Customs Unions Flashcards
5 Levels of integration (least to highest)
Free trade area (FTA)
Customs union
Common market
Economic union
Total integration
Where does the EU lie in terms of integration?
Between common market & economic union
Example of a FTA
EFTA (the one UK set up in response to EEC success)
FTA characteristics (2)
Tariff free between countries within the agreement, but countries set their own tariffs against rest of the world
Rules of origin
Rules of origin are complex and costly to administrate. Which next level of integration can avoid this ?
Customs union
Customs union
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
Common market
Same as customs union (free movement of goods), but add free movement of FOP (labour and capital)
Economic union
Has common policies e.g EU’s euro.
Total integration
State merge to form 1 country
Trade creation
Trade creation is the movement of production to a more efficient producer (e.g home to partner)
Trade diversion
Movement of production to a less efficient producer
Partial equilibrium analysis assumptions for the diagram
Partners and world supply curves are perfectly elastic (perfectly adjust to demand)
Consumers don’t differentiate - origin of good
Home & partner small, CU small
CU theory diagram - who are the most productive producers
Partner and rest of world are more productive with lower price and perfectly elastic supply curves
2nd diag pg 24. Add a tariff to RoW supply and Partner’s supply. Would this be pre-post CU
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)
Pg 24. Looking at surpluses: where is tariff revenue?
Pre-CU…
Where is home production, imports, price, consumption,
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
Post CU diagram - identify producer & consumer gains, and positive specialisation and substitution effects, loss
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.
Where is trade creation and diversion demonstrated
X+y is trade creation
Z is diversion (loss)
Given the TC and TD, what is Net gains expression
Net gain = TC - TD
X + Y = Z
Empirical evidence of CU (Balassa)
Are they beneficial? Eval
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
Critique of CU theory (6)
Static not dynamic
Simple assumptions
Measurement problems
Second best theory
Public goods arguement
TC&TD are not only effects of a CU
Measurement problems - why and how
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.
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
Second best theory
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
Public goods argument for CU benefits: (3)
Bargaining strength after union
Pragmatic argument for free trade
Link with allies
More examples of dynamic effects ignored
Rising productivity
Tech advancements
Concentration and market structures
E.O,S
Economies of experience
Terms of trade effect
Improving ToT increases welfare
