Global Patterns & Networks of Economic Unions

Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

Historical patterns of trade between the developed and undeveloped parts of the world changed abruptly in the '90's. We will explore the reasons why, one of which was the rise of large trading blocs or economic unions like the European Union and NAFTA.

Historical Patterns of Trade

Much of the global economy depends on imports and exports.

  • Imports are goods brought into a country from another country.
  • Exports flow the opposite way, they are goods sent out to another country.

When a citizen of Mexico eats a strawberry grown in the US, the strawberry is an import for Mexico and an export for the US.

Up until the '90's, there was a predictable flow of goods and services around the world. The undeveloped partslike Latin America and Asia had lots of natural resources needed to make things. So they exported them to the developed parts of the world like the United States and Europe.

The US and Europe then took the resources and turned them into finished products like TV's and automobiles, which they then exported back to the undeveloped countries. Trading in this pattern benefited everyone since just about every country was getting things they either didn't have or couldn't make for themselves.

Global Pattern Shifts in the 90's

Why did such a comfortable trading arrangement change in the 90's? There are three main reasons:

1. Industrialization. Formerly undeveloped nations like China and India industrialized fast and were now able to make things for themselves. They didn't need to import finished goods anymore; they could make their own and export some of them.

The electronics trade illustrates this well. In 1995 the US had 25% of world trade in high tech goods. By 2005 the US share had fallen to 15% while China's was also 15%.

Today virtually all of the electronic goods purchased in the US are imported from other countries with lower wage rates. The formerly advanced nations are no longer competitive in manufacturing things.

2. The former Communist nations like Russia and others in Eastern Europe emerged on the global stage. Russia is now a major supplier of minerals, timber and oil. Eastern European nations have emerged as auto assembly centers.

3. The rise of trading blocs, which are groups of nations that freely trade with each other, but erect barriers to those outside the bloc. Trade within blocs increases while trade with outsiders declines.

The European Union

The European Union (EU) is the world's most advanced trading bloc. It was founded in 1957 as a free trade area of six countries. It took until 2013 to reach its current size of 28 nations. Member nations must have a free market economy, a stable democracy and the rule of law. They must also accept all EU legislation made by a central body.

Member nations not only trade freely with each other without tariffs, but 19 of them even have a common currency, the Euro! Furthermore, citizens within the Schengen area (includes most EU nations plus a few others) truly live without borders, they can travel to other area nations without a passport or visa. A European with a pocketful of Euros can travel to other European countries as easily as Americans travel from state to state.

The European Union is not without its problems. New trade deals may have to be hammered out with Great Britain, as they have planned on leaving the EU.

The open attitude towards borders has led to a tidal wave of immigrants entering Europe from Africa and the Middle East. This creates a backlash from Europeans themselves who believe that western civilization and values are under threat as the number of foreign born residents grows larger.

NAFTA

The North American Free Trade Agreement (NAFTA) , founded in 1994, has eliminated most tariff and non-tariff barriers to trade and investment between the United States, Canada and Mexico. The movement of goods and services between the three nations subsequently exploded as trade between the US and Canada tripled and trade between the US and Mexico increased by five times by 2008.

The three flags of the NAFTA nations
NAFTA

The whole region has benefited from regional supply chains emerging for things like vehicle production. U.S. owned vehicle-makers source the parts and components of a car in the U.S. and Canada, then ship them to Mexico for assembly. The finished vehicles can then be transported and sold in any of the three countries.

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