Customs Unions Questions • What Benefits are Expected from Economic Integration? • The rationale of a Customs Unions (CU). • Static and Dynamic Effects.
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Customs Unions Questions • What Benefits are Expected from Economic Integration? • The rationale of a Customs Unions (CU). • Static and Dynamic Effects of a CU. • Which are the elements of the external EU Trade Policy? Advantages of economic integration (a) Prevents wars (b) Better use of existing resources • Specialisation (comparative advantage) • Price effects - intensified competition • Quantity effects • Location effects Advantages of economic integration (c) Growth effects • Accumulate more resources (d) Strategic effects • Greater negotiating power (WTO) • Better Terms of Trade The Customs Union EEC as Customs Union • Treaty of Rome Article 9 (1): ‘The Community shall be based upon a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relation with third countries’ Theoretical assumptions Allocation Efficiency as motivation behind free trade Question is: How to allocate a) resources to production b) output to people Allocation Efficiency … Market system provides for: • Competition in factor markets - prices reflect true scarcity & productivity • Competition in goods markets - firms charge true resource cost of goods Allocation Efficiency … • Consumers pay true costs - purchases determines resources to be allocated to production to reflect preferences RESULT: - market price as mechanism of allocation International trade (market allocation) barriers • They restrict: - international competition and - distort market determination of prices - The cost of protectionism: REDUCED welfare P The cost of protection Sdom (=MC) Ddom O Q The cost of protection P PW Sdom (=MC) S world Ddom O Q P The cost of protection a c PW b Sdom (=MC) S world y Ddom O Q1 Q2 Q P The cost of protection a PW + t Tariff PW c Sdom (=MC) S world b + tariff S world y Ddom O Q1 Q2 Q P The cost of protection a PW + t Tariff PW Sdom (=MC) S world c b + tariff S world y Ddom O Q1 Q3 Q4 Q2 Q P The cost of protection a PW + t Tariff PW e d c Sdom (=MC) S world b + tariff S world y Ddom O Q1 Q3 Q4 Q2 Q P The cost of protection a PW + t Tariff PW e 1c 2 d 3 4 Sdom (=MC) S world b f + tariff S world y Ddom O Q1 Q3 Q4 Q2 Q Effect of removal of tariffs Gains from liberalisation (1+2+3+4 –1– 3): add gains: extra consumer surplus: area 1 + area 2 + area 3 + area 4 subtract losses: loss of producer surplus: loss of tariff revenue: RESULT: area 2 + area 4 = LIFTING TARIFF GAIN FROM area 1 area 3 P The cost of protection a PW + t Tariff c PW e 1 d 3 2 g 4 Sdom (=MC) S world b f + tariff S world y Ddom O Q1 Q3 Q4 Q2 Q GATT/WTO • Promotion of free trade • Chapter XXIV: allowing regional trade liberalisation as contributor to global free trade (!?) Effects of customs unions • Static effects • Dynamic effects Static effects of a Customs Union • trade creation –With new partners in customs union • trade diversion –With the rest of the world Trade Creation Switch from high cost domestic production to lower costs foreign production P P1 Trade creation SUK PEU + tariff DUK O Q P Trade creation P1 SUK PEU + tariff DUK O Q2 Q1 Q P Trade creation SUK P1 PEU + tariff P2 PEU DUK O Q2 Q1 Q P Trade creation SUK P1 PEU + tariff P2 PEU DUK O Q4 Q2 Q1 Q3 Q P Trade creation P1 P2 1 2 3 SUK PEU + tariff 4 PEU DUK O Q4 Q2 Q1 Q3 Q P Trade creation SUK Gains See Sloman and Wride, pp. 694 P1 P2 1 2 3 PEU + tariff 4 PEU DUK O Q4 Q2 Q1 Q3 Q Trade diversion Switch from low cost foreign suppliers to higher cost foreign suppliers in partner country P Trade diversion P1 SUK PNZ + tariff P3 PNZ DUK O Q2 Q1 Q P Trade diversion P1 SUK PNZ + tariff P2 PEC PNZ P3 DUK O Q4 Q2 Q1 Q3 Q P Trade diversion P1 P2 1 2 3 SUK PNZ + tariff 4 PEC PNZ P3 DUK O Q4 Q2 Q1 Q3 Q P Trade diversion S UK Gains Losses P1 P2 1 2 3 PNZ + tariff 4 PEC PNZ 5 P3 DUK O Q4 Q2 Q1 Q3 Q P Trade diversion SUK Gains Losses See Sloman and Wride, pp. 694 P1 P2 P3 PNZ + tariff 1 2 3 5 4 PEC PNZ DUK O Q4 Q2 Q1 Q3 Q Measuring trade creation and trade diversion • Practical question – How can we quantify these? • Entity to measure – Rise in imports and exports to partners - at the expense of other exports/imports? (trade diversion) - at the expense of home sales? - purely additional? (trade creation) Measuring trade creation and trade diversion • We need: – to know actual pattern AND – what the pattern would have been without integration •Big question - how to treat nonintegration (the counterfactual)? Measuring trade creation and trade diversion • Facts: – Large and growing share of imports (for UK) from EC •E.g. EC (6) Imports – 30% (1962) 45.9% (1984) •E.g. EC (6) Exports – 18.5% (1962) 31.6% (1984) Measuring trade creation and trade diversion – In original six EU members • rise in intra-EU trade of 15-30% • for industrial goods (not agricultural goods) – trade creating > trade diverting •Effect of GNP growth: 0.15% Dynamic effects of a Customs Union • • • • Scale economies External economies Polarization of economic activity Economic efficiency Given by: – lower transaction costs – competition External EU Trade Policy Common Commercial Policy • Common External Tariff (CET) • Non-tariff Barriers • Export Subsidies • Intellectual Property • Labour Standards • Taxation • Competition Policy • Environmental Policy Relevance • Contributes to functioning of CU and Single Market • EU laws and community right to conclude trade agreement • Strengthens the bargaining power of EU versus individual states Origins • Treaty of Rome – Along with CU – (Art 110) Aim of: • Harmonious development of world trade • Ultimate abolition of international trade restrictions • Lower customs barriers – (Art 113) Coverage: • Tariff level • Trade agreements • Export policy • Protection of trade (anti-dumping) General liberalizing measures (In line with WTO negotiations) • 38% lower tariffs on manufactures • Import barriers on agriculture tariffs + gradual reduction thereof (36%) • Phasing out quantitative restrictions Policy Instruments • Tariffs: •CET (1995): average 9.6% •Different by products (e.g. 26% for agricultural goods) •Reductions through Uruguay Round •Into EU budget (less 10%) • Quotas: • e.g. steel, bananas Policy Instruments… • Voluntary Export Restraints (!?): • E.g. Japanese car exports to EU no more than 2/3 of market growth or less than 2/3 of market shrinkage • Anti-dumping measures: • Def: Selling in export markets below cost (‘normal’ price) • Frequency: – 139-177 per annum (1988-1997) – US 302 per annum (1997) EU preferential trading system • Neighbours and former colonies • Hierarchy: – Free access to EU industrial product market (Turkey, EEA countries, Maghreb) – Discretionary preference system (Lome/ACP, the Generalized System of Preferences) – Non-WTO members (e.g. Russia) Preferential trading • Direction: less discriminatory, in line with WTO • Extension to new partners (e.g. Mexico, Mercosur) • Cost of trade barriers estimates (Messerlin, 2000): 7% of GDP ($600 BN) • 1/3 of global free trade gain to EU (GATT) Trade structure • Largest bloc; almost 1/4 of world exports – (in 2007 17% of total merchandise and 28.5% of services trade) • 45% of extra-EU trade to developed countries • 15% of extra-EU trade to LDCs Trade structure • Intra-industry versus Inter-Industry trade • Trade balance in modest surplus • Intra-EU trade in total trade 63% (1998) vs. 42% (1961) • Rising extra-EU trade • High tech exports to developed countries lagging behind Major partners • USA: – Largest share of extra EU imports and exports (12.7% imports 21% exports in 2007) – Frictions in minor areas – Enduring debate on agricultural products – Transatlantic free trade agreement would mean 1%-2% GDP increase for EU (Boyd, 1998) Major partners… • China – rising partner, by 2007: – 16.2% of EU imports versus 5.8% of EU exports • Japan – – – – – Narrow range of products Reluctance of Japan to open markets Lack of EU knowledge of Japanese market 5.5% of EU imports versus even lower EU exports VERs Readings • Baldwin, R. E., 1984. Towards an integrated Europe. London: CEPR. ch. 2 • Hitiris* - ch. 1 (customs union) • El-Agraa - ch. 7, ch. 24*, ch. 25 • Sloman and Wride, Economics, ch. 24 • The customs policy of the European Union • External Trade • Essential EU Trade Statistics