EC1503 Macroeconomics I: Introduction to International Economics European Integration: Economics in

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EC1503 Macroeconomics I Introduction to
International EconomicsEuropean Integration
Economics in Action?

• Ken Thomson
• Emeritus Professor of Agricultural Economics
• 4pm, Tuesday 8 May 2007

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Post-War Europe

• Hunger starvation 1945, cold (1947)
• US Marshall Aid to Britain, Germany, France,
  Italy, etc.
• The Cold War (Berlin blockade 1948-49, Korea War
  1951, Cuba Crisis 1962)
• The United Nations and its family IMF, World
  Bank, GATT (now WTO) FAO (Boyd Orr), WHO, UNHCR,
  etc.
• Colonies move to independence

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Political Steps in Europe - I

• 1951 (the Schumann Plan) the European Coal
  Steel Community (France and Germany, plus Italy,
  Belgium, Netherlands, Luxembourg)
• 1957 (Treaty of Rome) the European Economic
  Community (EEC) of the Six UK stays out
• 1963 and 1967 UK applications to join the EEC
  refused
• 1973 UK, Eire, Denmark (but not Norway)
• 1980 1986 Greece Spain and Portugal

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Political Steps in Europe - II

• 1990 Germany re-unification
• 1995 Sweden, Finland, Austria (the EU-15)
• 2005 Eastward Enlargement Estonia, Lithuania,
  Latvia, Poland, Czech R., Slovakia, Hungary,
  Slovenia, Malta, Cyprus (the EU-10)
• 2007 Romania, Bulgaria (the EU-12)
• 20?? Croatia, Macedonia (Candidate Countries)
• 20?? other Western Balkans (Serbia, Albania,
  etc.)
• 20?? Turkey (also a CC), Ukraine, Belarus

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Political Steps in Europe - III

• Special aid and trade policies for ex-colonies in
  Africa, Caribbean, Pacific (but not N. Africa,
  India, Pakistan)
• A Neighbourhood Policy for countries in the
  West Balkans, North Africa, East Mediterranean
  and the ex-Soviet Union
• The EU and other organisations, e.g. the UN
  family, NATO, OSCE, Kyoto, etc.

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The Economics of Integration

• The gains from trade arising from
  specialisation (Adam Smith and Ricardo
  comparative advantage) in a Single Market
• Economies of scale of production in a larger
  market (e.g. for aircraft, banking, ..)
• A more efficient economy if internal trade
  barriers are reduced, e.g. common standards
• More negotiating (market) power, e.g. vs. the USA
  or China, in the WTO, etc.

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Two-Country Autarchy (No Trade)

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Two-Country Free Trade

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The Effects of Two-Country Trade

• Higher-priced (high-cost) country becomes an
  importer lower trading prices benefit consumers
  (users), but hurt producers
• Lower-priced (low-cost) country becomes an
  exporter higher trading prices hurt consumers
  (users), but benefit producers
• but comparative statics diagram shows
• net social gains in economic welfare

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The Welfare Effects of Two-Country Trade
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Other Effects of International Trade

• Greater variety for consumers
• More competition for producers dynamic effects?
• More specialisation ( less self-sufficiency)
• More (or less?) risk
• More scope for govt. intervention (trade policy)
• Links to non-trade issues environment, labour,
  politics (e.g. war), etc.

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Stages of Economic Integration

• Autarchy no (or very little) foreign trade
  (N.Korea?)
• Protection tariffs and non-tariff barriers to
  trade (import quotas, regulations, etc.) e.g.
  to raise tax revenue, stabilise industries (most
  developing countries)
• Free (or Preferential) Trade Area remove (or
  lower) tariffs etc. between countries in trading
  bloc (empires)
• Customs Union a common external tariff against
  third countries (EEC)
• Common (or Single) Market freedom of movement of
  goods, services and factors, i.e. labour, capital
  (the EU) and common policies (e.g. the CAP)
• Monetary Union the same currency (Eurozone 13)
• Complete economic integration (the UK - ?!)

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The effects of a Customs Union

• Static
• Trade creation removal of trade barriers allows
  low-cost producers to supply high-demand
  countries
• Trade diversion imports shift from lower-cost
  supplier outside the CU to higher-cost supplier
  inside the CU net gain/loss?
• Dynamic
• Economies of scale, better terms of trade,
  increased competition, faster technology
• Some countries (or regions) may become depressed
  takeovers may lead to monopolies

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The Common Agricultural Policy (CAP) of the EU

• The only mandatory (compulsory) EEC/EU policy
  (Treaty of Rome, 1957) the old CAP (1960s to
  1990s) involved
• common guaranteed market prices for wheat, milk,
  beef, etc.
• common external tariff (vs. imports from US etc.)
• intervention buying of surpluses into public
  stocks, and export subsidies
• structural expenditure on land improvement,
  farm amalgamations, modernisation, etc.

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Results of the old CAP

• Steadily rising production (mostly yields)
• Consumer taxation (esp. of poor)
• Steady loss of small family farms farming
  incomes more or less steady
• Greatly rising budget spending (over 50 of total
  EEC budget) to handle surpluses
• Increased price of land
• Some specialisation (where allowed)

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Ideas for CAP Reform

• Subsidise resources (land, labour, cows) to move
  out of agriculture? almost impossible (except
  set-aside)!
• Reduce guaranteed prices? - very difficult
  (farming lobby)
• Tax farmers to reduce budget cost? - ditto!
• Impose production quotas? tobacco and sugar
  (1960s-),cotton (1981-),milk (1984-)

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Real CAP Reform

• Lower guarantee prices but compensate farmer
  incomes via direct (not market) payments
• MacSharry 1992 part-move (for GATT/WTO Uruguay
  Round) agri-environmental payments
• Agenda 2000 further decoupling of payments
  from levels of production
• Currently most CAP subsidies decoupled in
  single farm payments (av. 10K/farmer)
• Budget cost still high about 30 billion/year

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Other EU Policies

• Competition Policy
• Regional Policy
• Social Policy education, training, youth
• Research European networks, projects
• Environment water, GHGs, waste, nature reserves,
  etc.
• Consumer Safety, e.g. food, chemicals
• Overseas Development

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e.g. EU Competition Policy

• For a more efficient internal economy, and to
  compete with USA, China, etc.
• Anti-trust (anti-monopoly)
• Mergers
• Cartels, e.g. price-fixing
• Monitoring and control of state aids
• International, e.g. multinationals
• Regulation (e.g. labelling)

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e.g. Regional Policy

• Greater cohesion between countries and regions
• is a strategic EU goal
• European Regional Development Fund
• Aid for infrastructure roads, rail, ferries,
  water, sewerage, etc.
• Urban, rural, cross-border etc. schemes

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European Economic Integration a Good Idea?

• Yes
• Consumers gain from free internal trade
• Economies of scale, in EU and globally
• Higher standards for environment, safety, etc.
• No
• Uneven distribution of economic gains
• Loss of national flexibility (sovereignty)
• Loss of local variety, e.g. foods, shops, etc.
• ???
• A powerful, capitalist, world bloc
• A political home, e.g. for Central/Eastern
  Europe