FREE TRADE AND PROTECTIONISM

1
FREE TRADE AND PROTECTIONISM

• Basis of trade - exchange and specialisation
• - trade patterns
• Comparative advantage
• - based on several initial assumptions
• - provides basis for free trade
• - illustration with two countries and two
  products
• - can be extended to many countries and many
  goods
• - often reflects differences in capital-labour
  ratios
• - does not explain who actually benefits from
  trade
• Intra-industry trade
• - represents two-way trade in goods within the
  same industry
• - people like many brands e.g. motor cars
• - economies of scale exist in many industries
• - specialisation limited by transport costs
  making trade between geographically close
  countries more likely
• - Intra-industry trade very strong in EU and is
  facilitated by an integrated
• market where barriers to trade are very
  low    

2
FREE TRADE AND PROTECTIONISM (Con)

• Obtstacles to trade
• - Dumping
• - Non-tariff barriers
• - administrative procedures
• - public procurement policies
• - voluntary export restraints
• - national promotional campaigns
• - restrictions on dubious grounds of safety and
  health
• - unique specification requirements
•    

3
TARIFF BARRIERS AND THE CUSTOM UNION

• Immediate aim of Rome Treaty to create economic
  integration through removal of trade barriers
  envisaged the creation of a common market
• even limited attempts at economic integration can
  lead to spillover effects
• Article 3 (a) calls for the removal of customs
  duties and quantitative restrictions (quotas
  etc.) and all other charges having an equivalent
  effect
• initial transition period of 12 years given to
  remove these barriers (achieved ahead of
  schedule)
• new entrants from 1973 (and after) given 5 - 7
  years to remove barriers (EFTA entrants immediate
  removal)
• importance of equivalent measures reflected by
  Cassis de Dijon case (Art 30)
• Major loopholes - Art 109i
• Protective measures allowed in the case of
  Balance of Payments difficulties (though
  qualified by many restrictions)

4
TARIFF BARRIERS AND THE CUSTOM UNION (Con)

• also Article 36 declares that restrictions on
  imports and exports can be    
• "justified on grounds of public morality, public
  policy or public security the protection of
  health and life of humans, animals or plants the
  protection of national treasures"  
• Article 36 creates the need for harmonisation of
  various country's standards (laid out in Article
  100).
• No discrimination allowed on grounds of
  nationality (Article 7)
• Anti-dumping measures also allowed though not in
  terms of intra-community trade
• Common Commercial Policy  
• member states cease to be free to unilaterally
  determine the rate of tariffs and quotas in
  relation to third countries
• member states can take protective action on an
  emergency basis but this can be revoked by the
  Commission

5
BASIC THEORY OF A CUSTOMS UNION

• Customs Unions not unambiguously favourable in
  economic terms
• It represents free trade within a block of
  countries, which can have discriminatory effects
  on the rest of the world
• Trade Creation - where production is shifted from
  a higher to a lower cost producer
• Trade Diversion - where production is shifted
  from a lower to a higher cost producer    
• Levels of Analysis  
• Static - where no change takes place in the
  volumes of trade brought about by customs union
• Partial Equilibrium - using supply and demand
  diagrams    

6
BASIC THEORY OF A CUSTOMS UNION (con)

• General findings
• - more likely to be advantageous if partners are
  potentially competitive with complementary needs
• - more likely to increase economic welfare the
  higher the initial duties on imports from
  partners
• - also more likely to be of benefit the lower
  the common external tariff against the rest of he
  world
• - the greater the proportion of world trade it
  covers the more likely that it will be
  advantageous    
• Empirical Findings
• - In general these studies show that trade
  creation effects outweigh trade diversion

7
BASIC THEORY OF A CUSTOMS UNION (con)

• Dynamic Considerations  
• - political cohesion
• - benefits of collective bargaining in terms of
  international negotiations
• - reducing monopoly power
• - internal economies of scale
• - external economies of scale
• - reducing levels of x-inefficiency
• - psychological changes in attitude
• - changes in distribution of income

8
NON-TARIFF BARRIERS IN THE CUSTOMS UNION

• Considerable problems with NTB's in the EC in the
  '80's
• Cartels and Concentrations
•  Dominant firms and mergers
• Fiscal Differences
• - considerable attention given to indirect tax
  (especially VAT)
• - little progress made on harmonisation of
  excise duties

9
NON-TARIFF BARRIERS IN THE CUSTOMS UNION (con)

• State Aids  
• - state aids kept constantly under review.
  Commission can terminate or modify aids that are
  deemed incompatible with Treaty's objectives  
• - Official and technical standards  
• - Product Liability  
• - Public Purchasing  
• - Various directives passed in 1970's to curb
  national favouritism.
• loopholes were continually exploited to
  evade issue however still very little use made
  of non-national suppliers and contractors  
• State Monopolies
• - problems with state commercial monopolies in
  France, Italy and Germany - not required to be
  abolished but rather reformed