Page 127 - Economics

CONFIRMING PAGES

PART ONE
98
Introduction to Economics and the Economy
have eventually resulted in stronger, not weaker, protec- their members’ trade with non-bloc members. Thus, the
tions for the environment and for workers. world loses some of the benefits of a completely open
global trading system. Eliminating that disadvantage has
The European Union been one of the motivations for liberalizing global trade
Countries have also sought to reduce tariffs by creating through the World Trade Organization. Those liberal-
regional free-trade zones —also called trade blocs. The most izations apply equally to all nations that belong to
dramatic example is the European Union (EU) , formerly the WTO.
called the European Economic Community. Initiated in
1958 as the Common Market, in 2003 the EU comprised The Euro One of the most significant accomplish-
15 European nations—France, Germany, United Kingdom, ments of the EU was the establishment of the so-called
Italy, Belgium, the Netherlands, Luxembourg, Denmark, Euro Zone in the early 2000s. In 2006, 12 members of the
Ireland, Greece, Spain, Portugal, Austria, Finland, and EU used the euro as a common currency. Great Britain,
Sweden. In 2004, the EU expanded by 10 additional Denmark, and Sweden have opted out of the common cur-
European countries—Poland, Hungary, Czech Republic, rency, at least for now. But gone are French francs,
Slovakia, Lithuania, Latvia, Estonia, Slovenia, Malta, German marks, Italian liras, and other national currencies
and Cyprus. within the Euro Zone.
Economists expect the euro to raise the standard of
The EU Trade Bloc The EU has abolished tariffs living of the Euro Zone members over time. By ending
and import quotas on nearly all products traded among the inconvenience and expense of exchanging currencies,
the participating nations and established a common sys- the euro will enhance the free flow of goods, services, and
tem of tariffs applicable to all goods received from na- resources among the Euro Zone members. It will also
tions outside the EU. It has also liberalized the movement enable consumers and businesses to comparison shop for
of capital and labor within the EU and has created com- outputs and inputs, and this will increase competition,
mon policies in other economic matters of joint concern, reduce prices, and lower costs.
such as agriculture, transportation, and business prac-
tices. The EU is now a strong trade bloc : a group of
countries having common identity, economic interests, North American Free Trade
and trade rules. Agreement
EU integration has achieved for Europe what the In 1993 Canada, Mexico, and the United States formed a
U.S. constitutional prohibition on tariffs by individual major trade bloc. The North American Free Trade
states has achieved for the United States: increased re- Agreement (NAFTA) established a free-trade zone that
gional specialization, greater productivity, greater output, has about the same combined output as the EU but en-
and faster economic growth. The free flow of goods and compasses a much larger geographic area. NAFTA has
services has created large markets for EU industries. The greatly reduced tariffs and other trade barriers between
resulting economies of large-scale production have en- Canada, Mexico, and the United States and will eliminate
abled these industries to achieve much lower costs than them entirely by 2008.
they could have achieved in their small, single-nation Critics of NAFTA feared that it would cause a massive
markets. loss of U.S. jobs as firms moved to Mexico to take advan-
The effects of EU success on nonmember nations, such tage of lower wages and weaker regulations on pollution
as the United States, have been mixed. A peaceful and in- and workplace safety. Also, there was concern that Japan
creasingly prosperous EU makes its members better custom- and South Korea would build plants in Mexico and trans-
ers for U.S. exports. But U.S. firms and other nonmember port goods tariff-free to the United States, further hurting
firms have been faced with tariffs and other barriers that U.S. firms and workers.
make it difficult for them to compete against firms within In retrospect, critics were much too pessimistic.
the EU trade bloc. For example, autos produced in Germany Since the passage of NAFTA in 1993, employment in the
and sold in Spain or France face no tariffs, whereas U.S. and United States has increased by 21 million workers and
Japanese autos exported to EU countries do. This puts U.S. the unemployment rate has declined from 6.9 to 5.1 per-
and Japanese firms at a serious disadvantage. cent. Increased trade among Canada, Mexico, and the
By giving preferences to countries within their free- United States has enhanced the standard of living in all
trade zone, trade blocs such as the EU tend to reduce three countries. (Key Question 10)

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