e euro transformed Europe (Warner, 1998) from “a jigsaw of costly protected markets into a vigorously competitive economic bloc, thereby enhancing international trade in the area”. The NAFTA: A Regional agreement without institutions
NAFTA represents a market of 379 million people with $6.5 trillion in production. The drive behind NAFTA was the establishment of a free trade area. Despite being a trilateral, it aimed at increasing international trade through the elimination of trade barriers. NAFTA could become more competitive in the world economy. The primary purpose of NAFTA is to assist the North American region in becoming more economically competitive with the rest of the world. It consists of US, Canada and Mexico. They set the rules regarding trade, investment and the provision of services. Despite the fact that free trade provides benefits, removing a trade barrier could cause damages to the shareholders and employees of the industry. The groups that get affected by foreign competition use politics to get protection from imports.
E.g. According to the U.S. International Trade Commission, US gaining from removing trade restrictions on textiles and apparel would have been nearly $12 billion in 2002. The EU has become more economically integrated by becoming a common market. This removes barriers to production, like capital and labor. As a common market, the EU manages individual nation’s tax, manufacturing, and agronomic policies. The EU nations have a single currency. The EU has free-trade agreements with other countries in the world. Under the terms of NAFTA, US, Canada, and Mexico segment tariffs on goods to reduce restrictions on trade in services and foreign venture.
Technology and Capital is another problem that NAFTA faces. The EU is different in the sense that all the member countries were developed nations. The evolution is homogeneous, while in NAFTA it’s not. NAFTA has not offered nor given any reparation, adjustments or any major infrastructure projects. The theory of Absolute Advantage and Comparative 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 b