2: Trade Integration in Europe

Question 1

Differentiate the different integration stages!

Answer 1

Siehe Übersicht!!

Question 2

Tell me something about the European FTAs.

Answer 2

• economic union of at least two countries,
• which mutually abolish tariff and non-tariff trade barriers
• trade policies towards non-member states remain autonomous and unchanged
• EFTA/CEFTA

Question 3

Outline the differences of trade creation and trade diversion.

Answer 3

• Trade creation takes place through the elimination of trade barriers between two or more countries. Trade is facilitated if previously domestic production is abandoned in favor of cheaper imports from partner countries.
• Trade diversion will occur when imports from the efficient or cheap producer “world market” are replaced by imports from a higher-cost (or less efficient) producer partner countries.

Question 4

What are + of regional economic integration?

Answer 4

• Economic (static) effects
• Trade creation effect
• Abolition of transaction costs
• Lower prices
• Larger variety of products Political effects
• Facilitating multilateral agreements on same issues

Question 5

What are - of regional economic integration?

Answer 5

• Economic (static) effects
• Trade diversion effect
• Trade diversion effect hurts third countries Political effects
• Difficulties for multilateral agreements because of special interests in regions

Question 6

Tell us something about customs unions.

Answer 6

• union between at least two countries which consists of a free trade area with a common external tariff
• participant countries set up a common external trade policy intending in most cases to increase economic efficiency

Question 7

What factors do CU effects depend on?

Answer 7

• 1. The production structure: Complementary vs. competitive
• 2. The size of the Customs Union: The more members, the more likely individual specialization
• 3. The level of initial tariffs: The higher the initial tariff, the larger the benefits from a customs union
• 4. Transport and transaction costs: Customs Unions tend to be created between neighbor countries
• 5. Economies of scale: Integrated markets permit to take advantage of low cost production due to economies of scale.
• 6. Terms of trade: Stronger bargaining power of importing countries that are united in a Customs Union
• 7. Improved technical efficiency: Competitive pressure leads to a lowering of the supply curve of domestic producers

Question 8

Compare FTA and CU!

Answer 8

• Free Trade Area = Customs Union – common tariff
• Opens door to ‘tariff cheats’: Imports from outside FTA destined for country A (= member of FTA) enter via another member country if the other member country has lower external tariff than country A → trade deflection
• Solution is ‘rules of origin’, which determine the origin of a product → thus, products can not enter a high-tariff country via a low-tariff country
• Despite the origin-problem in Free Trade Areas, almost all preferential trade arrangements in the world are Free Trade Areas because Customs Unions require some political integration.

Question 9

Summarize EU trade integration.

Answer 9

1. Growth in intra-EU trade has outpaced growth in extra-EU trade.
2. Trade creation clearly dominates trade diversion.
3. The most important area of trade diversion is agriculture.
4. What about the trade of services?

• Trade of services is frequently subjected to non-tariff barriers in the form of other obstacles.
• The share of intra-EU trade in services (especially, banking and insurance, air transport, communication) has not increased more than the share of extra-EU trade in services;

5. There are large differences in price competitiveness among EU countries.