arative Advantage is apt for the EU. Some countries are more specialized on some products compared to other products. The member states of the EU balance out one another in both Absolute and Comparative advantage. These theories can’t be applied to NAFTA, as Mexico depends on the US for the imports. Even if Mexico has plenty of raw material and oil, the country is comparatively small for both US and Canada. The benefits and costs of fixing the exchange rate
There are a few significant economic costs of fixed exchange rates. The benefits from using fixed exchange rates comprise of likely decrease in the external risk on non-permanent deals. Further benefits results due to the increase in trade and which was found to be quite significant through foreign direct investment. Macroeconomic benefits occurring because of the removal of exchange rate can be vital. When fixed exchange rates are used and choices for fiscal procedure are narrowly defined, that the financial policy has to be associated with the currency and exchange rate.
Advantages and Disadvantages of using a Single Currency
Using a single currency has its own advantages and disadvantages. One such benefit would be the removal of some foreign exchange costs, and other charges of converting currencies. The presence of high indirect taxes in Canada may encourage the shipment of goods to US. This would be considered as avoiding to pay the taxes levied on any imports to Canada, even with the removal of charges associated with currency. Comparing the EU to NAFTA
There are major differences between the EU and what NAFTA faced. 1) In EU, all the member states traded with one another and were more dependent on one another in relation to international trade. 2) The EU adopted a single “new” currency, when compared to adopting a “current” currency in the NAFTA. NAFTA opposing EU
Both NAFTA and EU have similar drawback. That is the high labor costs when compared to third world countries or developing nations, where the cost of labor is far less. The main distinction between NAFTA and the EU is related to merger. The new and old members in the EU have reduced drastically. The distance between Mexico, US and Canada could exist.
Source: Anderson, Cavanaugh (2004).
NAFTA can’t be changed to reflect the EU. The EU was formed as the nations did not dominate. This option is neither feasible nor viable for NAFTA, as there is a fear of losing their control. NAFTA has to move forward. If it does not, it may lose its dominance as the world’s top economic power.
NAFTA and the EU represent more than half of the world’s output. Both trading blocs disapprove one another for protecting their own market, following partial trade practices and more importantly their attempting to shut down one another’s markets.
The EU will continue to expand their market. NAFTA has to defend itself. NAFTA could protect itself by expanding to the South and by making the intra-NAFTA economy stronger. Both options are not reasonable in the short term.
The largest trading block is NAFTA, as the economies and markets of US are relatively huge in comparison. At one point of time NAFTA has to enter into some kind of conflict with the EU. It is not necessary that this rivalry or confrontation has to be violent and harmful. Both NAFTA and EU would lose a lot, if they go against one another. Both NAFTA and the EU have to overcome obstacles to peacefully coexist. In many areas specific interests of both the NAFTA and the EU collide.
Anderson, S., Cavanaugh, J. (2004). Lessons of European Integration for the Americas. Washington D.C.: “Institute for Policy Studies”.
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Chanona, A. (2003). A Comparative Perspective between the European Union and NAFTA, The Jean Monnet Chair. University of Miami. Miami, Florida, August.
Kamm, Thomas (1999), “Emergence of Euro Embodies Challenge and Hope for Europe,” Wall Street Journal, January 4, pp. A1 and A4.
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