We've been discussing the theory of trade. What I'd like to look at with you now is what does global trade actually look like? Is it free? Is it more protectionist? How does it look? What kind of arrangements do we have? Well, we need to be aware that the system we live in right now was born after World War II when some of the leaders of the world became very, very concerned that before World War II, after the Great Depression, countries had raised their protectionist barriers against each other because of their local recessions or depressions, and they had interfered with trade and we had lost a lot of global trade and people had suffered as a result. Actually, there was more unemployment because we interfered with trade, because jobs and the specialization and the consumer surplus, were lost. Well, these global leaders were very interested in creating a world where free trade would be the rule and it couldn't be so easily interfered with uninterrupted. So they created something that was called the GATT right after World War II, the GATT, General Agreement on Tariffs and Trade. Its idea was that it would set up a set of rules, it would set up forums where countries could discuss things, and countries would join and as they joined they, would reduce their tariffs with each other. Now, in 1995, the name of the organization was changed to the World Trade Organization, the WTO, and some of its institutions were changed. It now has 165 country members, and it administers the agreements of the WTO and provides a forum where if countries have complaints against each other, they can actually air those complaints, they can bring evidence to show that another country is interfering with trade. It's also a place where countries can sit down and discuss ways to make trade freer, ways to eliminate barriers to trade. The WTO is a very, very important multilateral organization, and this is one way that we have freed up trade in the post-war era and it's been quite successful. The other way that we have freed up trade in the post-war era is by something that we call economic integration or regional economic integration. What we find is we have groups of countries that have intensified free trade, among themselves, not on a global level as with the WTO, but on regional levels. It's a continuum of trade arrangements that get more intense as you go. There are several different levels of economic integration we can talk about. There are, in the first place, something we call preferential trade agreements. This is usually between one country and another. What they do is they reduce the tariffs they are allowed to keep under the WTO, which are not very high, but there are tariffs among countries. They reduce those tariffs with each other. So, for example there's a global agreement between the EU and Mexico that entered into force in the year 2000. That's an example of a preferential trade arrangement. Moving down, becoming more intense, there's something called a free trade area. This is where the countries practice absolutely free trade among themselves. It's not just lower tariffs, it's no tariffs. An example of that is the NAFTA, the North American Free Trade Area between Canada, the United States, and Mexico, that started in 1994. Since it involved such a large country as the United States, this was a huge step forward in global trade and benefited both all three countries in a great way. The next most intense, if you're moving on a continuum from least to most integrated, is something we call a customs union. In a customs union, a group of countries reach an agreement to not only have free trade among themselves but also to have the same trade barriers with all outside nations. They have a common external tariff. It's a pretty intense form of economic integration and the Andean Community, which was established in 1969 is an example of that now. The member nations are Bolivia, Colombia, Ecuador and Peru. Venezuela and Chile have been there and have been in and then out, so this is a customs union. Now, the next step up, if we're going to keep getting more intense, so preferential trade, free trade area, customs union, the next one would be a common market. This is where countries actually, besides having the common external tariff, they start to unify a lot of their policies. They may unify fiscal policies. They eliminate different kinds of barriers and they allow free movement of people, which is very important. You're not just having free movement of goods and services, but people and often capital enterprise, are moving as well. This is called a common market and the CARICOM, which was established in 1973 and includes 15 Caribbean nations and dependencies is an example of a common market. Europe was also a common market before it became an economic union. Now, the next step and it's the most integrated of these economic arrangements is economic union and it's often economic and monetary union. This is what Europe. The objective that Europe set up for itself moving from a common market to an economic union in 1992 is when they set the objective. They then moved towards monetary union and they reached that between 1999 and 2002, where they actually have a common currency and a common central bank. These are different ways that countries can intensify trade among themselves and presumably always increase the benefits as there are more capital flows, more worker flows, more flows of goods and services. The general rule we can state is as long as you are creating one of these and you create more trade than you divert, in other words, you generate new trade among yourselves rather than replacing trade with previous nations that are now not members. As long as trade creation is greater than trade diversion, there are net gains for everybody from these integration schemes.
