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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.

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Presentation on theme: "Customs Unions. Questions What Benefits are Expected from Economic Integration? The rationale of a Customs Unions (CU). Static and Dynamic Effects of."— Presentation transcript:

1 Customs Unions

2 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?

3 Advantages of economic integration (a) Prevents wars (b) Better use of existing resources Specialisation (comparative advantage) Price effects - intensified competition Quantity effects Location effects

4 Advantages of economic integration (c) Growth effects Accumulate more resources (d) Strategic effects Greater negotiating power (WTO) Better Terms of Trade

5 The Customs Union

6 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

7 Theoretical assumptions Allocation Efficiency as motivation behind free trade Question is: How to allocate a) resources to production b) output to people

8 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

9 Allocation Efficiency … Consumers pay true costs - purchases determines resources to be allocated to production to reflect preferences RESULT: - market price as mechanism of allocation

10 International trade (market allocation) barriers They restrict: -international competition and -distort market determination of prices -The cost of protectionism: REDUCED welfare

11 The cost of protection O P Q S dom (=MC) D dom

12 O P Q S dom (=MC) S world PWPW D dom The cost of protection

13 O P Q S dom (=MC) S world a c b Q1Q1 Q2Q2 PWPW D dom The cost of protection y

14 O P Q S dom (=MC) S world + tariff S world a c b Q1Q1 Q2Q2 Tariff P W + t PWPW D dom The cost of protection y

15 O P Q S dom (=MC) S world + tariff S world a c b Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom The cost of protection y

16 O P Q S dom (=MC) S world + tariff S world a d c b Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom The cost of protection y e

17 O P Q S dom (=MC) S world + tariff S world a d c b f Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom The cost of protection e y

18 Effect of removal of tariffs Gains from liberalisation ( –1– 3): add gains: extra consumer surplus: area 1 + area 2 + area 3 + area 4 subtract losses: loss of producer surplus:area 1 loss of tariff revenue:area 3 RESULT: area 2 + area 4 = GAIN FROM LIFTING TARIFF

19 O P Q S dom (=MC) S world + tariff S world a d cb f Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom The cost of protection e g y

20 GATT/WTO Promotion of free trade Chapter XXIV: allowing regional trade liberalisation as contributor to global free trade (!?)

21 Effects of customs unions Static effects Dynamic effects

22 Static effects of a Customs Union trade creation –With new partners in customs union trade diversion –With the rest of the world

23 Trade Creation Switch from high cost domestic production to lower costs foreign production

24 Trade creation O P Q S UK D UK P EU + tariff P1P1

25 O P Q S UK Q2Q2 Q1Q1 D UK P1P1 P EU + tariff Trade creation

26 O P Q S UK Q2Q2 Q1Q1 D UK P EU P1P1 P2P2 P EU + tariff Trade creation

27 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EU P1P1 P2P2 P EU + tariff Trade creation

28 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EU P1P1 P2P2 P EU + tariff Trade creation

29 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EU P1P1 P2P2 Gains P EU + tariff Trade creation See Sloman and Wride, pp. 694

30 Trade diversion Switch from low cost foreign suppliers to higher cost foreign suppliers in partner country

31 Trade diversion O P Q S UK Q2Q2 Q1Q1 D UK P NZ + tariff P1P1 P3P3 P NZ

32 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EC P1P1 P2P2 P3P3 P NZ P NZ + tariff Trade diversion

33 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EC P1P1 P2P2 P3P3 P NZ P NZ + tariff Trade diversion

34 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EC P1P1 P2P2 P3P3 P NZ 5 Gains Losses P NZ + tariff Trade diversion

35 O P Q S UK Q4Q4 Q3Q3 Q2Q2 Q1Q1 D UK P EC P1P1 P2P2 P3P3 P NZ 5 Gains Losses P NZ + tariff Trade diversion See Sloman and Wride, pp. 694

36 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 )

37 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 non- integration (the counterfactual)?

38 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)

39 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%

40 Dynamic effects of a Customs Union Scale economies External economies Polarization of economic activity Economic efficiency Given by: –lower transaction costs –competition

41 External EU Trade Policy

42 Common Commercial Policy Common External Tariff (CET) Non-tariff Barriers Export Subsidies Intellectual Property Labour Standards Taxation Competition Policy Environmental Policy

43 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

44 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)

45 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

46 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

47 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: – per annum ( ) –US 302 per annum (1997)

48 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)

49 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)

50 Trade structure Largest bloc; almost 1/4 of world exports – (in % of total merchandise and 28.5% of services trade) 45% of extra-EU trade to developed countries 15% of extra-EU trade to LDCs

51 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

52 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)

53 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

54 Readings Baldwin, R. E., 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


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