Similarities and Differences Between The EEA & NAFTA

Both have been criticised by its members; many in Europe seeing the disparity for poorer member states

By JERUSALEM POST STAFF
January 14, 2019 16:32
Similarities and Differences Between The EEA & NAFTA

The similarities and differences between the EEA and NAFTA. (photo credit: Courtesy)

 
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The European Economic Area (EEA) is a unique economic union with the aim of promoting free movement and free trade to 28 member countries while backing and encouraging strong economic partnerships. The North America Free Trade Agreement (NAFTA) is a free trade treaty between the United States, Mexico and Canada with an aim of removing trade barriers between the three countries, encouraging investment and the movement of goods across borders. While the EEA was originally created to foster economic cooperation, NAFTA has remained purely economic. Both are aimed at fostering economic growth in key areas but the EEA and NAFTA are different beasts in terms of scope, reach and implementation.

Similarities and differences EEA and NAFTA (Courtesy)

The European Economic Union (EEA)

The EEA was created in 1994 to facilitate trade and movement partnerships of the member countries of the European Union (EU) and the European Free Trade Association (EFTA). Countries currently belonging to the EEA  include those listed in the graphic below, while Switzerland’s entry was rejected in a 1992 referendum and remains outside both the EEA and the EU but retains a number of bilateral agreements with the EU allowing it to participate within the market.

The EEA differs from the EU in that it has no participation in the Common Agricultural or Fisheries Policies but it does rely on four freedoms that form the bedrock of the European Single Market, the freedom of movement of goods, people, services and capital.

Regulating the activities of the EEA member countries is left to the EU.

It's the EU's involvement that has seen the UK consider the prospect of severing their association with these European trade agreements entirely. However, the EEA's importance was highlighted when this potential outcome was reported. When it was announced in November 2018 that the UK could leave the EU without their pre-agreed trade deals, the pound sterling fell by almost 1.11% against the euro to €1.14, strengthening the bloc's single currency. The volatility hasn't stopped amidst uncertainty and confusion; the pound has since dropped to lows of €1.11 [January 7, 2019]. In forex trading, those with a forex account are well aware that of the many things that can cause a significant shift in a currency's strength is its nations' ability to make imports and exports, as well as government policy and employment figures.

North American Free Trade Agreement (NAFTA)

NAFTA is a trade agreement between Canada, the United States of America and Mexico, and was created in 1994 after years of discussion, revision and finally ratification. It was released to eliminate certain barriers to trade and investment between the three countries. This included the elimination of tariffs from goods going into the US from Mexico and from the US into Canada. In September 2018, it was announced that NAFTA was being replaced in 2020 by the United States-Mexico-Canada-Agreement (USMCA).

One of the biggest benefits of NAFTA was that it severely reduced the import costs for all three countries, which helped to reduce the risk of inflation and enable interest rates to remain low, maintaining steady oil prices and food prices.

Between 1993 and 2017, trade between the three countries quadrupled to over $1 trillion. The free trade agreements have now been being restructured but the trilateral pact has been preserved, albeit under a new name (USMCA) with slightly different provisions within the same overarching principle.

 

The three main sticking points for the US wanting to renegotiate this deal is whether NAFTA created or destroyed American jobs, improved or negatively affected average wages, its environmental impact and its impact on immigrants into the United States. Despite these issues the USMCA agreement is effectively a new trade deal. One of the main differences is having an end-point, unlike NAFTA which had an indefinite ending, this one has a sunset clause ending in 16 years time. Key differences in the agreement include a greater access to Canada’s dairy market for the US and automotive industry protection, although the removal of trading blocks for Canadian lumber imports into the US remain in place.

How Similar are the Trade Agreements?

As free trade agreements go, these are the two biggest in the world. Together they incorporate over a billion people producing nearly $40 trillion worth of GDP. They are primarily in force to protect and promote their economies and encourage greater economic growth through trade and reduction of import costs.

As a total, the EEA has a total population of 518,330,149 people with total GDP of $17,688,553 million ($17.68 trillion), resulting in an average GDP per person of $34,126 with a current debt ratio of 81.99% of GDP. This is slightly less than the current NAFTA partners who have a combined population of 486,061,000 people with an annual GDP at $22,285,400 million ($22.28 trillion), GDP per capita of $45,849 and a debt ratio of 100.61% of GDP.


For a trade agreement to work, it requires all member countries to cooperate so, with just three members making up NAFTA, disagreements will be more highlighted than an agreement including over 28 countries like the EEA. However, they are also more likely to be more economically beneficial, especially when it focuses on just the trade interests of three countries to consider. The EEA overcomes this by having a one-rule-for-all policy for members operating within a single market economy, rather than separate rules and regulations that still operate within Canada and the USA.

 Similarities and differnces between EEA and NAFTA (Courtesy)

Similarities

Both were founded with the aim of creating free trade zones whilst simultaneously fostering economic growth and enhancing economic ties.

Both were created from previous agreements. In the case of NAFTA, the Canada-United States Free Trade Agreement and the forerunner for the EEA was the EEC.

Both have been criticised by its members; many in Europe seeing the disparity for poorer member states. NAFTA has seen criticism too; from the US, who argue the deal isn’t fair to the country. They have renegotiated and renamed it USMCA, which will take over in 2020.

Differences

While the main goal of the EEA was to create a single market all governed by the same rules and regulations, including the free movement of goods and services. NAFTA’s main goal is the elimination of barriers preventing trade and investment between Canada, Mexico and the US.

The core principle of the EEA was the free movement of persons giving the right to citizens of all EEA members the opportunity to work, live, study and establish business in other member countries. NAFTA only makes temporary arrangements for business visitors, traders or investors to move freely and there are different rules that apply to Canadian and Mexican citizens visiting the US.
The EEA is an obvious extension of the economic, social and political goals of the EU under the auspices of a single European marketplace. NAFTA is a purely economic agreement between its members in terms of trade disputes, settlement procedures, customs law, rules of origin and the elimination of economic barriers at its heart.

Summary

Bilateral and multilateral trade agreements have three benefits for members; firstly, they promote and facilitate easier trade relationships and partnerships; secondly, they increase the relative wealth and GDP of their populations; and thirdly, they reduce the likelihood of conflict.

The EEA is a much more complex and wide-reaching agreement than NAFTA as it touches on almost every aspect of its members' livelihoods and businesses, including wages, currency, tariffs, free movement of goods, services and people. NAFTA, on the other hand, is a more economic-focused multilateral trade agreement which ultimately promotes more trade between members, reducing import costs, protecting rules of origin and securing more trade by reducing external imports from countries outside of NAFTA. Ultimately, the EEA has jurisdiction and regulatory bodies ensure rules and regulations are maintained by all member countries, while NAFTA can only initiate dispute settlement procedures, promote and protect intellectual property rights and uphold customs law.

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