We've just seen that the frequency, the prevalence of trade blocs around the world has grown very, very quickly over the last 30 years. And we've seen that there are many different kinds of trade blocs around the world. What has also happened over the last five or ten years is that trade blocs, both in Europe and in North America have become extremely controversial. So I would like to share with you some thoughts and some analysis as to why exactly have trade blocs become so controversial. First of all, let me just say that people get often, very excited about trade blocs, they believe that they're going to bring many benefits. Officially, trade blocs are always an attempt to enhance, to promote trade, but in reality, let's not fool ourselves. Trade blocs destroy, divert, and create trade in very complex ways. And the reason for that, is that remember, trade blocs include only a handful of countries. They don't include every country in the world. So, by definition, they distort normal economic exchange in the world. And, at the end of the day, let's all not forget either that trade blocs invariably are an attempt to privilege the countries that are members of the bloc relative to the countries that are not members of the bloc. In other words, trade blocs always privilege, always benefit, insiders relative to outsiders. So, let us start by looking a little bit more in depth at the North American Free Trade Agreement, the NAFTA. This is the only large trade bloc in the world that includes both rich and developing economies. As you know, Mexico is far less developed than Canada and the United States. The United States, of course, is the richest economy in the world and is generally the most technologically advanced. There was a Mexican president more than a 100 years ago Porfirio Diaz who famously said, poor Mexico, so far away from God, and so close to the United States. And this president was actually very much pro free trade, but he recognized that the relationship between the United States and Mexico would always be an unequal one. Now the NAFTA has been particularly controversial, because of its critics accusing the agreement of promoting social dumping. That is to say, that companies would race to the bottom and move to Mexico looking for not only lower wages than in either Canada or the United States, but also more liberal regulations regarding the environment, or regarding worker rights, and especially less enforcement of whatever regulations exist. Now, let's remember that the NAFTA is a free trade area where goods can move freely from Canada to the United States to Mexico, and vice versa. And it also includes the free movement of capital but not a free moment of labor. So, what this means is that then, you need to have in place a very complicated administrative structure and you need to establish origin and content rules to make sure that all of the relevant taxes are paid because remember that neither Canada nor the United States nor Mexico coordinate with one another. The tariffs or the roles that they impose on third countries. So in other words, if a Japanese company would like to sell something in the United States, and it realizes that a tariff on that good is lower if it enters through the Canadian border, then that would defeat the purpose of the trade bloc. So in other words, there needs to be a customs administration. At the border between Canada and the United States that examines, where the good came from, and in this case, it would have come from Japan. In other words, free trade areas tend to be very complex to manage. And as a result of that, we find many unintended consequences and effect. And again, this is mostly because external trade policies are not coordinated. Now, the NAFTA does include some product and environmental regulations, as I mentioned earlier, that are common to the three countries but the problem is enforcement. Canada is perhaps the country that are enforces the regulations in the strongest possible way, the US comes close but Mexico is much more relax when it comes to enforcing someone of those regulations. Another issue that has made the NAFTA over the years very controversial related to trucking. In the original agreement back in the year 1993, Mexican trucks could not cross the border. The actually had to stop at the border and then they had to unload their cargo and the cargo had to be loaded, then, on a US truck. That was meant to not only protect the US trucking industry but also to appease the critics of the NAFTA that pointed out that the Mexican trucks, perhaps, were not as safe as the American trucks. Now, that issue came to a resolution in the year 2011, when for the first time, Mexican trucks were able to cross the border with their cargo. But one aspect of the NAFTA that I think a lot of people forget is that, like any other trade bloc in the world, the NAFTA is about free trade among the member countries. That is to say, Canada, Mexico, and the United States. But it is protectionist relative to the rest of the world. Let me just make the point with a specific example, and that's the automobile industry. The NAFTA agreement came into effect on January 1, 1994. And within a few years, no more than three or four years, European, Japanese and South Korean automobile companies established assembly plants, not in Mexico or in Canada, although some of them did, but here in the United States. For example, Mercedes from Germany, setup a factory in Alabama. BMW, the famous German automobile company, setup a assembly plant in South Carolina. Toyota, from Japan, in Tennessee. Hyundai and Kia, from South Korea, in other states in the United States. Why were they doing that? Well, they were doing that because they were anticipating that the market in North America was going to grow fast. But also, because the NAFTA agreement increased the tariffs and the requirements on foreign made automobiles to be sold in the unified market of Canada, the US, and Mexico. In other words, when it came to automobiles, the NAFTA was protectionist. Now these companies from Europe, from Japan, and from South Korea brought with them hundreds of suppliers, which also established plants in the United States, next to their assemble facilities. As a result, jobs that could have been created in Europe, Japan or South Korea were lost because they moved to the United States. This is an example of how the NAFTA is protectionist but it is not the only example. The NAFTA, in general, like every trade bloc agreement is always protectionist. It always privileges the insiders relative to the outsiders. But more broadly, I would like to discuss with you where the economic controversies that underlie the formation of every trade bloc in the world, not just the NAFTA. Well the first is, the competitive implications. Companies tend to like the creation or the formation of trade blocs, because it's easier for them to reach economies of scale. For instance in Europe, the European Union today is a customs union. There's free trade among 28 member countries. But before the European Union was created, companies had to think about each of those markets as individual markets and each of those markets were compartmentalized. Obviously, it was very difficult for them to reach economies of scale in that context. Also, some people argue that, when a large number of countries come together and they reach an agreement and they form a trade bloc, they can improve their terms of trade. This occurs precisely because the companies can grow bigger in that wider economic space and they can acquire more bargaining power and relative to suppliers. Or also because the bigger size of the market enables them to specialize. And as we know, specialization is a very important component of competitiveness in the global economy. In terms of, what are the benefits under cost to the society of the formation of trade blocs this also quite a few controversies. As I mentioned earlier, any trade bloc creates trade but it also diverts and destroys trade depending primarily on the characteristics of the bloc itself. So for example, a free-trade area has very different implications or consequences than a customs union. Remember, once again, that a NAFTA is an FDA a free-trade area whereas, the European Union is a customs union. So many of these controversies from an economic point of view like I reflect it in the media of these days, I think, are over simplifications of the debates because, it is very complicated to actually assess the impact from an economic point of view of the formation of trade blocs in the world. But there's also political controversies that I would like to bring to your attention. Domestically, we always find in each country that becomes a member of a trade bloc. People or parts of the economy that are in favor and people or parts of the economy that are against the formation of the trade bloc. For example, small firms have a very different attitude towards trade blocs than larger firms. Exporting firms versus those that are competing against imports also tend to have very different attitudes regarding the formation of a trade bloc. Consumers, investors, savers, this is clearly also different kinds of categories of people in countries that may have a preference for a trade bloc or a certain type of a trade bloc. And there are some circumstances, but maybe against the formation of a trade bloc and there others. In United States, in Europe, in Latin America, in Southern Africa, in parts of Asia, we see how these domestic political dynamics play out. Sometimes tilting the balance in favor of the formation of a bloc. And sometimes actually preventing politicians or policy makers from reaching an agreement with other countries for the formation of a trade bloc. In some circumstances, the formation of a trade bloc leads to a very interesting phenomenon which is that, countries when they become part of a trade bloc realize that they need to remain competitive, because now they are exposed to free trade within the trade bloc. And so governments use the appeal of becoming a member of a trade bloc as a way to justify unpopular economic policies. This was clear with the case in many Southern European countries and Eastern European countries from the 1980s to the last few years. When it came to persuading the population, to swallow certain austerity measures, as being necessary for the country to join the European Union, in this case. But the political controversies are not only domestic, they're also international. For instance, in some cases, countries willing to become members of trade blocs have been told by the existing members of the trade bloc that they could not join unless they made certain kinds of political reforms. This was the case of both Spain and Portugal, when in the 1970s they were trying to become members of the European Union, at a time, when both countries were ruled by dictators. A precondition for them to join the European Union is that they had to become democracies. The same goes for Paraguay, which also in the 1970s was negotiating to enter a trade bloc. Another very interesting political controversy is whether trade blocs have more bargaining power in international trade negotiations. Well, the principle here is very simple. Each country in isolation, for instance in Europe, may not have enough power to sit at a negotiation table with China or with the United States, or with the Brazil. But combined, the 28 member countries of the European Union presumably have more bargaining power. The principle theoretically is quite clear. In practice of course, the problem is that, not all 28 members of the European Union agree on every issue. And so oftentimes, they come divided to negotiations at the global level. Some people also argue that global governance is enhanced by the existence of trade blocs, because instead of having to negotiate with 140 countries, you can have just a few trade blocs sitting at the table, representing each of them a certain number of countries. And then lastly, there's another controversial political effect at the international level of the formation of trade blocs, which has to do precisely with this issue of bargaining power. And how a big trade bloc, such as the European Union can impose certain conditions or policies on weaker countries. So in other words, when I'm trying to emphasize here today is that, trade blocs are in principle a good idea, specially for the countries that are coming together, if certain economic requirements are met. But invariably, they generate all sorts of controversies, both economic and political in nature. And I strongly believe that, this is the reason why we see so many debates and so many conflicts in the world right now over the issue of trade blocs. It's very easy to over simplify the cost benefit analysis of whether a trade bloc is a good idea or not. In reality, trade blocs are very, very complex arrangements, and it's very difficult to truly measure with a certain degree of accuracy. The benefits and costs for countries to become members of a trade bloc.
