|9. EU is a Customs Union|
|full Customs Union (1968)||The EC became a full customs union in 1968,
when tariffs and quotas were all removed on trade among its original member
countries, and a common tariff system was adopted vis-a-vis non member countries.
(1) Free Trade in Industrial Products: there are no longer tariffs or quotas on trade of industrial goods. Still there are some NTBs such as state monopolies, different tax systems, different customs classifications.
(2) Free Trade in Agricultural Products: Each country came into EEC with its own domestic farm program. The Rome Treaty does not spell out Common Agricultural Policy. By 1964 they adopted Common Grain Policy (at least for grains). 40% of EU budget (€150 billion in 2016).
The EC is still the largest importer of farm products in the world and the US is the largest exporter. US agricultural policy is aimed at opening up foreign markets except in dairy products. The single most important element of Europe's trade policy, from America's viewpoint, is the Common Agricultural Policy (CAP). It is a price stabilization policy for agricultural commodity markets. Price stabilization program was adopted in the United States when the Commodity Credit Corporation was established in 1933.
|Common Agricultural Policy||
Europe's CAP in EC is best illustrated in the following diagram.
Farmers suffer from price instability and lobby for price stabilization. In theory, CAP is designed to protect farmers by insuring stable prices. In practice, CAP as well as US farm price stabilization programs are subsidy programs, i.e., target price is above unit cost. (Initially, Europe's program did not have acreage restrictions, but now it does, imitating US programs.) CAP consumes more than 40% of the Commission's budget (about €145 billion). The main beneficiaries are France (20%), Germany and Spain (13% each), and the UK (9%).
Target Price = base price for grains to be established annually to protect European farmers.
(Intervention Price = the price at which the Community will buy from domestic producers.)
Threshold price = target price less transportation and marketing costs of imported grains.
Variable Import Levy = Threshold price - world price.
These programs produce huge surpluses such as "milk lakes" and "butter mountains" costing $14 Billion a year.
|10. EU is a Common Market|
Although the EC has been successful in eliminating tariffs and other barriers to trade among its members, a number of restrictions have remained. The Community intended to remove many of these restrictions by 1992, but did not succeed.
While these countries are being integrated, their corporate tax rates, income tax rates and VAT rates differ. (Tax rates of Europe)
(i) Differrent industrial standards
(e.g. frequency standards for TV sets), safety rules. A representative
of Phillips (a large Dutch firm) said that his firm had to make 9 different
types of television sets for European companies.
All EU members + Iceland, Norway, Switzerland (EFTA)+ Macedonia, Turkey
(ii) limitation on movements of skilled workers. Differing licensing requirements for doctors, lawyers and other professionals.
|Schengen Agreement (1985)||
originally signed near Shengen, Luxemburg in 1985
"Schengenland" is an area of free circulation of citizens of seven Member States signatories to the Schengen Agreement: Belgium, the Netherlands, Luxembourg, France, Germany, Portugal and Spain. No need to show passports. (France still continues temporary passport control)
After 2004, membership increased to 25 countries. (UK, Romania, Bulgaria are not members.)
(i) European Union citizens and legal EU residents of the 25 Member States could travel throughout the bloc without showing passports.
(ii) Visa with no territorial restrictions (visitors can stay up to 90 days per six-month period.
(iii) Nonmember country nationals with a residence permit valid in one Schengen country may travel on a valid passport without a visa, for up to 90 days per six-month period to other Schengen ountries.
In 2006, directive on the right to move freely: pasportless travel if a national identity card is issued from an EU country.
Read more about Schengen Agreement.
|11. EU is an Economic Union|
|Single Currency||Europe now has a single currency, Euro.|
(i) A single currency makes Europe a single market.
(ii) No member country can manipulate exchange rates to insulate its economy from shocks originating in other member countries.
(iii) A price change in a foreign market (inside EU) will be directly transmitted to each member country, necessitating adjustments in real variables (such as unemployment and output).
⇒ Inflation in one country is transmitted to other markets. A member country no longer retains the ability to neutralize inflationary shocks from other countries.
|Advantages of single currency (SC)||
1. One-off cost of introducing a single currency
2. Due to language differences, European labor is not as mobile as American workers.
3. No central EU fiscal authorities that regulate natioinal debts. (only European Central Bank)
4. Inability to devalue one's currency.
5. Inability to oust members with delinquent sovereign debts (e.g., Greece)
Dangers of Single Currency: Sovereign debts
Sovereign debts have been rising since the monetary conversion in 2002. This is due to lack of financial regulation of national finances.
European Banking Authorities will be set up to regulate banking activities. Still, there is no central authority to regulate national debts.
Also, inflation occurs during conversion in many member countries. For instance, Italian lira was converted into euro at then exchange rate of 1950 lira/euro. If the price of a product were 20,000 lira before the conversion, shopkeepers and public employees would often inflate the price/wage to 20 euro (when the correct price would have been about 10 euro.)
Raising prices through this conversion made some European countries less competitive (e.g., Greece, Italy, Spain, Portugal)
Phase A: The European Council launches the single currency and identifies the countries that will participate.
Phase B: within 1 year: Monetary Union is effectively launched with the irrevocable fixing of parities. (A country should not overvalue its currency in the conversion process.)
Phase C: within 3 years after Phase B, the transition completed with the introduction of notes and coins.
If sovereign debts are not contained,
(i) Germany may exit from the single currency and return to Deutsche Mark.
(ii) Germany may yet form another currency union with those European countries with trade surpluses.
|12. External Relations of the EC|
Association Agreements to create CU and to accord eventual community membership have been signed with a few countries. Malta and Cyprus were admitted, but Turkey's application is still under review.
ASEM = cooperation to bring together the 15 EU Member States + 10 Asian nations (Brunei, China, Indonesia, Japan, South Korea, Malaysia, the Phillipines, Singapore, Thailand, and Vietnam) created in 1996 (Bangkok).
|13. The Effects of Economic Integration on Trade|
|Static Effects||Static effects deal with snapshots immediately after integration.|
|Trade Creation Effect||
Tariff preferences have trade creation effect and trade diversion effect.
The two red traingles represent the positive welfare gains from the trade creation effect.
|Trade Diversion Effect||Three countries:
(i) A, B are
members of a CU
Assume (i) horizontal foreign supply curve
(ii) C (nonmember) is more efficient than B (member)
Under the free trade situation, the England imports the product from Australia.
After joining the customs union, the tariff inclusive price of imports from Australia rises, but the price of imports from France remains the same. Accordingly,
England now imports from France, rather than from Australia.
|Dynamic Effects||include the response of the economy over time as it responds to the changes.|
|(i) Market extension||
Viner's analysis of CU focuses on static gains: the abolition of tariffs among members has the trade creation and diversion effects. However, the static theory ignores the dynamic effects of CU on economic growth.
Dynamic effects include drastic Long Run outcomes such as exit. Brexit: UK existed from EU in June 2016. (immigrants, forgotten middle class)
(i) the most obvious dynamic consequence of a CU is market extension. Efficient producers enjoy free access to national markets of all member countries. Obviously, inefficient producers lose even the national market and are forced to exit from the market.
Before forming a CU, however, access to foreign markets was hindered or blocked by trade restrictions. CU enables firms to achieve economies of scale.
An efficient firm not only survives but also has access to all markets within a customs union, but inefficient firms lose even the little markets they had before. (The Parable of Talents)
Talent = about 130 pounds or 60 kg.
|temporary unemployment||When inefficient firms exit from the market, workers in such firms become unemployed. Eventually, they need to move to other industries.|
(ii) Increased Competition
|Domestic firms are no longer protected from high tariffs. Increased competition implies the survival of low cost firms and lower prices. Increased competition also encourages product innovation.|
|14. International Integration in other Continents|
|SR objective: market extension - replace small
national markets with a large supernational market
LT goal: economic growth through increased international specialization, economies of scale and expanded trade
These goals are sought by many LDCs. The Treaty of Rome has become the model for a global movement toward economic integration.
|EAEC (Eurasian Economic Community, 1996)||
Belarus, Russia, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan.
Not a FTA yet (only a goal).
Population: 214 million. GDP = 2.3 trillion.
European Free Trade Association
Current members include Iceland, Lichtenstein, Norway and Switzerland. Largest partner in trade in services of EU.
They are likely to be absorbed by EU eventually. GDP = $920 billion. GDP per capita = $68,000.
(Algeria, Morocco, Tunisia and Libya)
North Africa is becoming a key supplier of energy. Airbus and Suguitomo Electric are moving into this region (FDI). This region is an alternative to Eastern European countries that absorb Europe's FDI.
|Latin American Integration Association (ALADI)||Asociation
Latinoamericana di Integracion (ALADI)
Initially, integration in Latin America took two parallel forms. (1) Latin American Integration Association, and (2) Central American Common Market. Subsequently, the Andean Common Market has been added.
The motivation for closer integration among these countries: (a) the success of EC, and (b) slow economic growth and social modernization in this continent.
Members: 13 countries (Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Panama, Peru, Uruguay, Venezuela.)
GDP = $6.27 trillion, per capita GDP = $12,500)
Despite recent setbacks by Brexit, integration efforts in Europe has been largely successful. This success is largely due to (a) common racial stock (predominantly Caucasian), (b) common cultural heritage of Western Europeans, and (c) similarity of European languages which are derivatives of Germanic language with common Latin roots.
Efforts to integrate Asian economies have been hampered by three obstacles:
(a) Racial and language diversity of Asian countries. Asian races are more populous and diverse than European races. Diverse languages: tonal Chinese language, Ural-Altai language group (Manchu, Mongolian, Japanese, Korean, etc.),
(b) Japanese occupation of Asian countries in World War II, and
(c) Two large economies, China and India, have no urgent need to intergrate with other economies.
Despite these obstacles, bilateral FTA fervor is sweeping Asia.
Association of South East Asian Nations (ASEAN) (the most successful)
(i) established in 1967
(ii) now 10 countries: Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Cambodia, Laos, Vietnam
(iii) currently transforming into AFTA (ASEAN Free Trade Area)
(iv) GNP= $300 billion, intra-ASEAN trade rose to $68 billion in 1995.
(v) plans to expand. two proposals, Tokyo centered Asian trade alliance, and Asia-Pacific economic zone, excluding US and Japan.
China-ASEAN FTA came into effect on January 1, 2010. In terms of population, it is the largest FTA (1.9 billion). In terms of GDP, it is the third largest: EU, NAFTA, China-ASEAN FTA.
|Trend||bilateral trade agreements: China-South Korea Free Trade, went into effect on December 20, 2015|
St. Stephan's Cathedral, Vienna