Theorie und Politik der Europäischen Integration

Theorie und Politik der Europäischen Integration

Prof. Dr. Herbert Brücker

Lecture 4

Market Size and Scale EffectsTrade and Competition Policies

Theory and Politics of European Integration

Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker

Theory and Politics of European Integration Lecture 5 Preferential Trade Liberalisation

Last Lecture

• Preferential Trade Liberalisation· The PTA Diagram

– Free Trade Equilibrium– MFN Tariff Equilbrium– Unilateral Trade Discrimination– Supply Switches– Welfare Effects

· Empiry: Is Trade Diversion an Issue?· Welfare Effects of a Customs Union· Customs Union vs. Free Trade Area· WTO Rules and Customs Union/Free Trade Areas

– Art. 24 WTO



Uniform MFN TariffDomestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR MS

MSMFN

M’

Partner HomeRoWBorder price

Border price

Pa

P’

T

T

PP’-T

XR’

XP’ XP MFREE

p*

XR



Discriminatory, Unilateral LiberalizationDomestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR MS

MSMFN

M’

Partner HomeRoWBorder price

Border price MSPTA

1

Pa

P’

T

T

P” P”

P’-TP”-T

XR” XR’ XP’ XP” M”

p*



Domestic Price and Border Price Changes

Domestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR

MS

MSMFN

M’

Border price Border price

MSPTA

P’

TP”

P’-T

P”-T


P’-T

P”




Domestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR

MS

MSMFN

M’


MSPTA

P’

TP”

P’-T

P”-T


P’-T

P”

domestic price falls to P’’ from P’




Domestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR

MS

MSMFN

M’


MSPTA

P’

TP”

P’-T

P”-T


P’-T

P”

domestic price falls to P’ from P”

Partner-based firms see border price rise,

from P’-T to P”




Domestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR

MS

MSMFN

M’


MSPTA

P’

TP”

P’-T

P”-T


P’-T

P”

domestic price falls to P’ from P”

Partner-based firms see border price rise,

P’-T to P”

RoW firms see border price

fall from P’-T to P”-T.



Quantity Changes: Supply Switching

Domestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR

MS

MSMFN

M’


MSPTA

P’

TP”

P’-T

P”-T


P’-T

P”


Theory and Politics of European Integration Lecture 3 Preferential Trade Liberalisatio

Quantity Changes: Supply Switching

Domestic price

Homeimports

MD

RoWExports

PartnerExports

XSPXSR

MS

MSMFN

M’


MSPTA

P’

TP”

P’-T

P”-T


P’-T

P”RoW exports fall



Today's Lecture - Overview

• Market Size and Scale Effects• EU Competition Policies• EU Trade Policies



Today's Reading

• Market Size and Scale Effects· Baldwin & Wyplosz (2009) “The Economics of European

Integration”, McGraw-Hill, Ch 6.

•Competition and State Aid Policies· Baldwin & Wyplosz (2009) “The Economics of European


• Trade Policies· Baldwin & Wyplosz (2009) “The Economics of European




Market Size Matters

• European leaders always viewed integration as compensating small size of European nations.• Implicit assumption: market size good for economic

performance.

• Facts: integration associated with mergers, acquisitions, etc.• In Europe and more generally, ‘globalisation.’



Sketch of economic logic

• liberalisation • de-fragmentation • pro-competitive effect • industrial restructuring (M&A, etc.) • RESULT: fewer, bigger, more efficient firms

facing more effective competition from each other.



Sketch of economic logic

• liberalisation • de-fragmentation • pro-competitive effect • industrial restructuring (M&A, etc.) • RESULT: fewer, bigger, more efficient firms

facing more effective competition from each other.



Monopolies and duopolies

• Firms are not price takes• Elasticity of demand curve constrains price

levels • Profit maximum is achieved if prices are chosen

in a way that marginal revenues equal marginal costs

• Duopoly: Price and production depends on expectations on behaviour of competitors

• Cournot-Nash equilibrium: Optimum is achieved when symmetric firms produce same level of output



Economic logic (background): Monopoly case

Sales

Price

MarginalCost

Marginal RevenueCurve

DemandCurve

Sales

Price

Q’+1

P”

MarginalCost Curve

C E

D

DemandCurve

A

B

Q*Q’

P*P’




Sales

Price

MarginalCost


DemandCurve

Sales

Price

Q’+1

P”

MarginalCost Curve

C E

D

DemandCurve

A

B

Q*Q’

P*P’

Extra revenues of one unit: D + E – A.„marginal revenue“

Extra revenues of one unit: D + E – A.„marginal revenue“




Sales

Price

MarginalCost


DemandCurve

Sales

Price

Q’+1

P”

MarginalCost Curve

C E

D

DemandCurve

A

B

Q*Q’

P*P’Profitmaximum:

marginal revenue equals marginal costs.

Profitmaximum: marginal

revenue equals marginal costs.



Duopoly case, example of non-equilbrium

Residual Demand Curve firm 2 (RD2)

Firm 2’s expectation of sales by firm 1, Q1

DemandCurve (D)

MC

Residual Marginal Revenue Curve firm 2 (RMR2)

x2’

p2’

Firm 2 sales

Residual Demand Curve firm 1 (RD1)

Firm 1’s expectation of sales by firm 2, Q2

DemandCurve (D)

price

MC

Residual Marginal Revenue Curve firm 1 (RMR1)

x1’

p1’

Firm 1 sales

A1 A2

price



Duopoly and oligopoly case, equilbrium outcome

RD’

D

MC

x**

p**

sales

A

price

RMR’

3x**Oligopoly

RD

Typical firm’s expectation of the other firm’s sales

D

MC

x*

p*

sales

A

price

RMR

2x*

Duopoly

Typical firm’s expectation of other the other firms’ sales



Bringing this to trade

• Brander and Krugman (1983)• Building on Nash they combine increasing

returns to scale, imperfect competition and trade

• Presentation of theory here in Breakeven-Competition (BE-COMP)-Diagram



Breakeven-Competion (BE-COMP) Diagram

Mark-up ()

COMPcurve

BE (break-even) curve

’

n’

mono

duo

n=1 n=2 Number of firms




Mark-up ()

COMPcurve


’

n’

mono

duo


Markup (µ): Price markup over costs,

depends on competition

Markup (µ): Price markup over costs,

depends on competition




Mark-up ()

COMPcurve


’

n’

mono

duo


Breakeven (BE) curve: With increasing returns to scale only a limited number of firms can

survive. Survival depends on markup µ.

Breakeven (BE) curve: With increasing returns to scale only a limited number of firms can

survive. Survival depends on markup µ.



Details of COMP curve

Marginal cost curve

Typical firm’s sales

price

p"

Monopoly mark-up

Duopoly mark-up

D

R-D (duopoly)

xmonoxduo

MR (monopoly)R-MR

MC

p'

AB

A’

B’

COMPcurve

n=1 n=2

mono

duo



Details of BE curve: closed economy

Sales per firm

AC

price

Totalsales

Co

Demand curve

Mark-up (i.e., p-MC)

o

xo= Co/no

MC

euros

BE

no

poo+MC

x’= Co/n’ x”= Co/n”

A

B

B Apo

ACo=po

n” n’

Home market

COMP


Theory and Politics of European Integration Lecture 7 Trade and Competition Policies

Outline of BE-COMP Diagram

Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curve Demand curve

COMP curve




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curve

Average cost of representative firm equals price after adjustment of firm number

Demand curve

COMP curve




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curve


Demand curveCompetition curve shows combination of mark-up and equilibrium firm number

COMP curve




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curve


Demand curve Breakeven curve is upward sloping, since sales per firm fall with increasing firm number such that higher mark-up is needed to breakeven

COMP curve



Addressing European integration

• Assume that trade-to-non trade liberalization provides (i) each firm with a market of twice its side and (ii) double the number of firms in each market

• What happens to markup, equilibrium number of firms, average costs, price and demand?



No-trade-to-free-trade integration

Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curve

After integration, each firm has (i) second market of same size and (ii) twice the number of competitors




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curveCompetition effect: number of firms is 2n’, such that mark-up declines to A at given firm number.




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curveMarket size effect: BE curve shifts to outward to the right. At given number of firms (point 1) we have no equilibrium).




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curveSmaller mark-up and higher competition reduces prices to pA. Below breakeven point for given number of firms. Industrial restructuring results in E’’ equilibrium number of firms.




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curveSince each firm has a larger market in new equilibrium, average costs decline. Efficiency gain.




Sales per firm

AC

price

Totalsales

Demand curve

Mark-upeuros

x’

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market

E”

E’

C

Average cost curve

Welfare gain: C. Consumer benefit from (i) lower prices, (ii) higher consumption.



Economic logic

• Integration: no-trade-to-free-trade: BE curve shifts out (to point 1). (Larger market effect)

• Defragmentation:• PRE typical firm has 100% sales at home, 0% abroad;

POST: 50-50 ,• Can’t see in diagram.

• Pro-competitive effect: • Equilibrium moves from E’ to A: Firms losing money (below BE).• Pro-competitive effect = markup falls.• short-run price impact p’ to pA.



Economic logic (cont.)

Industrial Restructuring:

• A to E”,• number of firms, 2n’ to n”. • firms enlarge market shares and output, • More efficient firms, AC falls from p’ to p”, • mark-up rises, • profitability is restored.

Result:

• bigger, fewer, more efficient firms facing more effective competition.

Welfare: gain is “C”.



Facts

• M&A activity is high in EU.• much M&A is mergers within one member state

• about 55% ‘domestic’;• remaining 45% split between:

· one is non-EU firm (24%), · one firm was located in another EU nation (15%),· counterparty’s nationality was not identified (6%).

· Empirical evidence: Single Market Programme reduced Price-Cost Margins by 4 per cent on average.· High variance:· - 15 per cent in office equipment sector· -0.1 per cent in brewing



Facts

Distribution of M&A quite varied:• Big 4: share M&As much lower than share of the EU GDP.• I, F, D 36% of the M&As, 59% GDP.

· Except UK.• Small members have disproportionate high share of M&A.• This picture fits pretty well into theoretical expectations:

Small countries suffer more from fragmentation of markets such that pressure for industrial restructuring is higher compared to countries with a larger market share



Facts

M&A activity by nation, 1991-2002

B, 2.8%

DK, 2.6%

EL, 1.1%

E, 5.0%F, 13.5%

IRL, 1.7%

I, 6.2%

L, 0.5%NL, 6.5%

A, 2.1%

P, 1.2%

FIN, 3.9%

S, 5.3%

UK, 31.4%

D, 16.3%



Facts

• Why M&A mostly within EU?• Why UK’s share so large?• Non harmonised takeovers rules.

· some members have very restrictive takeover practices, makes M&As very difficult.

· others, UK, very liberal rules.

• Lack of harmonisation means restructuring effects very impact by member states.



EU Competition and State Aid Policy



Competition and subsidies

Two immediate questions:

• “As the number of firms falls, isn’t there a tendency for the remaining firms to collude in order to keep prices high?”

• “Since industrial restructuring can be politically painful, isn’t there a danger that governments will try to keep money-losing firms in business via subsidies and other policies?”

The answer to both questions is “Yes”. • See Chapter 14, 3rd Edition.



EU Competition Policy

• Exclusive competency of EU; Commission controls.

• 2 aspects: mergers & anti-competitive behaviour.

• Economic integration yields less firms, higher concentration but more cross-border competition

• Creates incentives to collude and undertake anti-competitive measures

• Look at justification for putting competition policy at the EU level



Anti-competitive behaviour

• Collusion is a real concern in Europe. • dangers of collusion rise as the number of firms falls.

• Collusion in the BE-COMP diagram• COMP curve is for ‘normal’, non-collusive competition• Firms do not coordinate prices or sales

• Other extreme is ‘perfect collusion’ • Firms coordinate prices and sales perfectly• Max profit from market is monopoly price & sales• Perfect collusion is where firms charge monopoly price and split the sales among

themselves



Economic effects

Number of firms

Mark-up

COMP

BEFT

E”

nB

mono

B

n=1 n”

A

2n’

B

”

• Consider two cases:• Perfect collusion:

• Firms set prices to monopoly level and divide profits equally.

• Price increases.• Markup increases.• More firms enter market.• Eventually, zero profit

condition restored, i.e. price equals average costs.

nP’



Economic effects

Number of firms

Mark-up

COMP

BEFT

E”

nB

mono

B

n=1 n”

A

2n’

B

”

• Partial collusion• Less opportunities to

cheat• 2n’ is too high for all

firms to break even. • Industrial consolidation

proceeds as usual, but only to nB.

• Zero profits earned by all at point B.

• Prices higher, pB> p”, smaller firms, higher average cost.



Economic effects (cont.)

price

Totalsales

Demand curve

Number of firms

Mark-up

COMP

BEFT

pB

Perfectcollusion

Partialcollusion

E”

nB

mono

B

n=1 n”

pmono

E”p”

B

CB

A

• The welfare cost of collusion (versus no collusion)

• four-sided area marked by pB, p”, E” and B.



EU Competition Policy

• To prevent anti-competitive behavior, EU policy focuses on two main axes:

• Antitrust and cartels. The Commission tries:• to eliminate behaviours that restrict competition (e.g.

price-fixing arrangements and cartels) • to eliminate abusive behaviour by firms that have a

dominant position• Merger control. The Commission seeks:

• to block mergers that would create firms that would dominate the market.



Economics of cartels

euros

QuantityC’ C

P’

P = AC

ab

Demand curve

• Suppose price without cartel would be P.

• Cartel raises price to P’.• Consumers lose: -a-b;

‘ripoff’-effect• Producers gain: a.• Net loss: b.• “technical inefficiency”



The vitamin cartels (Box 11‑1)

• In 2001, Commission fined 8 companies for their participation in cartels that eliminated competition in the vitamin sector (vitamins A, E, B1, B2, B5, B6, C, D3, Biotin, Folic acid, Beta Carotene and carotinoids) for more than ten years.

• The European vitamins market is worth almost 1 billion euros a year.

• The firms fixed prices, allocated sales quotas, agreed on and implemented price increases and issued price announcements in according to agreed procedures.

• EU can fine firms up to 10 % of total annual sales.



The vitamin cartels (Box 11‑1) (cont.)

• They also set up a mechanism to monitor and enforce their agreements and participated in regular meetings to implement their plans. This included the establishment of formal structure and hierarchy of different levels of management, often with overlapping membership at the most senior levels to ensure the functioning of the cartels, the exchange of sales values, volumes of sales and pricing information on a quarterly or monthly basis at regular meetings, and the preparation, agreement and implementation and monitoring of an annual "budget" followed by the adjustment of actual sales achieved so as to comply with the quotas allocated.

• Hoffman-La Roche of Switzerland received the largest fine (462m euros) for being the cartel ringleader, which also included BASF and Merck (Germany), Aventis SA (France), Solvay Pharmaceuticals (the Netherlands), Daiichi Pharmaceutical, Esai and Takeda Chemical Industries (Japan).



Exclusive territories

• More common anti-competitive practice is ‘exclusive territories’

• Nintendo example; high prices in Germany vs UK.

• Prevent arbitrage within the EU (illegal).• European Commission

fined Nintendo and the 7 distributors 168 million euros.

euros

Quantity

PGermany

PUK

DGermany

DUKMC

MRGermany

MRUK



Exclusive territories

• German demand curve steeper, i.e. higher willingness to pay (lower price elasticity)

• UK has flatter demand curve (e.g. more opportunties to substitute, higher price elasticity)

• Profits are maximized where marginal revenue and marginal costs curve intersect

• This implies requesting higher price in DE relative to UK

euros

Quantity

PGermany

PUK

DGermany

DUKMC

MRGermany

MRUK



Abuse of dominant position

• Firms that are lucky or possess excellent products can establish very strong positions in their market.

• Not a problem, per se• position may reflect superior products and/or efficiency • e.g. Google’s triumph

• However dominance may tempt firm to extract extra profits from suppliers or customers

• Or arrange the market to shield itself from future competitors. E.g. hiding the programm code.

• Illegal under EU law ‘abuse of dominant position.’e.g. Microsoft with media software• charge high price of Word, etc. where the competition

has been driven out of biz (WordPerfect, etc.), but give for free all software where there is still competition.



Merger control

• Initially P=AC.• Merger implies lower AC to

AC’, but raises the price to P’.

CS=-a-b; ‘ripoff’ PS=+a+c• Net welfare = -b+c ;

ambiguous, ‘efficiency defence’

• Laissez-faire (in US and increasingly in EU); if free entry then eventually P driven down to AC’.• Overall gains as in

BE-COMP diagram.

euros

QuantityC’ C

P’

P=AC

ab

c

Demand curve

AC’

Williamson diagram



State aid economics

• Look at two cases:

• Restructuring prevention.

• Unfair competition.



Restructuring prevention

• Consider subsidies that prevent restructuring

• Specifically, each governments make annual payments to all firms exactly equal to their losses• i.e. all 2n’ firms in Figure

6-9 analysis break even, but not new firms

• Economy stays at point A• This changes who pays for

the inefficiently small firms from consumers to taxpayers.

Number of firms

Mark-up

COMP

BEFT

BE

2n’ n” n’

E’

A

1

E”'

A



Restructuring prevention: size of benefit

• Pre-integration: fixed costs = operating profit = area “a+b”• Post-integration: operating profit = b+c• ERGO: Breakeven subsidy = a-c • Net Benefit: b+c+a-c=a+b

Sales per firm

AC

Price

Totalsales

Demand curve

Number of firms

Mark-upeuros

x’

COMPBEFT

2n’

p’

C’ CA

pA

xA= 2CA/2n’

pA

a

b c

E’

AA

A

MC

E’



Restructuring prevention: welfare impact

Sales per firm

AC

Price

Totalsales

Demand curve

Number of firms

Mark-upeuros

x’

COMPBEFT

2n’

p’

C’ CA

pA

xA= 2CA/2n’

pA

a

b c

E’

AA

A

MC

E’

d

• Change producer surplus = zero (profit is zero pre & post)• Change consumer surplus = a+d• Subsidy cost = a-c (producer’s loss)• Total impact = a+d – (a-c)= d+c



Does it make sense to subsidize?

• Static welfare gains resulting from inefficiency of imperfect competition, i.e. differences between average and marginal costs• Higher production = higher welfare under

increasing returns to scale

• However, subsidizing loss-making enterprizes creates dynamic losses -> reduced innovation and technological progress



Only some subsidise: unfair competition

• If Foreign pays ‘break even’ subsidies to its firms

• All restructuring forced on Home

• 2n’ moves to n”, but all the exit is by Home firms

• Unfair

• Undermines political support for liberalisation



EU policies on ‘State Aids’

• 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition.

• EU founders considered this so important that they empowered the Commission with enforcement.



EU Trade Policies



Trade: Facts

• Two-thirds of EU25 exports are to other EU25 nations. • More than 90% of this is actually among the EU15 trade

(10 new Member States are fairly small economically). • Add all other European nations, three-fourth of Europe’s trade

is within Europe.• North America and Asia are the EU25’s main markets outside

Europe, each accounts less than one-tenth of EU exports. • Africa, Latin America and the Middle East are not very

important.• The pattern on the import side is very similar• Rounding off, three-fourth of EU imports are from Europe,

with the fourth quarter split into two more or less even groups of nations – Asia, and all other nations. Trade with non-European nations is balanced.



Facts: Patterns of Trade

EU25 exports, 2003

EU2567%

EFTA4%

Turkey1%

CIS2% Other Europe

1%

Other24%

North America9%

Asia7%

Latin America2%

Africa3%

RoW1%

Middle East3%

EU25 Imports, 2003

EFTA4%

Turkey1%

CIS3%

Other Europe1%

Other25%EU25

67%

Asia12%

North America

6%

Latin America2%

Africa3%

Middle East1%

Source: Eurostat. The latest data can be downloaded from Eurostat’s new user-friendly service europa.eu.int/comm/eurostat/



Facts: Differences across Member States: non-EU trade

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

LatviaLithuaniaSlovakia

AustriaFinlandEstonia

SloveniaPoland

SwedenDenmarkGermany

Czech Rep.Hungary

ItalyGreece

EU25-AvgFrance

PortugalCyprus

SpainNetherlands

UKBelgium

MaltaIreland

Luxembour

NonEU Europe N. Amer. Africa Latin Amer. Asia RoW



Composition of imports and exports, aggregate trade

• Manufactured goods 90% of total exports (half of all exports being machinery and transport equipment).

• Import side, two-thirds on manufactured goods.

• EU-25 is a big importer of fuel (18 % of imports).

• Only 6% food and agriculture. • Other types of goods play a relatively minor part in the

EU’s trade.



Composition of imports and exports, aggregate trade

Food & live animals

Other raw materials

Fuel products

Chemical products

Other manufactured

Machinery, transport equipment

Machinery, transport equipment 45% 34%

Other manufactured 26% 26%

Chemical products 16% 9%

Fuel products 3% 18%

Other raw materials 2% 5%

Food & live animals 5% 6%

Misc. 2% 3%

Exports, 2004 Imports, 2004

Manufactured Goods, 87%

Manufactured Goods, 69%



EU External Trade Policy: Institutions and trade in goods

• Recall: Customs Union requires common trade policy• Trade policy among the ‘first pillar’ since Rome Treaty• European Commission has the right to set tariffs and

negotiate on trade issues at WTO• EC Trade Commissioner negotiates, has a mandate

assigned by the council of ministers• Council has final say



EU Trade Policies: other areas

• World trade negotiations involve far more than trade in goods.• Trade-related intellectual property rights (TRIPs)• Trade-related investment measures (TRIMs), • Service trade• Technical Barriers to Trade (TBTs), trade facilitation, etc.

• Treaty of Rome only gave Commission power over trade in goods

• Treaty of Nice (& Amsterdam) extended Commission’s authority to some aspects of Services trade and TRIPs, & made QMV the rule in Council on such matters.



Contingent protection

• WTO allows members to raise tariffs to:• Counter ‘unfair’ trade practices, e.g.

• Antidumping measures, e.g. penalty tariffs• Countervailing duties, e.g. ‘voluntary agreements’ of

‘price-undertakings’· Firms charge higher prices, but EU loses tariff revenue

• Provide temporary protection “safeguards” • Widely applied by US and EU

• The various WTO articles on these require a procedure; in EU the Commission is in charge of these procedures, but the final decision is subject to QMV approval of the Council.



EU External Trade Policy: MFN Tariffs

• MFN tariff structure reflects comparative advantage of EU industries

• Low tariffs in manufacturing· Exception: textiles and clothing

• High in food and agriculture, especially diary products• Interest groups matter



EU’s MFN tariff structure (Common External Tariff – CET)

197676

2671

150114

75192

101210

101010121414

2317

2212

0 50 100 150 200 250

Cut flowers and plantsOther agricultural products

Oil seeds, fats, oils and their productsFish and fishery products

Beverages and spiritsFruit and vegetables

Coffee and tea, cocoa, sugar, etc.Tobacco

Live animals and products thereofGrains

Dairy products

Wood, pulp, paper and furnitureNon-electric machinery

MetalsMineral products, precious stones

Non-agricultural articles n.e.s.Electric machinery

Chemicals and photographic suppliesLeather, rubber, shoes & travel gds

Transport equipmentTextiles and clothing

Average

High

Source: WTO’s Treade Policy Review, EU 2004.



EU External Trade Policy: Preferential Agreements

• EU has special deals with 139 nations; often more than one per partner.

• Each can be very complex ...



EU External Trade Policy



Preferential agreements: logic

‘Hub’ and ‘Spoke’ System• EU is a regional ‘hub’ in ‘hub’ and ‘spoke’ system of

trade deals· Morocco is a typical case: 71% of exports to EU, but

only 1% of EU imports from Morocco· Asymmetry gives EU high leverage in dealing with

these nations



EU External Trade Policy: European circle

European-Mediterranean area:• West, Central and Eastern Europe

= Single market in industrial goods;· EU + EEA + Swiss bilateral agreements

• Euro-Mediterranean Association Agreements:· Morocco, Algeria, Tunisia, Egypt, Israel, the

Palestinian Authority, Lebanon, Jordon, Syria and Turkey.

· Asymmetric (EU cuts its tariffs faster) FTAs in manufactures, by 2010.

· Turkey unilaterally in Customs Union in manufactures.



EU External Trade Policy: European circle (cont.)

• European-Mediterranean area (cont.):• Asymmetric dependence (e.g. 70% of Morocco’s

exports to EU, but <1% of EU to Morocco)

• EFTA’s “FTA union” with EU; EFTAns mimic EU to avoid discrimination against EFTA-based exporters.



Former Soviet Republics & Western Balkans

• Partnership and Cooperation Agreements (PCAs).• These are GSP+ (GSP=Generalised System of

Preference).• Russia, Ukraine, Georgia, Belarus, Armenia, Azerbaijan,

Kazakhstan, Kyrgyzstan, Moldova and Uzbekistan.• Asymmetric tariff reduction without requiring PCA

partners lowering theirs.

• Stabilisation and Association Agreements (SAAs).• Former Yugoslavian states.• Croatia has started membership; others likely to follow.



Preferential arrangements with former colonies

• Colonial preferences conflicted with Common External Tariff

• EU made exception for these nations to avoid imposing new tariffs; signed “unilateral PTAs”

· Yaoundé Convention and Arusha Agreement • When UK joined 1974 exceptions extended to many

Commonwealth nations.· “ACP nations” (Africa, Caribbean & Pacific); the new

agreement = Lomé Convention. · Duty-free but subject to quota for sensitive items

(sugar, banana, etc.)



Preferential arrangements with former colonies

• These didn’t help the ACP nations much • c.f. Asian success without tariff preferences

• When Lomé Convention renewed in 2000, the EU and the ACP nations agreed to modernise the deal

• Cotonou Agreement; eventually reciprocal free trade• stepwise reduction of tariffs on ACP nation side• general outline of principles• details fixed in bilateral Economic Partnership

Agreements (EPAs)



Generalised System of Preferences (GSP)

• 1971 GATT provision allows tariff preferences.

• EU grants GSP to almost all poor nations.

• General GSP.

• “Super-GSP” more generous on market access.

• ‘Everything but Arms’ (EBA) for least developed nations.



Generalised System of Preferences (GSP) (cont.)

• On paper, EBA grants zero-tariff access all goods, except arms and munitions.

• Goods in which these nations’ are most competitive are in fact excluded from the deal.

• Tariffs on bananas, rice and sugar – products where these poor nations could easily expand their EU sales – are to come down only in the future.

• Moreover, even though all tariffs on these items will be gone by 2009, the exports quantities are limited by bilateral quotas.

• 49 nations qualify for EBA in principle in 2005.



Non-regional FTA

• Mexico, Chile, and South Africa, done.

• Ongoing with Mercosur and the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates).



Finally, non-preferential trade

• Only 6 main nations: US, CAN, JAP, AUS, AT, KOR

• But about 1/3rd of EU imports are not granted some sort of preferential treatment



NEXT LECTURE

• December 12, 2013

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Theorie und Politik der Europäischen Integration