SCHOOL OF INTERNATIONAL BUSINESS AND FINANCE

UNIVERSITY MALAYSIA SABAH LABUAN INTERNATIONAL CAMPUS

SEMESTER I (SESSION 2012/2013) INTERNATIONAL ECONOMICS INSTITUTIONS (GD 30603)

PREPARED FOR : MR. HO YEW JOE

PREPARED BY : NAME BERTILLA VOYN BJ BIUS JENNIFER VOON MEI YING KAMSIANAH BINTI TAJUDIN NORAINI MOHD IBRAHIM NURSYUHADA MUHAMAD WAZIR MATRIC NUMBER BG10110035 BG10110145 BG10110164 BG10110336 BG10110388 PHONE NUMBER 014-8587976 016-8292783 013-5537224 019-8200998 013-4795495 SIGNATUR E

TITLE : TOPIC 6 : EUROPEAN FREE TRADE ASSOCIATION (EFTA)

DATE OF SUBMISSION :

23 NOVEMBER 2012

1.0 INTRODUCTION
This part will discuss about the background of European Free Trade Association (EFTA), history of its establishment from the formation of this union until its current position, the key objective or functions of EFTA and lastly is its structure of governance.

1.1 Background of the Institution/Organization/Grouping/Agreement

European Free Trade Association (EFTA) is the oldest free trade area in the world. Today, there are only four member States of EFTA which are Iceland, Liechtenstein, Norway and Switzerland. EFTA has played an important role in European countries in term of economics and political development after its establishment for the past 40 years ago. EFTA also is one of the members in European Economic Area (EEA) where its target is to increase the freedom among its region to promote their internal market in term of goods, services capital as well as individual skills. In addition, EFTA has builds good connection with EEA so that it would give the benefit both institutions. In 2011, Hong Kong, China and Montenegro joined the expanding network of EFTAs free trade partners (Grnningster, 51st Annual Report European Free Trade Association 2011, 2012, p. 3). At the same year as well EFTA was also engaged in a number of important free trade negotiations including with Bosnia and Herzegovina, India, Indonesia and the members of Customs Union of Russia, Belarus and Kazakhstan (Grnningster, 51st Annual Report European Free Trade Association 2011, 2012)

1.2 Establishment History

EFTA was established in 1960 founders Denmark, Portugal, Switzerland by Stockholm where of the this Norway, Sweden, and the Convention

association are Austria,

United Kingdom. Iceland

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becomes a member of EFTA in 1970 and two years later, Denmark and the United Kingdom (UK) join the European Economic Community (European Union) and leave EFTA. Portugal has followed Denmark and UK in 1985 to join EEC (EU). In 1986, Finland becomes a full member of EFTA and Liechtenstein joined EFTA in 1991. After 25 years the establishment of EFTA, another three countries leave EFTA which is Austria, Finland and Sweden to join the EU and Liechtenstein together with Iceland and Norway becomes full member of European Economic Area (EEA) in the Agreement in 1995 to participate in the EUs Internal Market. There are only four countries were joined EFTA which are Norway, Iceland, Liechtenstein and Switzerland.

1.3 Objectives/Functions of Establishment

The core objective of EFTA is to enhance the economic wealth amongst its Member States, to build a good connection with other European countries and to contribute to the expansion and liberalization of world trade (In Commemorationof EFTA's 40th Anniversary, n.d, p. 1). In fact, EFTA would adjust it aim when they manage to accomplish their purpose. At the beginning of its formation in1960, its key objective is to promote closer economic cooperation and free trade in Europe country (Grnningster, 2012) .However, after several years of its establishment EFTA has come out with new objective which is to securing fair competition and conditions for supply of raw material within the area (In Commemorationof EFTA's 40th Anniversary, n.d, p. 4) This critical objective has allowed EFTA to boost its living standard and adapt its aim based on current situations in a creative way so that it would give the benefit for its Member States. In addition, EFTA also is responsible in the EFTA Convention which is they forms the legal basis of the association and deal with free trade relations among the EFTA States; EFTAs worldwide network of free trade and partnership agreements and enable three out of four of its EFTA Member States such as Iceland, Liechtenstein and Norway to participate in the Internal Market of the European Union after they made the Agreement on the European Area (EEA).

1.4 Structure of Governance

Iceland* Mr rni r Sigursson Mr Skli Helgason Ms orgerur K. Gunnarsdttir Mr Sigmundur D. Gunnlaugsson Mr Magns Orri Schram Left-Green Movement Social-Democratic Alliance Independence Party Progressive Party Social-Democratic Alliance

Liechtenstein* Mr Harry Quaderer Mr Albert Frick Independent Progressive Citizens Party

Norway* Mr Svein Roald Hansen Labour Party (Chair CMP/MPS and President of the EEA JPC) Mr Harald T. Nesvik Ms Gina Knutson Barstad Ms Laila Gustavsen Ms Laila Marie Reiersten Mr Jan Tore Sanner Progress Party Socialist Left Party Labour Party Progress Party Conservative Party

Switzerland* Mr Ignazio Cassis Mr Didier Berberat Mr Eugen David Ms Brigitta M. Gadient Mr Hans Kaufmann Radical-Liberal Party Social Democratic Party Christian Democratic Party Civic Democratic Swiss Peoples Party

*Committee members as at October 2011 from Annual Report 2011

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EFTA also has came out with The Standing Committee of the EFTA states serve as aforum in which the EEA EFTA States consult one another and arrive at a common position before meeting with the EU in the EEA Joint Commite (Fact Sheet of The European Free Trade Association, 2007, p2).

Figure1: The Two-Pillar EEA Structure from the European Economic Area.
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Figure 1 shows The Two-Pillar EEA Structure between EFTA and European Union. The left side of the figure shows the EFTA institutions such as Iceland, Liechtenstein, Norway and Switzerland is an observer whereas the right side shows the European Union, and at the middle is EEA as joint bodies. EFTA Surveillance Authority and EFTA Court are the other two important bodies that exist under the EEA EFTA pillar. First bodies which is EFTA Surveillance Authority functions is to ensure that the EEA EFTA States fulfill their obligation under the EEA Agreement whereas EFTA Court corresponds to the Court of Justice of the European Communities in matters relating to the EEA EFTA States (The European Economic Area (EEA), 2007, p. 2)

2.0 HIGHLIGHTS
This section will discuss about the latest programmes by EFTA, achievements by EFTA and problems faced by EFTA.

2.1 The Latest Initiatives/Developments/Programmes

According to the European Economic Area (EEA) Agreement, it ensures participation by three states which is Iceland, Liechtentein and Norway in a number of European Union (EU) programmes and agencies. Therefore, EFTA joined the programmes under EU which is Consumer Programme (2007-2013), Health (2008-2013), Culture (2007), Media (2007) and The Civil Protection Financial Mechanism (2007-2013).
2.1.1 Consumer Programme (2007-2013)

There are four main purposes consumer program which are to complement, support and monitoring of national consumer policy, protecting the interest of health, safety and economic, consumer law, thereby protecting consumer rights in the information and education, and finally form the consumer organizations to protect their interests. Therefore, EFTA want to ensure that the high level of protection, good consultation and better representation of consumers interest. EFTA have fully participated in the EU consumer programmes since the EEA Agreement came into force in 1994.
2.1.2 Health Programme (2008-2013)

The EFTA states have participated in the EU Public Health Programmes since 1995 or 1996. This program is a strategic plan for the development of health policy within European Union. This programme provide the means to support actions in areas where the EU can make a difference, the ultimate goal being to contribute to a high level of physical and mental
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health and wellbeing throughout the EU. The EFTA states contribute actively to the shaping of the new health strategy.
2.1.3 Culture Programme (2007)

Established the cultural programme is to stimulate the mobility of artists and art. This program offers an opportunity for participants such as organizational culture, especially for enterprises in the culture and administration of the network and thus enabling cooperation in various fields. From this program, EFTA intended to help improve the culture shared by Europeans through the same cultural heritage, developed through cultural cooperation between the creators, players and cultural cooperation between the creators, cultural players and cultural institution of the countries taking part in this program in order to encourage the existence of European citizens. The Culture 2007-2013 programme are not only sets ambitious political goals for the unity of diversity through mobility, but also contains a new methodology of consultation and partnership, as the programme attempts to reach out to stakeholders for help in implementing the programme.
2.1.4 MEDIA (2007 - 2013)

The fourth programme is MEDIA. Started on 1 January 2007 and will last until 2013. MEDIA Training Programme for professionals in the European audio-visual industry. From this program, EFTA try to enhance the level of competence, strengthen the pre-production phases, stimulate the marketing and distribution of European films, television programmes and multimedia productions and build up new networks and industrial infrastructures. MEDIA 2007 supports professional training such as screenwriting, management and new technologies, project development for example single project and state funding and the distribution and promotion of European audio-visual works including support for cinematographic festivals. Other than that, it is also support pilot project to ensure that the programme adjust to market developments.
2.1.5 Civil Protection Financial Mechanism (2007 2013)

In the Community Action Programme on Civil Protection, the EFTA states participate in the interlinked Community Mechanism for Civil Protection, the Monitoring and Information Centre (MIC), and the Crisis Communication System (CECIS). The main role of the Community Mechanism for Civil Protection is to facilitate cooperation in civil protection assistance interventions in the event of major emergencies which require an urgent response. This also applies to situations where there may be an imminent threat of such major emergencies. Therefore that enhances Community cooperation in civil protection matters.
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2.2 Major Achievements of the Establishment

According to the WTO Statistics, all the EFTA states are highly dependent on global trade, with trade to GDP ratio equal to 87.8%, 74.2% and 111.1% for Iceland, Norway and Switzerland, respectively. Economic growth for EFTA increases because of the small-sized market and also they have high level of development placed trade. In 2010, the EFTA states together were the eleventh largest merchandise trader globally. According to the graph 2.1 bellow shows that the total merchandise trade with the world in 2000 until 2010. The total merchandise trade with the world was valued at USD 589 billion, with imports accounting for USD 257 billion in 44% and exports for 332 billion in 56%. This represents a 13% increase over trade in 2009, a year which the EFTA states experience a significant drop in their trade with the world due to the global economic turmoil.

Graph 2.1: EFTA total merchandise trade with the world, 2000-2010 On the import side, we can see in graph below shows that the EU accounted for 72.9% of EFTA total import in 2010, followed by the United States at 5.4%, China 4.9% and Japan 2.1%. The EU was also the EFTA states main export destination in 2010, taking in 67.6% of EFTA total exports. EFTA FTA Partners excluding the EU accounted for 10.6% of exports, followed by the US at 8%. China overtook Japan as EFTA third most important export destination in 2010 accounting for 2.9% of EFTA total exports to the world. With regards to total trade share with FTA partners, huge disparities sometimes characterise the variations of
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partners share with EFTA. For instance, Canada is the most important third country partner with 1.4% of EFTA total trade at USD 8,,46 billion whereas Montenegro is the least significant, representing only 0.002% of EFTA total trade at USD 14.1 million.

Top EFTA import sources in 2010

Top EFTA export destinations in 2010

Turning to investment, the Member States are important investors abroad with outward FDI accounting for 83%, 41% and 172% of Iceland, Norway and Switzerland GDP in 2010. The global stock of FDI originating from EFTA States amounted to USD 1090 billion in 2010 whilst the global FDI stock into the EFTA States in that year was valued at USD 723 billion. Both Norway and Switzerland are net outward investors. Iceland has traditionally been a net outward investor, a trend that was reversed in 2010. FDI from the EFTA countries is concentrated in finance and banking are Switzerland, chemicals and plastics are Iceland and Switzerland , mining and oil and gas extraction are Norway , as well as manufacturing.

2.3 Major Issues/Problems of the Establishment

There are three problems that are facing by EFTA that are new partners and new challenges, viability of EFTA and memberships problems.
2.3.1 New Partners and New Challenges

Currently, EFTA is negotiating free trade agreements with economic heavyweights such as India, Indonesia and Russia and also China on individual basis. With this negotiation, EFTA is facing the increasing level of complexity during negotiation because of the new era where the political and economic nature of the new trade partners. With the increasing of complexity level during negotiation, the risk of failure will also increase. Besides, even though the general outlook is positive, but many new difficulties may appear. For example, society will eventually start to be apprehensive of deals with countries where outsourcing could be a serious outcome, losing jobs at the expense of a FTA is a regular concern expressed by citizens and lobbies and unions from certain portions of the manufacturing and agricultural sectors do not generally view the expansion of preferential deals from a optimistic viewpoint (Rao, 2011). In addition, engaging in negotiation with countries that not concern with human rights, EFTA will also faces problems on increasing demand for transparency and refusal. Moreover, negotiating with countries that have lots of power influences, it will bring more challenges for EFTA during negotiation. This will cause conflicts of interests to be more focuses on Intellectual Property Rights (IPR) issues, investment, and market access on agricultural goods or sustainable development clauses. EFTA will also have to take into consideration that developing countries do have necessarily the capacity to enforce the rules set out in the FTAs. A country such as India, which does not even have a common external tariff due to its federal fragmentation, may not be able to properly comply (Rao, 2011). Therefore, it is important for EFTA to take in consideration for new partners because there are advantages and also disadvantages for taking new partners in EFTA.
2.3.2 Viability of EFTA

One could if ask whether EFTA is a viable intergovernmental organization and if it has a concrete future (Rao, 2011). Since the birth of EFTA, there are many questions about is EFTA is a viable intergovernmental organization and if it has a concrete future especially
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when United Kingdom left EFTA along Denmark along in 1973 and at that time, many thought the event sounded the death kneel of EFTA. In 1995, the same questions arose when Austria, Finland and Sweden left EFTA but EFTA is still around and is well anchored on European soil after seventeen years. This showed that EFTAs sustainability does not seem to be directly threatened even the grounds could become shakier. Indeed in 2009, EFTA have once more trembled when Iceland applied for European Union (EU) membership but The Icelandic financial crisis demonstrated how the country could be exposed to external shocks and how internal mismanagement could lead to catastrophes (Rao, 2011). In 2011, Iceland was fully engaged in the negotiations process and could possibly become an EU member between 2012 until 2015. The problem faced by EFTA is if there is another country left EFTA, could EFTA still survive. For example, although Iceland may not be the most influential member, but it certainly contributes actively to maintain it. Besides, it will be uncertain if member states governments continuing use EFTA as a platform for administering the EEA and conducting free trade negotiations around the world. The first EFTA pillar, i.e. the Vaduz Convention, would lose even more of its appeal, which is currently not so vivid if we take into account that intra-EFTA total trade represents only 0.6 per cent of total share in merchandise (Rao, 2011). In addition, if Liechtenstein, Norway and Switzerland decide to left EFTA, it will brings more losses to EFTA compared to benefits. The remaining countries would also lose political leverage in free trade negotiations and have to face legal difficulties regarding the transformation of EFTA. Therefore, this showed that members that left EFTA will brings problems to members of EFTA and this will also cause loses to EFTA.
2.3.3 Membership

Are there any prospects to open up EFTA membership to newcomers, or even former members? (Rao, 2011). The Faroe Islands expressed their desire to join EFTA but for EFTA, it would brings some difficulties because Faroe Islands are not fully independent State and still relying on Denmark in many aspects of their economy and foreign relations. Therefore, EFTA would need to amend substantively Article 56 of the Vaduz Convention as it stipulates that only States may accede to the Convention (Rao, 2011). Besides, if EFTA accept Faroe Islands as member, it would be troublesome and costly for EFTA because EFTA have to renegotiating all FTAs plus EFTA countries could lose credibility as a demander for semi-autonomous State. In addition, members like Switzerland or Liechtenstein would not favour another Nordic nation to obtain memberships because they do not share the
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same economic interests. Finally, is it also possible that any EU States would decide to (re)join EFTA? (Rao, 2011). Regarding this statement, some of the politicians and citizens of United Kingdom have expressed that their country should go back to lesser degrees of integration and greater level of sovereignty, and that such action could be undertaken through EFTA. This kind point of view is becoming more popular in the face of the current EU depression. But at this moment, EFTA will preserve its current composition for many years to come, if not will lose one member but will certainly not gain one (Rao, 2011).

2.4 Synthesis of Chapter and Concluding Remark

There are many programmes that joined by EFTA in 2007 until 2012. For example, programmes that joined by EFTA are Consumer Programme, Health Programme, Culture Programme, MEDIA and Civil Protection Financial Mechanism. Through these programmes, EFTA have built a good connection with other European countries and also concerned with the societys welfare. For example, the consumer programme and the health programme, it is held to protect consumers rights and also support in shaping a new health strategy. Besides, there are also some achievements that done by EFTA. For example, their economic growth is growing year by year because of the small-sized market. EFTA also act as important investors abroad with outward FDI. Although EFTA have many achievements, they also facing some problems such as new partner new challenges, viability of EFTA and membership problems. For example, if there is new partner joined EFTA, EFTA will faces problem such as increasing level of complexity during negotiation. As a conclusion, EFTA is still standing on its two feet. To have a better future, EFTA should overcome the problems that they are facing and also join as many programmes as possible.

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3.0 CRITICAL REVIEW

This part will discuss about the literature review on the issues pertaining to the regional economic problems prior to the establishment of EFTA, comments on EFTA, compare and contrast between EFTA and other institutions or organizations and lastly overall conclusion.

3.1 Literature Review

As we can see, there will be issues pertaining to the regional economic problems before the establishment of the European Free Trade Association (EFTA). The practices and difficulties of restructuring international institutions at the worldwide level increasingly provided a powerful force for regional economic arrangements.
3.1.1 The Arguments square up with the New Regionalism

According to Crawford and Laird (2001) cited in Viner (1950) stated that the regional trade agreements (RTA) of the economic analysis were focusing on the relative balance of trade creation and trade diversion. As to Bhagwati (1992) and Krueger (1995) are more concentrates on the consequence of RTAs because of the system of multilateral and the longer-term movement towards the free trade. Thus, the concern of Bhagwati and Krueger has achieved a rapid rise in the number of such agreements in the current years. It is among the members of World Trade organization (WTO) that probably the participants in some of the agreements and for the nonparticipants are in the others. Additionally, the new RTAs are not only a trade agreement with the neighbours but it has a wider network with a number of participants and in some of the cases has different levels of economic development. Besides that, the Asia Pacific Economic Cooperation (APEC) and the European Union (EU) does not have the permission to do the mutual exchange of trade preference and it is very important even though these new agreements are overlap.
3.1.2 The Forming of European Economic Community (EEC)

Based on the Chinese University of Hong Kong (2000) stated that before the establishment of EFTA which is in 1950s, in order to improve the economic integration of its nation states where that time was a strong current in Western Europe. Besides that, the forming of the European Economic Community (EEC) were proposed by some of the European governments with aiming a operates a custom union that apply to all kinds of
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goods. The EEC was created on the 1 January 1958 because the government of United Kingdom was planned to form a looser agreement that regarding to the free trade but the government did not join the EEC. Instead with the aiming of counterbalancing the EEC, the government wanted to explore the idea of free trade arrangement between the European countries outside the EEC.
3.1.3 Lack of Competition in European Union (EU)

Based on Randwyck (2011) stated that ever since there are many laws will be made because of in order to reduce the experimentation in each country with policies and yet changing and innovating policies. Other than that, the structure of European Union has lessened the competition of ideas by lowering the performance. In addition, the approach of one-size-fits-all cannot be adapted in the business environment or even in non-profit organizations; in fact the flexibility is needed in order to address the local problem.

3.2 Comment
By the establishment of EFTA, the EU can work with the EFTA by the influence of European Economic Area (EEA) agreement since there is a lack of competition in EU. Before any of the new legislation is adopted, the EEA agreement lets to input from the EFTA countries. Besides that, the process of decision shaping can be done by the EFTA experts in EU sub-committees or the submission of EFTA comments. Yet, the EFTA states do not join in the voting in Council. The Qualified Majority Voting has decided to increase the number of areas in EU as a result that there is no need for universal agreement. Additionally, there is no need if the Britain country is an EFTA or EU member because it can be ignored and out voted. If the Britain country is switching to EFTA membership, it means that it will affect the United Kingdom (UK) employment because of the billions of savings that need to be made and has less regulatory costs.

3.3 Compare and Contrast 3.4 Overall Conclusion

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4.0 REFERENCES
Crawford, J.-A., & Laird, S. (2001). Regional Trade Agreements and the WTO. 193211. Civil Protection Financial Instrument. (n.d.). Retrieved 14 November, 2012, from EFTA: http://www.efta.int/eea/eu-programmes/civil-protection.aspx Consumer Programme. (n.d.). Retrieved 14 November, 2012, from EFTA: http://www.efta.int/eea/eu-programmes/consumer.aspx Culture Programme. (n.d.). Retrieved 14 November, 2012, from EFTA: http://www.efta.int/eea/eu-programmes/culture.aspx Grnningster, T. (2012). 51st Annual Report European Free Trade Association 2011. European Free Trade Association. Grnningster, T. (2012). This is EFTA 2012. Brussels. Health. (n.d.). Retrieved 14 November, 2012, from EFTA: http://www.efta.int/eea/eu-programmes/health.aspx Media 2007-2013. (n.d.). Retrieved 14 Novembr, 2012, from EFTA: http://www.efta.int/eea/eu-programmes/media.aspx (n.d). In Commemorationof EFTA's 40th Anniversary. EFTA. Randwyck, H. v. (2011). EFTA or the EU. Rao, Darius;. (2011). Past Achievements and Future Challenges of the European Free Trade Association. World Trade Institute, 1-89. The Chinese University of Hong Kong. (2000). Regional Trading Agreements. (2007). The European Economic Area (EEA).

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