.. d Uruguay joined the Treaty later the dates for the elimination of their tariffs are pushed back a whole year so that by the year 2000 they will have 100 percent eliminated tariffs. The downfall of this elimination of tariffs is that some businesses will have to cut back and restructure so some people will loose their jobs, but in the long run the economy will grow stronger from it. However, the social security system for the countries will be transformed such that a worker can work in any of the member countries and accumulate years until retirement and still receive a pension (americasnet.com). Each of the countries is using MERCOSUR in a different way to increase their productivity.
In Brazil through privatization they use MERCOSUR to attract outside investors for industries and services to improve roads and railways and other large industries like power. Argentina is also using privatization to increase opportunities with their airports. Paraguay and Uruguay are taking more advantage of the integration process. In Paraguay they are using it to increase and improve waterways and in Uruguay the are using it to build a bridge and distribute gas and electricity (americasnet.com). All of the countries have increased their GDP since the induction of MERCOSUR and have become more economically independent. Argentina has gone from a recession in 1988 through an incredible recovery through to 1996. They have increased their exports by 13,000 form 1993 to 1997 and exports have increased by 15,000 in the same period of time (Argentina Brief).
Other MERCOSUR countries have experienced the same results and are continually growing. The one exception to the benefits of MERCSUR would be the economy of Paraguay. Before they joined the market, they were the best performing country in the region, but now they have fallen behind all the other members in MERCOSUR as a result of the political instability and small domestic market (Sabkar, Maysoon). The effectiveness of GATT is that it applies to a majority of the economy. In the market of major industrial goods, tariffs have been eliminated and reduced in the developing markets of: construction equipment, agricultural equipment, medical equipment, steel, beer, distilled spirits, pharmaceuticals, paper, toys and furniture (Congressional Digest).
These are some of the most important industries in the United States and are some of the most competitive in the world. As stated by the US report on GATT, a key provision was that it “significantly lowered access to markets that represent approximately 85% of world trade in terms of reduced tariffs on specific items of key interest to US exporters”. There have been tariff reductions ranging from 50 to 100% on important electronics software (US report on GATT 2). The most important sector to be included is agriculture. For the first time, all agricultural tariffs are bound and reduced.
GATT strengthens long term rules for agricultural trade, reduces agricultural export subsidies and opens new markets. Intellectual property such as patents, trademarks and copyrights for movies, computer programs, books and music is also protected. Many of the industries listed above deal with technology and are crucial to everyday life. By promoting the reduction of tariffs in the sectors of the economy important to the United States, industries will be able to expand and grow. The way that industries will be able to grow is through the reduction of tariffs.
While barriers to trade come in many forms, the tariff has been used to protect domestic industries from foreign competition. The negative aspect of tariffs is that they reduce the amount of goods produced for export. Graph 1 exhibits the effects of a tariff on quantity supplied by United States. Let’s suppose the tariff is on imported French wine. At normal equilibrium, quantity demanded of wine equals quantity supplied at one hundred billion and a price of $2.
That is the United States would supply 1 billion bottles of wine. However, a tariff creates a situation similar to a price ceiling. The tariff causes the price to decrease to $1 and the quantity supplied decreases to .5 billion while quantity demanded increases to 1.5 billion. The effect of the tariff is to decrease the quantity supplied by the United States. To producers in the United States that means a decrease in the production of goods and services. The reverse happens when the tariff is reduced. Quantity supplied will increase, that is more goods will be produced for trade.
This increase in exports has other implications on the economy. Since exports will be increasing at a higher rate than imports the net exports will be positive. Aggregate expenditure equals spending by consumers, investors, government and net exports. An increase in the net exports will increase the aggregate expenditure shifting it to the right. This is seen in graph 2, where the aggregate expenditure curve (AE) shifts to the right (AE’). As shown by the graph, the level of national income increases from 250 billion to 300 billion. Therefore, increasing net exports will increase the level of national income. “By eliminating import taxes, world income will increase as much as $5 trillion in the next 10 years. Higher world incomes mean more demand for our commodities” (Kleckner 1). With an increase in national income, the standard of living in the United States and other participating economies should increase. More jobs will be created for the unemployed, helping the economy reach the full employment level. At this level, all resources would be in use.
Similar to other free trade agreements, the purpose of those formed through the EFTA is to strengthen European as well as international economies. In establishing a strong foundation for free trade, it seems that the EFTA has done much good for economies within Europe. According to the EFTA web page, “Ministers emphasize EFTA’s strong credentials as a free trade organization and underline that free trade and economic integration play an increasingly important role in securing work, welfare, peace, and democracy in Europe” (EFTA Page). Its visible effects on international trade provide only a nominal indication of the many accomplishments of the EFTA; its work can also be observed in terms of its underlying affect on the economy. In establishing strong international relationships, it has expanded the level of exporting and importing, increased employment, raised consumption, and in effect, also enhanced the average GDP for countries active in the EFTA (Fortune).
Each part of this integration serves a beneficial purpose, and positive aspects of the EFTA’s work are evident in economies throughout Europe. As the EFTA has worked to strengthen relationships not only within its member countries, but all over Europe and the rest of the world, it has established many alliances, thus creating a solid base for foreign trade. The level of exporting and importing, particularly among European countries has shown a definite increase. The expansion of foreign trade creates potential for more employment opportunities; it can also be directly related to its aggregate supply, and in effect, its level of GDP. The increase in exporting, being a significant expenditure included in the calculation of GDP, is shown in its effect on GDP growth.
Within the free trade of the EFTA, the level of employment in member countries also has been affected. As the degree of economic activity increases due to free trade alliances, many areas, including that of employment also begin to change direction. The expansion of exporting mentioned before plays a role in the variable level of employment. Increased employment will add to the level of human capital as rising imports and exports expand capital resources, thus contributing to an outward shift in the aggregate supply curve. Any increase in resource availability for land, labor, capital, or entrepreneurship will allow for an outward shift in the production possibilities curve, followed by a similar shift in the aggregate supply curve, eventually increasing real GDP.
Rising employment can also effectively create a rise in consumption and in average national income, ultimately adding to real GDP. Consumption can be affected not only by a rise in the employment level, but also by the reduction in tariffs provided by the EFTA. When consumers have to pay less for their goods, their level of real wealth has the effect of increasing. Lower prices enable them to buy more goods with the same level of income; there is the illusion of greater income. This feeling of increased wealth, along with a rise in the actual level of employment, contributes to increased consumption. The increasing degree of consumption will, again, lead to greater national income, and to a higher level of real GDP. A rise in trade combined with increasing levels of employment and consumption allows for potential growth in the level of GDP. According to Fortune magazine, the average GDP of those countries belonging to the EFTA rose an average of 2.1% each year (Fortune 7).
As trade, employment, and consumption increase together, GDP has a tendency to do so as well. EFTA countries approaching a level of full employment due to changes in trade, tariffs, and consumption will eventually experience its beneficial effect on the economy. Conclusion In general, it seems that each of the researched trade agreements has been successful in promoting overall economic growth throughout the regions of the world. NAFTA MERCOSUR The positive effects of GATT are numerous and widespread. GATT has proved to be highly successful in removing barriers to trade in goods. In eight consecutive rounds, GATT has lowered tariffs on manufactured products from more than 40% to below 4% among developed nations.
“In part as a result, world merchandise trade, measured in the tens of billions of dollars at the inception of GATT, now stands at $5 trillion” (Break down the barriers). This growth has brought prosperity to developed countries as well as developing countries. Some of these benefits are result of the larger scope of world trade rules and the large proportion of the economy that is covered under GATT. The EFTA has been fairly effective in following through with its one underlying goal, the removal of trade barriers within and outside of the EFTA. It has also been proficient in cultivating its relationships with third world countries.
Its success in these areas has allowed for the growth of its member countries in areas of trade, employment, consumption, and eventually also national income and real GDP. It seems, however, that it needs to do more in order to have a more influential presence. Since its initial founding, the number of member-countries in the EFTA has dwindled from seven to only four. The EFTA is clearly not the most prominent free trade organization in Europe; it is apparent that the European Union holds the position of dominance, as many EFTA countries have defected to the EU over the years. The EFTA’s minority power in Europe and the simple reality of its size may cause many countries to brush it aside.
While it has united with the European to Union to accomplish many things such as the European Economic Area, it might be more effective if it could handle more significant matters on its own. Bibliography EFTA Page. EFTA Secretariat EFTA Surveillance Authority EFTA Court. 23 March 1999 *http://www.efta.int/structure/main/index.html*. “How They Add Up.” Fortune 126.13 (14 Dec. 1992): 152 – 153. http://www.americasnet.com/mauritz/mercosur/englis h ; MERCOSUR Sabkar, Maysoon; http://bmb.net/our views/Reports/Country/paraguay 1.htm , 1998 http://www.embassy.org/uruguay/econ/mercosur/merc- 002.htm ; Embassy of Uruguay, Washington D.C.
1996 http://www.heinlein.com.ar/eco.htm ; Argentina Brief.