Let's now turn to another very important phenomenon in the global economy right now, which is also producing quite a bit of instability. And that's the phenomenon of trade blocs. That's associations of countries that decide to adopt some common policies regarding global economic exchange relative to other countries that are not members of the bloc. So, I would like to share with you a definition, and some information about trade blocs first. And then share with you some thoughts as to what are the effects that those trade blocs have on the global economy. And what's the future of trade blocs because, obviously, over the last few years they have become extremely controversial, both from an economic and a political point of view. First of all, the phenomenon of trade blocs has to be compared with the so-called multilateralism, which was the policy pioneered or sponsored by the United States after World War II. Which essentially involved not picking and choosing members of a trade bloc, but rather trying to agree on basic trade and investment matters with all countries in the world. The United States proposed an organization called the General Agreement on Tariffs and Trade. And it aimed at bringing to the negotiation table as many countries in the world as possible. It was launched in 1947, with an agreement that originally had no more than 25 countries. And that sought to lower tariffs, that is to say taxes on trade, so as to promote more economic exchange around the world. As you can see on this table, over the years in the 1940s, and the 50s, and the 60s, and the 70s, more and more countries became members of these worldwide organization. And they committed to lowering barriers to trade, and, of course as a result of this, global trade expanded very, very quickly. Now what you can also tell from the information in the table is that each round of negotiations among an increasingly larger number of countries took longer and longer. And, in fact, the most recent attempt at facilitating trade, especially in services around the world, was initiated as you can see on the table in the year 2001. That was a long time ago, and more than 140 countries have been part to these negotiations. And the round, which once again started at the turn of the 21st century, has not yet been concluded. So in other words, what became readily apparent is that multilateralism had its limits. And that it was very difficult to deal simultaneously in negotiations that included more than 120 or 140 different countries. At the present time, the GATT, the General Agreement on Tariff and Trades, it's called the World Trade Organization. And you can see here on the map that most countries in the world, those in green, are members of this World Trade Organization. And the European Union, with 28 member countries, is also a member, but it just votes and negotiates as one bloc inside of the World Trade Organization. And then there's two other categories of members here, or countries on the map. One is a yellow category, which is 20 countries in the world that are observers members, so they're not quite members. And then in red you see a handful of countries that have no membership at all in the World Trade Organization. So in other words, this is one approach to free trade in the world. The other approach is the one that is going to focus our attention here which is blocs. That is to say, a group of countries that agree to one or more of the following things. At the very least, a bloc must agree to reduce tariffs on certain types of goods. And when countries reach such an agreement, they create a so-called preferential trade area. This is what the Europeans did back in the 1950s when France and Germany and Italy agreed to have a preferential trade area for coal and for steel. Now, another thing that countries may do is to remove all internal trade barriers for all types of tangible goods, all types of merchandise. And when they do that, they create a free trade area. For example, the North American Free Trade Agreement is a free trade area among Canada, the US, and Mexico. And, as you know, tangible goods, merchandise can move freely from Mexico to the United States, from the United States to Canada, and vice versa. Now a third step that countries may take is to coordinate their external trade policy relative to countries that are not members of the bloc. When they do that, they create a so-called customs union which is what the European Union is, it's a customs union. Now the NAFTA is not a customs union because Canada and the US and Mexico have never agreed on a common policy relative to third countries. That is to say, Mexico, the US, and Canada retain their own respective tariffs relative to, let's say, Japan, or relative to the European Union. Another example of this is trade policy relative to Cuba. Mexico and Canada trade with Cuba, whereas the United States has a trade embargo in place. Now, another step that countries may take is to allow for the free movement of not only goods, but also capital within the bloc. And they can also allow for the free movement of labor. If they do both of those things, then they're creating a common market. The European Union has been a common market since the 1970s. The NAFTA is only half of a common market because remember that the NAFTA allows for the free movement of capital, but not for the free movement of labor. Now, countries can also deepen their commitment to integration by coordinating their indirect tax policies. That is to say, their sales taxes or, as they're called in Europe, their value added tax. And they can also coordinate their regulatory and competition policies. If they do that, then they're creating a so-called single market. The European Union has been a single market since the year 1992. Now, other steps that countries or blocs of countries can take include coordinating their macroeconomic policies. Perhaps also coordinating or introducing a common currency. Merging their treasuries and fiscal policies, or merging their banking supervision and resolution policies. If they do, or if they take these steps, they're creating an economic union, a monetary union, a fiscal union, or even a banking union. Now remember that the only trade bloc in the world that has taken any of these steps is the European Union. But it's only been a subset of the 28 member countries, only 19 of them, that adopted the Euro as their single currency. We shall see later that they didn't really adopt a fiscal union or a banking union, and that's precisely what got them into trouble back in the year 2009. So in other words, just to summarize, the European Union is, today, a single market. And a subset of the European Union, called the Euro Zone, is also a currency union, a monetary union. Whereas the NAFTA is just a free trade area that also has free movement of capital. Now, also keep in mind a very important characteristic of trade blocs. Most of the time, trade blocs tend to include countries that are at similar levels of development. Countries that are close geographically, or they actually share a border that are adjacent to one another. Countries that have similar trade policies before they become members of the bloc. And, of course, countries that have a desire to organize themselves as a region. Now, how common are trade blocs in the world? So far I've only given you only two examples, our European Union and the NAFTA, the North American Free Trade Agreement. Well, the first trade bloc in the world was formed in the year 1834, and it was the German Customs Union. That was the first modern trade bloc. It was created even before Germany became a unified country. At the present time, believe it or not, there are 302 trade blocs in the world. Now, you can imagine that that's greater than the number of countries in the world. So it must be the case that some countries belong simultaneously to more than one trade bloc, and that's exactly the situation today. So in other words, the world of trade has become very complicated and complex because precisely the fact that we have as many as 302 different kinds of trade agreements among groups of countries in the world. On this map, you can visualize the most important trade blocs in the world. You can see the two largest ones, the European Union and the North American Free Trade Agreement. But there's other trade blocs in different parts of the world, in South America and Central America, in Northern Africa and the Middle East, in Southern Africa and so on, that have become important over the last few years.
