Customs Unions

Question 1

5 Levels of integration (least to highest)

Answer 1

Free trade area (FTA)
Customs union
Common market
Economic union
Total integration

Question 2

Where does the EU lie in terms of integration?

Answer 2

Between common market & economic union

Question 3

Example of a FTA

Answer 3

EFTA (the one UK set up in response to EEC success)

Question 4

FTA characteristics (2)

Answer 4

Tariff free between countries within the agreement, but countries set their own tariffs against rest of the world

Rules of origin

Question 5

Rules of origin are complex and costly to administrate. Which next level of integration can avoid this ?

Answer 5

Customs union

Question 6

Customs union

Answer 6

Tariff free between members, and 1 common external tariff! (CET)

Rules of origin within the union not required e.g goods from Germany to France

Question 7

Common market

Answer 7

Same as customs union (free movement of goods), but add free movement of FOP (labour and capital)

Question 8

Economic union

Answer 8

Has common policies e.g EU’s euro.

Question 9

Total integration

Answer 9

State merge to form 1 country

Question 10

Trade creation

Answer 10

Trade creation is the movement of production to a more efficient producer (e.g home to partner)

Question 11

Trade diversion

Answer 11

Movement of production to a less efficient producer

Question 12

Partial equilibrium analysis assumptions for the diagram

Answer 12

Partners and world supply curves are perfectly elastic (perfectly adjust to demand)

Consumers don’t differentiate - origin of good

Home & partner small, CU small

Question 13

CU theory diagram - who are the most productive producers

Answer 13

Partner and rest of world are more productive with lower price and perfectly elastic supply curves

Question 14

2nd diag pg 24. Add a tariff to RoW supply and Partner’s supply. Would this be pre-post CU

Answer 14

So prices with tariff would be the higher prices so pre-CU (since CU makes free movement of g&S only for members of the agreement, not the RoW.)

(Ignore the dotted partners+tariff, since if partners then likely part of the agreement)

Question 15

Pg 24. Looking at surpluses: where is tariff revenue?

Pre-CU…
Where is home production, imports, price, consumption,

Answer 15

Since pre CU we have tariffs, so Sw+tariff is the cheapest supply we get. So:

Home prod - Q2
Imports - Q2 to Q1
Consumption up to Q1 in total (home prod+imports)
Price P2

Question 16

Post CU diagram - identify producer & consumer gains, and positive specialisation and substitution effects, loss

Answer 16

Fall in home production Q2 to Q4 , since CU means partner has no tariff and so go with them as more efficient.

Consumer welfare gain since cheaper prices for consumers. Producer gain as producing more efficiently at a lower cost/price.

Question 17

Where is trade creation and diversion demonstrated

Answer 17

X+y is trade creation
Z is diversion (loss)

Question 18

Given the TC and TD, what is Net gains expression

Answer 18

Net gain = TC - TD
X + Y = Z

Question 19

Empirical evidence of CU (Balassa)

Are they beneficial? Eval

Answer 19

Balassa found TC>TD i.e worth forming CU.
Eval: a static (one-off gain) of 0.15% of GDP, no dynamic benefits e.g economies of scale

Question 20

Critique of CU theory (6)

Answer 20

Static not dynamic
Simple assumptions
Measurement problems
Second best theory
Public goods arguement
TC&TD are not only effects of a CU

Question 21

Measurement problems - why and how

Answer 21

We use counterfactual analysis e.g look at what happens if UK had not joint EEC - so obvs no way to truly project knowing it is fully accurate.

Question 22

Note: recent studies also found a counterfactual loss to UK if it had not joined the EU = 2.1% GDP (so it was good to join!)

Of course unsure if fully correct tho

Question 23

Second best theory

Answer 23

The best option was global free trade, 2nd best was CU with tariffs for ROW (since in diagram the SW is still below SP

But we use the common external tariff to RoW instead and so perhaps not good

Question 24

Public goods argument for CU benefits: (3)

Answer 24

Bargaining strength after union
Pragmatic argument for free trade
Link with allies

Question 25

More examples of dynamic effects ignored

Answer 25

Rising productivity
Tech advancements
Concentration and market structures
E.O,S
Economies of experience

Question 26

Terms of trade effect

Answer 26

Improving ToT increases welfare