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Extending micro tools to study effects of preferential tariff liberalisation. Studying European integrations e.g. EEC's ... Opens door to tariff cheats' ... – PowerPoint PPT presentation
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Title: P1247676907JilSB
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The Economics of European Integration
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Chapter 5Essential Economicsof Economic
Integration (Preferential Liberalisation)Katja
Zajc Kejarpresentation in part adapted from
BaldwinWplosz 2006
3
Extending micro tools to study effects of
preferential tariff liberalisation
- Studying European integrations e.g. EECs
customs union which were discriminatory, i.e.
preferential requires - at least three countries
- at least two integrating nations.
- at least one excluded nation.
- Ability to track domestic and international
consequences of liberalization.
4
Development of customs union theory
- Pre-1950 view was that customs unions implied a
move towards free trade and were therefore
welfare-improving. - Jacob Viner (1950) showed that customs unions
have contradictory effects on welfare due to
their trade creation and trade diversion effects. - Lipsey (1957) extended this analysis to include
consumption effects. - Customs union theory addresses the trade and
welfare effects on both members and the rest of
the world of a change from national tariff
protection to a customs union.
5
Unilateral preferential tariff liberalisation
small country case
- Settings
- Three countries Home, country A, country B
- Home initially imposes a tariff of T on imports
from A and B - Goods produced in all 3 countries are perfect
substitutes - Small country assumption Home faces a flat
import supply curve from both countries
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Initial equilibrium
- Before preferential discriminatory liberalisation
(econ. Integration) - Pre-liberalisation total supply curve TS1
- Home price PAT
- Border price PA
- Home production Q3
- Home consumption Q4
- Import volume Q4-Q3 from country A
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Integration with low-cost country
- Preferential discriminatory liberalisation with
country A ? total supply curve becomes TS3 - Home price PA
- Border price PA
- Home production Q1
- Home consumption Q6
- Import volume Q6-Q1 from country A
- Discriminatory liberalisation with the low-cost
country has the same impact as MFN liberalisation
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Welfare effects Integration with low-cost country
- Integration versus MFN
- ? Consumer surplus ? by the sum of all the areas
A through J - ? Producer surplus ? by the area AE
- ? Government revenue ? by the area CH
- _____________________
- NET EFFECT positive, equal to (BFG) (DIJ)
- Only trade volume effect!
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Integration with high-cost country supply
switching
- Preferential discriminatory liberalisation with
country B ? total supply curve becomes TS2 - Home price PB
- Border price PB (?)
- Home consumption Q5
- Some high cost Home production is replaced by
lower cost imports Q3-Q2 - Home production Q2
- Import volume Q5-Q2 (?) it is entirely replaced
by imports from B
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Welfare effects Integration with high-cost
country
- Integration versus MFN
- ? Consumer surplus ? by the area ABCD
- ? Producer surplus ? by the area A
- ? Government revenue ? by the area CH
- ___________________
- NET EFFECT ambiguous, equal to BD-H
- Two effects
- positive trade volume effect
- Negative border price effect
- ? Viners ambiguity
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Intuition for Viners ambiguity trade creation
trade diversion
- Discriminatory liberalisation.
- Liberalisation tends to improve welfare trade
creation - Trade creation the welfare change due to the
replacement of (higher-cost) domestic production
of import goods by (lower-cost) imports () - Discrimination tends to diminish welfare
trade diversion - Trade diversion the welfare change due to the
replacement of imports from a low cost source by
imports from a high cost source (-)
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Trade creation trade diversion
- Trade creation diversion is jargon that is
often used. - It is imprecise, but widely used.
- Intuition for why it is so popular, despite its
shortcomings. - It captures ambiguity of welfare gains in two
words.
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Welfare effects for partner country
? welfare H BDJ (?or?) P F
(always?) _______________ CUHP BDFJ
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Welfare effects for ROW
- Releasing a small country assumption,
discriminatory liberalisation of Home towards
Partner country brings ROW a welfare loss - ROW gets lower price and sells less a negative
border price effect and a negative trade volume
effect
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Conclusions
- Contrarily to the non-discriminatory
(multilateral) liberalisation the welfare effect
of preferential tariff liberalisation is
ambiguous for the liberalising nations (Viners
ambiguity) - The impact on excluded nations is always
negative. - ? theoretical superiority of non-discriminating
liberalisation.
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Impact of EEC customs union formation
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Analysis of a Customs Union
- European integration involved a sequence
preferential liberalisations but all of these
were reciprocal. - In example, both Home Partner drop T on each
others exports. - Need to address the 3-nation trade pattern.
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Customs Union vs FTA
- FTA like CU but no Common External Tariff.
- Opens door to tariff cheats,
- goods from RoW destined for Home market enter via
Partner if Partner has lower external tariff,
called trade deflection. - Solution is rules of origin meant to establish
where a good was made. - Problems Difficult and expensive to administer,
especially as world get more integrated. - Rules often become vehicle for disguised
protection. - Despite the origin-problem in FTAs, almost all
preferential trade arrangements in world are
FTAs. - CUs require some political integration.
- Must agree on CET and how to change it, including
anti-dumping duties, etc.
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Kemp Wan Theorem
- Argument so far is that a CU may not lead to an
overall welfare improvement for Union members.
Also, trade diversion hurts ROW exporters.
However, if we allow the possibility of costless
redistribution between partners, then it is
possible to prove that a CU need never harm any
country. This argument is known as the Kemp-Wan
theorem (1976). - It depends on the CET being a variable and being
set at the appropriate level. - Possible to alter CET to get Pareto improvement.
- Form CU and adjust CET to ensure zero external
trade effect (thus welfare impact on RoW is
zero). - Treat external trade vector as part of endowment
vector First Welfare Theorem tells us FT
between partners achieves FB and so is better
than distorted equilibrium. - Not practical, but an intellectual landmark (FTAs
need not be bad).
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Readings
- Basic
- Lecture notes (ppt presentation)
- BW Annex A of Chapter 5 (p. 136-138)
sub-chapters 5.1.4, 5.3, 5.4, 5.5 Box 5.2.5.4. - Additional
- BW Rest of Chapter 5
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