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Customs Unions

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

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Customs Unions

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  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 P Sdom(=MC) Ddom Q O

  12. The cost of protection P Sdom(=MC) S world PW Ddom O Q

  13. P The cost of protection Sdom(=MC) a c b S world PW y Ddom O Q2 Q1 Q

  14. P The cost of protection Sdom(=MC) a PW + t S world+ tariff Tariff c b Sworld PW y Ddom O Q2 Q1 Q

  15. P The cost of protection Sdom(=MC) a PW + t S world+ tariff Tariff c b S world PW y Ddom O Q4 Q2 Q3 Q1 Q

  16. P The cost of protection Sdom(=MC) a e d PW + t S world+ tariff Tariff c b S world PW y Ddom O Q4 Q2 Q3 Q1 Q

  17. P The cost of protection Sdom(=MC) a e d PW + t S world+ tariff c Tariff 1 3 4 b 2 S world PW f y Ddom O Q4 Q2 Q3 Q1 Q

  18. 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: area 1 loss of tariff revenue: area 3 RESULT: area 2 + area 4 = GAIN FROM LIFTING TARIFF

  19. P The cost of protection Sdom(=MC) a e d PW + t S world+ tariff Tariff 1 3 4 c b 2 S world PW f g y Ddom O Q4 Q2 Q3 Q1 Q

  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. P Trade creation SUK P1 PEU+ tariff DUK O Q

  25. P Trade creation SUK P1 PEU+ tariff DUK O Q1 Q2 Q

  26. P Trade creation SUK P1 PEU+ tariff P2 PEU DUK O Q1 Q2 Q

  27. P Trade creation SUK P1 PEU+ tariff P2 PEU DUK O Q1 Q3 Q2 Q4 Q

  28. P Trade creation SUK P1 PEU+ tariff 1 3 4 2 P2 PEU DUK O Q1 Q3 Q2 Q4 Q

  29. P Trade creation SUK Gains See Sloman and Wride, pp. 694 P1 PEU+ tariff 1 3 4 2 P2 PEU DUK O Q1 Q3 Q2 Q4 Q

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

  31. P Trade diversion SUK P1 PNZ + tariff P3 PNZ DUK O Q1 Q2 Q

  32. P Trade diversion SUK P1 PNZ + tariff P2 PEC P3 PNZ DUK O Q1 Q3 Q2 Q4 Q

  33. P Trade diversion SUK P1 PNZ + tariff 1 3 4 2 P2 PEC P3 PNZ DUK O Q1 Q3 Q2 Q4 Q

  34. P Trade diversion SUK Gains Losses P1 PNZ + tariff 1 3 4 2 P2 PEC 5 P3 PNZ DUK O Q1 Q3 Q2 Q4 Q

  35. P Trade diversion SUK Gains Losses See Sloman and Wride, pp. 694 P1 PNZ + tariff 1 2 3 4 PEC P2 5 P3 PNZ DUK O Q1 Q3 Q2 Q4 Q

  36. Measuring trade creation and tradediversion • 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 tradediversion • 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 tradediversion • 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 tradediversion • 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: • 139-177 per annum (1988-1997) • 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 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

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