with

    Eastern Europe collapsed in 1991 along with the COMECON trading

    organization. Subsequent growth in trade with the West has been slow, andcurrent-account deficits of more than US$ billion have been recorded in each

    of the last four years. In terms of population, Romania is 4 times larger than

    that of the Slovak Republic (5.3 million). The legacy of a high-inflation

    environment and modest growth accounts for the Romanian currency's very

    small purchasing power. Despite all theses shortcomings Romania became a

    full member of EU in ten years, that is December 1st, 2007.

    The Slovak Republic with its small population and economy calls our

    attention. How can it hope to compete in an expended EU? Although its

    population is only 5 million and its GNP is only US$ 10 billion, Slovakia

    has a relatively high level of export in GNP, 60% higher than the larger

    Romania.

    Given the above disparities, interests within the EU have been divided into

    five "constituencies." (3) (See Chart 1.) The "Core" constituency is France

    and Germany (which founded in 1951 the European Coal and Steel

    Community to rebuild war-torn Western Europe). To this core are appended

    Belgium, Holland, and Luxembourg, too close geographically and too small

    economically to avoid being drawn into the orbit of power.

    The second EU constituency is made of the "free traders" Britain and

    Denmark (both of which joined the EU in the early 1970s). Britain leads the

    way to open a common market of goods, services, capital, and people while

    at the same time trying to prevent the rise in Europe of any singly powerful

    country.

    The EU third constituency involves the poorer, newly democratic members

    admitted in 1980s (Greece, 1981; Portugal and Spain, 1986), each seeking tomodernize their economies in order to guarantee against a resurgence of any

    authoritarian rule. This expansion widened the gap between richer and

    poorer countries, the latter including Ireland and to some extent Italy.

    The fourth constituency involves Eastern Europe, which freed itself from

    Russian rule after 1989. It sees admission to the EU, proposed for the year

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    2000 by Germany, as guarantee against the resurgence of Russian authority

    in the region.

    The fifth EU constituency involves the European Free Trade Association

    (Austria, Finland, Norway, Sweden), which has realized, except for Norway,

    that it must not be left out of the EU as it expands to include even Eastern

    Europe. Indeed Austria may move directly into the Core.

    Given the divergent interests of these five constituencies, two models offer

    future direction to solve the problem of disunity within unity. The British

    model, which seeks to give more or less equal weight to, the concentric

    circles depicted in Chart 1, thus encourage cooperative diversity; and the

    German-French model, which seeks to move forward with monetary union

    and unified foreign policy focused on the center circle in Chart 1. The idea

    that Britain may resist France and Germany by refusing to join the EU

    monetary union has prompted The Economist to write:

    If Britain stays out, only to change its mind later {as it did about the EU], it

    leaders may seem as silly as Churchill now seems, for this comment on the

    founding of the European Coal and Steel Community 43 years ago: 'I love

    France and Belgium but we must not allow ourselves to be pulled down to

    that level." (4)

    Turning now to a comparison of the EU and NAFTA, several factorsemerge. The population of the two trade blocks is about the same (363.3

    million for NAFTA, 345.0 million for the 12 EU countries, and 368.8 for the

    15 countries in 1992). With regard to economic differences, Germany

    emerges as having the biggest sheer economic power, followed by France

    and Italy within the EU.

    Noticeable is that the USA has the highest GNP among all countries (US$

    5.9 trillion) and the highest GNP/C within NAFTA (US$ 23,120).

    Comparing the countries with lowest export share of GNP in each unit,

    NAFTA's Mexico with only 14% has much less than the EU's Greece, which

    stands at 23%. Romania and the Slovak Republic have twice Mexico's

    export share in GNP.

    With regard to the power of population and GNP, the index in Table 5 is

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    based on the fact that the most important country is the USA, which equals

    100. while Mexico has one-third of the U.S. population, but only 5% of

    GNP.

    Table 5 shows why Japan is often seen as the economic "enemy" of both

    NAFTA and the EU, its power being concentrated in one county which has

    established a web of trade dependency worldwide.