Professional Documents
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A Critical Analysis of the Effects of Expansion on Trade within the European Union
(EU) and the North American Free Trade Agreement (NAFTA)
Pin #: 10470094
By Michael Wade Jackson
NAFTA/ INTL Transactions: Fall 2004
Larry Pascal / David Banowsky
December 1st, 2004
Hypothetical:
Globalization Co. is faced with the opportunity to open shop in either the
European Union or the Americas. The issues of citizenship or investment are not at issue
because this company will be strictly affiliated with the region in which it is founded.
This means that the company will meet all requirements to be considered a company
owned by a national of the country in which it is located and will be treated as such in the
fields of taxation, free trade agreements, labor, agriculture, and assistance to commercial
development. The question is then which market or trade alliances pose the most
significant benefit to Globalization Co. and in which area of the trade zones should the
company be founded.
The major issues of concern are: (1) the structure of the free trade zone and
agreements; (2) the number of existing and future alliances that will open markets to our
product; (3) the internal expansion which is possible within the pre-existing structure of
both the EU and NAFTA; (4) the availability of labor; (5) the economic stability within
the existing structure; (6) the protection of intellectual property of the company; and (7)
the social or cultural differences that may make investment in the region unsound.
Advise the Board of Directors (unofficial- remember the company does not exist
but in the minds of interested parties, so as to avoid conflict when creating this company)
as to the benefits and costs associated with locating Globalization Co. in the European
Union versus the United States of America under the structure of NAFTA.
History:
The European Union is the product of the Treaty of Paris (1951); Treaty of Rome
(1957); The European Free Trade Area Treaty (1959); The Single European Act (1987);
and the Maastricht Treaty / Treaty on the European Union (1993)1. These treaties
however do not on their face convey the events that lead to the formation of the European
Union.
The Union itself was the product of a desire to avoid future conflict between
former enemies after World War II. These enemies were France and Germany. The
Union began as a trade agreement (Treaty of Paris) based on coal and steel – the
materials needed to build a war power – and the European Coal and Steel Community
(ECSC) was born. The ECSC and the European Union in general have been highly
influenced by the French2. This influence is the result of the desire of the French to
1
See Ralph H. Folsom, European Union Law, at ix, x (West Group 3d ed. 1999).
2
See Id. And Governing the European Union, (Simon Bromley ed., Sage Publications 2001).
1
address the “German problem” and to provide a framework to prevent future conflict
between the nations3,4.
From the ECSC the other nations of Western Europe desired to benefit from free
trade or at least tariff breaks on Coal and Steel. This desire produced the European
Economic Community (EEC) and the European Free Trade Area Treaty (EFTA). These
agreements brought more Western European nations into the fold. However, the Treaty
of Rome also encouraged the further enlargement of Europe to include other countries
which may desire to benefit from the customs union. The EU has expanded from 15
nations in 1995 to 255 nations at present with the addition of the former Soviet States.
This expansion poses interesting opportunities for the citizens of Europe as well as a
corporation desiring to be founded in the EU6.
2
within member states. The “factors of production” is defined as capital, labor, enterprise
and technology9. This is a significant advantage in a community that is now comprised
of some 25 member states. This common market as well will allow the influx of new
labor supplies from former Soviet countries10.
The move to a customs union with a universal tariff applied to imports and free
movement of goods within member states has lead to the elimination of not only tariffs
but as well the elimination of “measures or equivalent effect”. “Measures of equivalent
effect” are barriers to trade between member states that may not be classified as tariffs
but subsequently are restraints on trade which are incompatible with the union11. An
example is found in Procureur du Roi v. Dassonville12. This case concerned the Belgian
denial to import Scotch whiskey without a British customs label. The European Court of
Justice (ECJ) held that such an action had equivalent effect of a quota and was not
allowed. Therefore barriers to trade which may resemble a tariff or quota are unlikely to
find support either in the ECJ or member states.
A major issue that faces the European Union and free movement within Europe is
the presence of NTBs or Non-tariff trade barriers. These barriers are authorized under
the Treaty of Rome as amended in Article 30. Article 30 permits national restraints on
imports and exports justified on the grounds of:
However the caveat applies that such national barriers shall not be a mask or shelter for
arbitrary restrictions on trade between member states14. The ECJ has reviewed such
national barriers and has allowed the British to use Criminal law to prevent the
importation of pornography from Holland which is outlawed but not sex dolls from
Germany which could be produced in the United Kingdom15. However, the ECJ did not
allow Germany to prevent the importation of Heineken under German law which requires
“pure standards” for beer16.
9
See Folsom, European Union Law, at 5
10
These former Soviet block countries are a majority of the 10 new members of the European Union.
These markets will allow for the influx of new labor and employees which were previously restricted by
immigration laws and labor requirements. Such restrictions comprise Non-tariff trade barriers (NTB)
which are not allowed under the EU common market.
11
See Folsom, European Union Law, at 134-135. See Also Bromley ed. , Governing the European Union.
12
See Procureur du Roi v. Dassonville (1974) Eur. Comm. Rep. 837. See Also Rewe Zentral AG v.
Bundenmonopolverwaltung fur Branntwein (1979) Eur.Comm.Rep. 649 (German minimum alcoholic
beverage rule unreasonable).
13
Folsom, EU Law, at 138-139.
14
See Id.
15
Id.
16
Id.
3
Intellectual Property
A significant area in which the ECJ and the EU has allowed for the creation of
NTBs is the realm of Intellectual Property (aka industrial or commercial property). The
creation of NTBs is prevalent in this field because the rights associated with the industrial
or commercial property is tightly linked to the nation in which the interest is granted.
The EU does have a community patent system however this system is merely the
ability to have one patent application file in the member countries and not require the re-
filing in other member countries after filing in the home nation. However, this EU wide
patent system does not mean that if one nation grants a patent that the other nations will
also grant a patent. The EU however has agreed on a Common Market Trademark
Regime in 199317. Furthermore the EU has recognized a system for copyright protection.
The ECJ has however established a doctrine of exhaustion18. This doctrine
closely parallels the limits of control found under US copyright law in which after the
first sale into the market the good the intellectual property owner loses control over
resale. The rights are said to be exhausted. The ECJ has applied this principle to all
copyright protected goods except for broadcasts which have been deemed to not be
exhaustible.
The doctrine of exhaustion has been used as well in the pharmaceutical industry
involving both patent and trademark litigation. The best example of this involved the
Centrafarm case19. This case involved Sterling Drug which was a US company that
owned the British and Dutch trademark and patent rights to negram. A significant
disparity in price was created between the UK and the Netherlands. Centrafarm was an
independent importer from the UK and Germany. Centrafarm decided to import to the
Netherlands and Sterling Drug moved to block the importation. The ECJ held that the
rights or Sterling Drug did not extend to the blockage of “parallel goods” and that once
the product was on the market the rights were exhausted. This followed Article 30’s
restriction on the creation of arbitrary barriers to trade. Since the good was already in the
common market and had the consent of the common owner the goods could not be
blocked20.
The protections on intellectual property within the EU is a barrier to trade
however when balanced against the rights of the inventor/company it appears that the
balance is appropriate. The main point of contention is the use of the courts in there
respective countries to try and torpedo the process of patent litigation. This has been a
rising concern in Europe since the creation of the community patent system. This is the
process by which the courts of two member nations are used concurrently and that the
progress in one court will delay or halt the progress of another court. These efforts and
the communities to litigate patent rights have remained UK, France, Germany, and the
Netherlands21. The personal opinion of both Mr. Ebbink and Mr. Meibom is that the
17
See Folsom, EU Law, at 141
18
Id. At 142
19
See Centrafarm BV and Adriann de Peipjper v. Sterling Drug Inc. (1974) Eur.Comm.Rep. 1147
20
See Folsom, EU Law, at 143-144. See Also Centrafarm Eur.Comm.Rep. 1147 (1974).
21
APILA Spring Meeting May 13-15 2004 (Dallas, Texas): Patent Litigation Forum Shopping in Europe
Personal commentary by speakers: (1)Patrice Vidon,CNCPI (French Institute of Industrial Property
Attorneys),Rennes, France; (2) Wolfgang von Meibom, Bird & Bird, Dusseldorf, Germany; (3) Richard
Ebbink, Nauta Dutilh, Amsterdam, The Netherlands.
4
expansion of the EU and the addition of the former Soviet States will not provide a larger
forum for IP litigation in the European Union. Currently the ugly step-sister of EU patent
litigation is Italy. Spain and Portugal are not utilized as well as Greece the sentiment is
that the patent systems in these countries are not able to protect the rights of the IP holder
and that judgments from these countries are not recognized22. The conclusion to be made
about the protection of Industrial property within the EU is that the system is not perfect
but that does embrace and recognize rights in the sweat of the brow.
The EU and MERCOSUR26 entered into trade talks in 1995. This has lead to the
formation of a free trade agreement between the two regions which is now being
finalized. The agreement itself has slowed between 1995 and 2004 and currently the
dispute concerns agricultural subsidies27. The main benefit to both trading blocks is that
22
Id. I do not share this belief and I do feel that IP issues will arise in the new member states including
piracy issues. I also believe that since these member states had to meet the requirements to join the EU
which include the recognition of industrial property rights that these countries may become a forum for
torpedoes or perversion of Industrial Property law in the EU since the court systems of these countries may
lack a structured IP laws.
23
See Europa, A constitution for Europe, available at: http://europa.eu.int/futurum
24
See Id. (Competencies means areas in which the EU governmental organizations have control versus
national governments. There are three degrees of competency: Exclusive, Shared, & Supporting,
coordinating or complementary action)
25
See Id.
26
MERCOSUR is the South American Common Market of Brazil, Argentina, Paraguay, & Uruguay
27
See EU & MERCOSUR available at: http://europa.eu.int/comm/external_relations/mercosur/intro/ ; See
Also Counsel on Hemispheric Affairs, EU Mercosur Free Trade: US A third Wheel? Available at:
http://www.coha.org/NEW_PRESS_RELEASES/New_Press_Releases_2004/04.37_EU-Mercosur.htm
5
the expansion of a common market both within Mercosur and free trade with the EU will
greatly benefit both groups. The European Union will have access to South America and
Central America which it has not had before.
The European Union and Mexico entered into a free trade agreement in 2001. The
most significant impact is that the duties on imports of goods from Mexico to the EU
have been removed in 2003 and the importation of machinery or goods from the EU to
Mexico will cease to exist in 200728. This is a beneficial partnership for the EU because
it allows EU products to be a stones throw from the border of the United States. Mexico
is the European Union’s second trading partner after the United States.
Note: The EU also has trade agreements with Chile, Canada29 in the Americas and is
pursuing talks with China.
[Note: As the topic of this course was NAFTA and trade in the Americas little space will
be allotted to NAFTA/FTAA and more space will be devoted to analysis of the EU and
NAFTA for Globalization Co.]
History:
The North American Free Trade Agreement (NAFTA) was implemented in 1994
and involves the trade between the Untied States, Canada, and Mexico. The agreement
itself is a free trade agreement it does not have the character of either a customs union or
of a single common market. The agreement was the result of the success of the CFTA
between the United States and Canada and the CFTA was a guide post when drafting
NAFTA. The agreement itself is unique in that unlike the European Union which states
that its expansion shall be limited to European countries NAFTA has within it an
expansion provision that allows for any nation to join the agreement30. This provision
however to date has not been used.
FREE-TRADE
NAFTA does not remove customs boundaries and does not allow for the free flow
of goods between member nations that do not originate within those countries. This
structure is the basis of NAFTA because the customs union and common market models
as employed by the European Union are unlikely to be agreed upon when considering the
compromises to sovereignty and national identity that usually follow such an
28
See Victor Rioz, Mexico’s free trade agreements: A world of opportunities, available at:
http://www.maquilaportal.com/editorial/editorial133.htm . See Also EU relations with Mexico available at:
http://europa.eu.int/comm/external_relations/mexico/intro/
29
See Ralph H. Folsom, NAFTA and Free Trade in the Americas, (West Group 2d ed. 2004) at 247.
30
See Folsom, NAFTA, at 238. (NAFTA specifically anticipates growth by accession through Article 2204
with the proviso that current members can veto the accession of an applicant.)
6
agreement31,32. The benefit of a free trade agreement between the three member nations
is that goods that are made within a member state can move without tariff across national
borders. This however does not apply to goods which are not from the US, Mexico, or
Canada. This poses a major slow down at borders as importers will have to face tariffs at
each national border from Canada to the United States to Mexico. This is unlike the
European Union where once the common tariff is paid goods can move freely within
member states.
Intellectual Property
The intellectual property and its protection is regulated under NAFTA through the
three member countries involvement in the World Trade Organization (WTO) and the
TRIPS agreement. NAFTA itself does contain intellectual property protections in
Chapter 17 of the agreement. The understanding between TRIPS and NAFTA is that
which ever body of law affords the broadest protection shall prevail.33 The TRIPS
agreement concerns itself with all fields of intellectual property and most notably looks to
prevent counterfeit goods and piracy. The United States has significant structure to its
intellectual property framework consisting of federal protection of IP interests.
NAFTA unlike the European Union allows for the free movement of goods and
limited movement of the “factors of production”. Under NAFTA services34 are limited in
movement and the use of labor from the member countries is regulated by the existing
laws concerning immigration. NAFTA still employs borders and customs control on
national boundaries and the movement of skilled professionals between the US, Canada,
and Mexico is slowed by the limited recognition of degrees and training. There is still
national protection in NAFTA which is not allowed under the European Union.
NAFTA EXPANSION
NAFTA under Article 2204 allows for any nation or block of nations to join the
NAFTA agreement. As such Australia, South Korea, New Zealand, and Singapore have
shown interest in joining NAFTA35. However running concurrent to the possible
expansion of NAFTA is the FTAA. The Free Trade Across the Americas appears to be a
more likely candidate for expansion than NAFTA36.
31
A good example of this is Canada’s Cultural Industries exception to NAFTA which allows Canada to
block the in flow of US media and books which may impact Canadian Culture.
32
See Folsom, NAFTA, at 33 to 39.
33
See Folsom, NAFTA, at 172
34
This means that in comparison to the EU services are limited under NAFTA. However, if you compare
NAFTA and CFTA it is apparent that the shift from a positive list to a negative list has been beneficial to
the service trade between US, Mexico, and Canada.
35
Folsom, NAFTA, at 238
36
Personal belief as well as a recognition that NAFTA is called the North American Free Trade Agreement
and it would most likely be political suicide for a government to join such an agreement as named in the
hearts and minds of their citizens.
7
FTAA: The most likely road to expansion37
The NAFTA agreement will remain however the most likely avenue for
expansion is the FTAA. This agreement is working in the footsteps of the CFTA,
NAFTA, and CAFTA (still in the works). The proposed completion date for the FTAA
was 2005 however the negotiations are moving slowly based on the behavior of Brazil
and its Mercosur trading group. The FTAA hopes to compete for trade with the
European Union and to bring economic prosperity across the Americas.
Expansion under the FTAA will create a trading block which will consist of
approximately 34 countries. These countries cover North, Central, and South America38.
The goal of the FTAA is to create a trading block with a combined population of 800
million and a GDP of $13 trillion and $3.4 trillion in world trade (2001).
The hope of the FTAA will be to further remove protection on agriculture and
other items of trade such as textiles, car parts, and machinery to increase the economic
power of the trading group.
WHY?
37
See Council of the Americas, FTAA: Blueprint for prosperity: building on NAFTA’s success, available
at: http://www.counciloftheamericas.org/coa/committees/FTAAblueprint2001.pdf
38
The 34 countries are: (1) USA (2) Canada (3) Mexico (4) Argentina (5) Bolivia (6) Ecuador (7) Brazil
(8) Colombia (9) Chile (10) Paraguay (11) Peru (12) Uruguay (13) Venezuela (14) Antigua and Barbuda
(15) Bahamas (16) Barbados (17) Belice (18) Costa Rica (19) Dominica (20) Dominican Republic (21) El
Salvador (22) Grenada (23) Guatemala (24) Guyana (25) Haiti (26) Honduras (27) Jamaica (28) Nicaragua
(29) Panama (30) St. Kitts and Nevis (31) St. Lucia (32) St Vincent and the Grenadines (33) Suriname (34)
Trinidad and Tobago
39
See Key facts and figures about the EU, available at:
http://europa.eu.int/comm/publications/booklets/eu_glance/44/index_en.htm (Based on EU 15 and analysis
of the 10 new member countries including the two remaining applicants for admission Turkey and
Romania)
8
expansion coupled with the EU constitutions move for a more aggressive “cohesion
policy” makes the EU a better candidate for investment. Globalization Co. will benefit
from the new cohesion policy which will be implemented under the new EU constitution
because it provides assistance in addition to national assistance to countries which need
to catch up economically with the original EU 15. This policy is designed to grant
significant aide to the 10 new member states and will provide approximately 213 billion
euro to develop the new member states from 2000-200640.
The European Union has diligently sought trading partners around the world and
even though the EU is only for European nations the establishment of free trade
agreements with MERCOSUR (in progress), MEXICO, CANADA, CHILE, and CHINA
(in progress) shows a commitment to global trade and as well provides sufficient market
structure to be beneficial to Globalization Co. The most important agreement is that with
MERCOSUR because MERCOSUR has taken it upon itself to negotiate free trade
agreements with its neighbors and other countries in the Americas that have been
successful such as the ANDEAN agreement. These agreements as well as the contiguous
infrastructure of the European Union make it the more appropriate choice.
The structure of the European Union is already superior to the NAFTA agreement
because it allows for the free movement of goods and individuals which provides a
significant number of potential workers. The removal of customs and barriers to trade
such as tariffs and a continued fight against NTBs makes the EU structure a better fit for
Globalization Co.
Conclusion
The European Union is the correct fit for Globalization Co. in light of the
structure of the union as well as the level of economic stability within the member
countries. The process of admission to the European Union required the meeting of
certain economic stability and unemployment requirements as well as commitments to
democracy which creates stability in this region. The recommendation is to review
placing the company in the original EU 15 versus the 10 newly admitted nations. The
most appropriate position would be to establish the company in one of the EU 10 with the
most stable democracy and best infrastructure to handle deployment of the product to the
Union and the world.
40
See Europa, A constitution for Europe. (This is significant investment on the part of the European
Union. This amount is a third of the total community budget. This assistance is in addition to existing
national programs.)
9
WHY NOT NAFTA/FTAA?
[Note: The assumption is that Globalization Co. if organized in the NAFTA region would
found itself in the United States since it has beneficial bankruptcy laws as well as
infrastructure comparable to that of the European Union 15]
The NAFTA agreement even with Article 2204, which allows for membership of
nations and trade groups irrespective of geographical location, has not gained favor
among American States. The negotiations concerning the FTAA have stalled with the
country of Brazil hampering the process while trying to increase its power by forming
and agreement with the European Union. The countries that wish to join the FTAA as
well contain a significant number of non-contiguous regions which provide problems to
product distribution. The FTAA also appears to be at least two to three years away from
completion since the original deadline to conclude talks was January 2005.
The United States does not seem to have a lot of trade agreements but that may be
the result of the policy of the government that free trade is a tool to national security.
The European Union was founded on such a belief and it was aimed at addressing the so
called “German Problem” however the United States and NAFTA have not provided
sufficient framework to expand.
There are benefits to free trade in goods of the member states but trade with
remaining nation borders and the inability to move goods from one member to the other
that have already received that members import tariff can cause problems which are not
positive of an agreement to remove barriers to trade. The strong nationalism of the three
member countries is as well a rationale behind the development of a Free Trade zone and
not that of a Customs Union and Common Market. These issues will most likely hamper
the expansion of United States and trade in North America for the future.
Conclusion:
NAFTA/FTAA is not yet developed enough to offer the benefits of the European
Union. The markets which will be opened with an agreement in the Americas can just as
easily be reached through the EU MERCOSUR agreement. NAFTA even with Article
2204 has not been a viable avenue of expansion and the FTAA is not readily apparent on
the horizon so long as disagreements between Brazil and the United States remain.
10
Bibliography
3. Europa, Key Facts and Figures about the European Union, EU Press available at:
http://europa.eu.int/comm/publications/booklets/eu_glance/44/index_en.htm
5. Folsom, Ralph H., European Union Law 3rd Edition, West Group Minnesota
1999.
6. Folsom, Ralph H., NAFTA and Free Trade in the Americas 2nd Edition, Thomson
& West 2004