FREE TRADE AND PROTECTIONISM Basis of trade - exchange and specialisation Trade patterns Comparative advantage - based on several initial assumptions - provides basis for free trade - illustration with two countries and two products - can be extended to many countries and many goods - often reflects differences in capital-labour ratios - does not explain who actually benefits from trade

FREE TRADE AND PROTECTIONISM (con) Intra-industry trade Represents two-way trade in goods within the same industry people like many brands e.g. motor cars economies of scale exist in many industries specialisation limited by transport costs making trade between geographically close countries more likely Intra-industry trade very strong in EU and is facilitated by an integrated market where barriers to trade are very low

FREE TRADE AND PROTECTIONISM (con) Barriers to Trade Dumping Non-tariff barriers administrative procedures public procurement policies voluntary export restraints national promotional campaigns restrictions on dubious grounds of safety and health unique specification requirements

TARIFF BARRIERS AND THE CUSTOMS UNION Immediate aim of Rome Treaty to create economic integration through removal of trade barriers; envisaged the creation of a common market even limited attempts at economic integration can lead to spillover effects Article 3 (a) calls for the removal of customs duties and quantitative restrictions (quotas etc.) and all other charges having an equivalent effect initial transition period of 12 years given to remove these barriers (achieved ahead of schedule) new entrants from 1973 (and after) given years to remove barriers (EFTA entrants immediate removal) importance of equivalent measures reflected by Cassis de Dijon case (Art 30) Major loopholes - Art 109i Protective measures allowed in the case of Balance of Payments difficulties (though qualified by many restrictions)

TARIFF BARRIERS AND THE CUSTOMS UNION (con) also Article 36 declares that restrictions on imports and exports can be "justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures" Article 36 creates the need for harmonisation of various country's standards (laid out in Article 100). No discrimination allowed on grounds of nationality (Article 7) Anti-dumping measures also allowed though not in terms of intra- community trade Common Commercial Policy member states cease to be free to unilaterally determine the rate of tariffs and quotas in relation to third countries member states can take protective action on an emergency basis but this can be revoked by the Commission

BASIC THEORY OF A CUSTOMS UNION Customs Unions not unambiguously favourable in economic terms. It represents free trade within a block of countries, which can have discriminatory effects on the rest of the world Trade Creation - where production is shifted from a higher to a lower cost producer Trade Diversion - where production is shifted from a lower to a higher cost producer Levels of Analysis Static - where no change takes place in the volumes of trade brought about by customs union Partial Equilibrium - using supply and demand diagrams

BASIC THEORY OF A CUSTOMS UNION (con) General findings more likely to be advantageous if partners are potentially competitive with complementary more likely to increase economic welfare the higher the initial duties on imports from partners also more likely to be of benefit the lower the common external tariff against the rest of he world the greater the proportion of world trade it covers the more likely that it will be advantageous Empirical Findings In general these studies show that trade creation effects outweigh trade diversion

BASIC THEORY OF A CUSTOMS UNION (con) Dynamic Considerations - political cohesion - benefits of collective bargaining in terms of international negotiations - reducing monopoly power - internal economies of scale - external economies of scale - reducing levels of x-inefficiency - psychological changes in attitude - changes in distribution of income

NON-TARIFF BARRIERS IN CUSTOMS UNION Considerable problems with NTB's in the EC in the '80's Cartels and Concentrations Dominant firms and mergers Fiscal Differences - considerable attention given to indirect tax (especially VAT) - little progress made on harmonisation of excise duties

NON-TARIFF BARRIERS IN CUSTOMS UNION (con) State Aids state aids kept constantly under review. Commission can terminate or modify aids that are deemed incompatible with Treaty's objectives Official and technical standards Product Liability Public Purchasing Various directives passed in 1970's to curb national favouritism. However loopholes were continually exploited to evade issue; however still very little use made of no-national suppliers and contractors State Monopolies - problems with state commercial monopolies in France, Italy and Germany - not required to be abolished but rather reformed