Economic Integration

Question 1

Free Trade Area

Answer 1

Involves eliminating barriers to intra-group trade while
allowing each country to maintain its own barriers to
trade with non-members.

Question 2

Rules Of Origin

Answer 2

Rules of origin are the criteria needed to determine the
national source of a product.
* Their importance is derived from the fact that duties and
restrictions in several cases depend upon the source of
imports.
* There is wide variation in the practice of governments with
regard to the rules of origin.
* While the requirement of substantial transformation is
universally recognized, some governments apply the
criterion：change of tariff classification, or the ad valorem
percentage, or manufacturing/processing operation.

Question 3

Customs Union

Answer 3

Intra-group trade faces no barriers and members
maintain a common external tariff on trade with nonmembers.
- No independent trade agreements for members
- No checks between NI and Ireland
- “Labour Party” proposes a customs union with a say in trade deals. Not politically viable

Question 4

Example of Goods moving in customs union

Answer 4

a car from the US entering the EU customs
union currently attracts a tariff of 10% of the car’s value. It
doesn’t matter if the car arrives in France, Spain or
anywhere else - the same one-off 10% charge is applied.
 That car can then move between all the customs union
countries without incurring extra costs or custom checks.

Question 5

What is the green and red lane

Answer 5

Goods going to NI would not have to be checked and require minimal paperwork
Red lane: goods from UK to Ireland and EU and checks are carried out

Question 6

Common market

Answer 6

Extends free trade among members to factors of
production (labour migration and capital flows),
as well as to goods and services.

Question 7

Economic Union

Answer 7

In addition to common market, members
harmonize or even unify the monetary and fiscal
policies.

Question 8

What is trade creation

Answer 8

Occurs when domestic production in a member nation is replaced by lower-cost imports from another member

Increased welfare for members as nations specialise in comparative advantages
Link ( Ricardian model)
The country will import the product is has comparative dis-advantage in and Comparative advantage determines trade pattern

Increased welfare for non-members as real income increases and spills over into increased imports from rest of world

Question 9

How is trade creation formed graphically in a customs union

Answer 9

Draw Graph: …
After forming a customs union with B, the imports from B is larger, therefore trade is created.
Domestic production decreases from X to X and Price drops from Pb+T to Pb.
Meaning some domestic production is replaced by lower cost imports.

Welfare effects:
Consumer = +(a+b+c+d)
Producer = - a
Government = - C

Question 10

Trade diversion

Answer 10

occurs when lower-cost
imports from non-members are replaced by
higher-cost imports from members.

This is due to removal of tariff to the members.

By itself, trade diversion lowers welfare as it shifts
resources away from comparative advantages. There is a worsened international allocation of resources
Non-members suffer due to economic resources being utilised ineffeciently

The pre-tariff price of a product from country B is
higher than the pre-tariff price of the same product
from country C.
* As a result, country A imports from country C:
PB+T >PC+T

Question 11

Graph for customs union
(Trade diversion)

Answer 11

Trade is diverted from countryC to country B, from lower-cost
imports to higher-cost imports
(PC< PB).

Trade diversion customs
union also has trade creation
effect: more imports, production from X1 to X3, replaced by the
lower-cost imports.

Welfare Effect:
Consumer: +(a+b+c+d)
Producer: - a
Government: - (c+e)
Total welfare: b+d-e

Question 12

When is trade creation likely to be greater than trade diversion

Answer 12

Initial tariff is very high.
- There is a greater probability that customs union will
create trade among members rather than divert trade
from non-members to members.

Cost difference between goods purchased with and
outside the union is a relatively small.
- This makes it less likely that customs union will lead to
costly trade diversion.

Question 13

Examples of forms of economic integration

Answer 13

PFA - British Common Wealth Preference Scheme 1932

FTA - EFTA 1960 / NAFTA 1993

CU - EU 1957 / common market status in 1993

Question 14

Theory of Second Best

Answer 14

If all conditions required to meet Pareto optimum can’t be satisfied, trying to reach as many of these conditions doesn’t necessarily lead to the second best option.

Link

Forming a customs union and removing trade barriers may not result in the second-best welfare position

Question 15

How to maximise welfare in Customs Union

Answer 15

1. Countries competitive rather than complimentary
2. More countries = low-cost producers
3. Higher Pre Union trade barriers
4. Low barriers on trade with Rest of World

EU have great bargaining power due to acting as a single unit

Question 16

Static Welfare effects

Answer 16

1. Admin savings
   2.Elimination of Customs office
   3.Elimination of boarder patrol

By reducing its demand for imports from and its supply of exports to the rest of the world, there is likely to be an improvement in the collective ToT

Static welfare benefits are estimated to be 1-2% of GDP for the EU (Salvatore)

Question 17

Brexit Effects

Answer 17

“Common User Charge” - up to £145 for consignments of EU plant and animal products - detering trade

Still face customs checks - UK to EU trade has declined by 16%

“UK experienced lower growth rates in exports and imports compared to EU and US (2021)”
However “ UK imports from rest of the world have increased substantially.”

British businesses have spent nearly £100,000 a year navigating post- Brexit customs 2021-2024

Regulatory compliance obligations such as Trade and Cooperation Agreement (sets out preferential arrangements in areas such as trade in goods and in services, digital trade, intellectual property, public procurement, aviation and road transport, energy etc)

It provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin.

Question 18

Dynamic Benefits of Customs Union

Answer 18

1. Increased competition due to sluggish nature of monopolies being removed as trade barriers are lifted as such there is an increase in technology development to become more effecient
2. Economies of scale due to enlarged market
3. stimulus to investment to take advantage of enlarged market to meet increased competition
4. common market, the free community‐wide movement of labor and capital is likely to result in better utilization of the economic resources of the entire community.