EU Policies Trade Policy

1
EU Policies Trade Policy

• EC329 Economics of the European Union
• Holger Breinlich
• University of Essex

2
Plan of Talk

• An overview of EU trade patterns
• EU institutions and legal framework for trade
  policy
• The EUs external trade policy
• The European Mediterranean trade area
• Preferential arrangements with former colonies
• Preferences for poor nations GSP
• Non-regional free trade arrangements
• The EUs Common External Tariff
• Summary and Learning Outcomes

3
EU Trade Patterns
4
Trade Patterns Export Destinations

• 2/3rds EU25 exports are to other EU25 nations (of
  which 90 is among EU15)
• Add all other European nations, 3/4th of Europes
  trade is within Europe
• North America and Asia are the EU25s main
  markets outside Europe, each accounts less than
  1/10th EU exports.
• Africa, Latin America and the Middle East are not
  very important

5
Trade Patterns Import Destinations

• The pattern on the import side is very similar to
  the export side
• Main difference is trade deficit with Asia (12
  imports vs. 7 exports)
• Rounding off, 3/4ths 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

Turkey
CIS
Other Europe
EFTA
1
3
1
4
North
America
6
Asia
12
Other
Africa
25
3
EU25
67
Latin America
2
Middle East
1
EU25 Imports, 2003 (source Eurostat)
6
Import Patterns of EU Members
NonEU Europe
N. Amer.
Africa
Latin Amer.
Asia
RoW
Luxembour
Ireland
Malta
Belgium
UK
Netherlands
Spain
Cyprus
Portugal
France
EU25-Avg
Greece
Italy
Hungary
Czech Rep.
Germany
Denmark
Sweden
Poland
Slovenia
Estonia
Finland
Austria
Slovakia
Lithuania
Latvia
Source Eurostat
20
30
40
50
60
70
80
90
100
7
Composition of Imports Exports
Machinery, transport

• Manufactured goods 90 (half of all exports being
  machinery and transport equipment).
• Import side, 2/3rds on manufactured goods.
• EU25 is a big importer of fuel.
• Other types of goods play a relatively minor part
  in the EUs trade.

equipment
Other manufactured
Manufact. Goods, 87
Manufact. Goods, 69
Chemical products
Fuel products
Other raw materials
Food live animals
Exports, 2004
Imports, 2004
45
34
Machinery, transp. eq.
26
26
Other manufactured
16
9
Chemical products
3
18
Fuel products
2
5
Other raw materials
Food live animals
5
6
2
3
Misc.
8
Trade Destinations Composition
9
EU Trade Institutions
10
Trade in Goods

• Trade policy one of the main supranational
  policies in the European Union
• Treaty of Rome Commission responsible for goods
  trade negotiations
• Council of Ministers sets Directives for
  Negotiation
• Council accepts/rejects final deal by QMV
• Commission also in charge of surveillance and
  enforcement of 3rd nation commitments to EU (?
  trade disputes with US, China, etc.)

11
Newer Trade Issues

• At the time of the Treaty of Rome, barriers to
  goods trade (mainly tariffs) were of primary
  concern
• Since the 1980s, GATT negotiations have also
  included
• Trade in services (GATS)
• Intellectual property rights (TRIPs)
• Trade-related investment measures (TRIMs)
• Initially, EU Commission had no authority to
  negotiate in these new areas (change with the
  Treaty of Nice)
• But expansion of unanimity requirements due to
  principle of parallelism

12
Antidumping Antisubsidy Measures

• Normally, no tariff increases allowed for most
  goods under GATT/WTO
• But temporary exceptions (safeguards) granted
  for
• Avoiding unfair competition (dumping) through
  anti-dumping duties
• Offsetting foreign trade-distorting subsidies
  through countervailing duties (CVDs)
• EU Commission in charge of investigating dumping
  complaints
• Any decision must be confirmed by Council of
  Ministers
• Anti-dumping duties imposed for five years
  (renewable)
• Often prevented through price undertakings by
  exporter
• Traditionally CVDs rarely used in the EU

13
The EUs External Trade Policy
14
European-Mediterranean Area

• West, Central and East Europe Single market in
  industrial goods (EU EEA Swiss bilateral
  agreements)
• Euro-Med Association Agreements
• Morocco, Algeria, Tunisia, Egypt, Israel, the
  Palestinian Authority, Lebanon, Jordan, Syria and
  Turkey.
• Asymmetric FTAs in manufactures (EU cuts its
  tariffs faster)
• Turkey unilaterally in Customs Union in
  manufactures
• Asymmetric dependence (e.g. 70 of Moroccos
  exports to EU, but lt1 of EU to Morocco)
• EFTAs FTA union with EU EFTAns mimic EU to
  avoid discrimination against EFTA-based exporters

15
Former Soviet Republics Western Balkans

• Partnership and Cooperation Agreements (PCAs)
• Concluded with all CIS nations Russia, Ukraine,
  Georgia, Belarus, Armenia, Azerbaijan,
  Kazakhstan, Kyrgyzstan, Moldova and Uzbekistan
• These are in essence generous GSP versions (GSP
  Generalised System of Preference, see below)
• EFTAns and Turkey usually extend same preferences
• Stabilisation and Association Agreements (SAAs)
• Granted to former Yugoslavian states and Albania
• Basically GSP preferences with additional
  elements (financial assistance, trade in services
  etc.)
• Unofficial first step towards EU membership (?
  PCAs)

16
Preferential Trade Arrangements in Europe
17
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 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.).
• These didnt help the ACP nations (e.g. Asian
  countries more successful without preferences)
• When Lomé Convention renewed in 2000, the EU and
  the ACP nations agreed to modernise the deal ?
  Cotonou Agreement, eventually reciprocal free
  trade

18
General System of Preferences (GSP)

• 1971 GATT provision allows for GSPs. EU quickly
  grants GSP to almost all poor nations
• General GSP
• Super-GSP more generous on market access but
  usually conditions (compliance with EU views on
  labour rights, environmental protection,
  combating illegal drugs etc.)
• Everything but Arms (EBA) for least developed
  nations (49 nations in 2005)
• On paper, EBA grants zero-tariff access on all
  goods, except arms and munitions
• But 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

19
Non-Regional FTAs Non-Preferential Trade

• EU has negotiated FTAs with non-European nations
  in recent years
• So far Mexico, Chile and South Africa
• Ongoing negotiations with Mercosur, Andean
  Community, the Gulf Cooperation Council (Bahrain,
  Kuwait, Oman, Qatar, Saudi Arabia and United Arab
  Emirates)
• All in all, only nine nations dont have
  preferential access to EU market (i.e. face the
  CET)
• But make up 1/3 of EUs external trade (U.S.,
  Japan etc.)
• Structure of the CET (figure)

20
The Common External Tariff
Textiles and clothing
12
Transport equipment
22
Average
Leather, rubber, shoes travel gds
17
Chemicals and photographic supplies
High
23
Electric machinery
14
Non-agricultural articles n.e.s.
14
Mineral products, precious stones
12
Metals
10
Non-electric machinery
10
Wood, pulp, paper and furniture
10
Dairy products
210
Grains
101
Live animals and products thereof
192
Tobacco
75
Coffee and tea, cocoa, sugar, etc.
114
Fruit and vegetables
150
Beverages and spirits
71
Fish and fishery products
26
Oil seeds, fats, oils and their products
76
Other agricultural products
76
Cut flowers and plants
19
0
50
100
150
200
250



Source WTOs Trade Policy Review, EU 2004
21
Summary and Learning Outcomes

• Overview of EU trade patterns and trade policy
• Looked at
• General EU trade patterns
• EU institutions and legal framework for trade
  policy
• The EUs external trade policy
• The European Mediterranean trade area
• Preferential arrangements with former colonies
• Preferences for poor nations GSP
• Non-regional free trade arrangements
• The EUs Common External Tariff

22
Location Effects, Economic Geography and Regional
Policy

• EC329 Economics of the European Union
• Holger Breinlich
• University of Essex

23
Plan of Talk

• Facts on Europes economic geography
• Theoretical frameworks
• Comparative advantage
• Agglomeration and the New Economic Geography
• Implications
• EU regional policy
• Empirical evidence
• Summary and learning outcomes

24
Facts on Europes Economic Geography
25
Facts on EU Economic Geography

• Europe is highly centralised in
• terms of economic activity
• Core 14 of land area, but 33 of pop. and 47
  of GDP
• Intermediate 21 of land, 25 of pop., 32 of
  GDP
• Periphery 65 of land, 42 of population, 21
  of GDP

26
Facts on EU Economic Geography

• Periphery has lower standard of living
• More unemployment
• Higher share of low-income groups

Source European Commission
27
Geographic Income Inequality
Lux.
DK

• Very uneven income distribution
• Use regional GDP/capita adjusted for price
  differences (1999)
• Luxembourg is 110 richer than average.
• Bulgaria only 26 of average

Ireland
NL
Austria
Belgium
German
Sweden
UK
Finland
Italy
France
Spain
Cyprus
Portugal
Slovenia
Greece
Czechia
Hungry
Slovakia
Poland
Estonia
Latvia
Lithuania
Romania
Bulgaria
0
50
100
150
200
250
EU27100. Source European Commission


28
Geographic Income Inequality

• Income distribution even more uneven at regional
  level
• Within nation economic activity is very unevenly
  distributed
• Unemployment shows similar pattern but somewhat
  less clear (see Overman and Puga, 2001)

29
Geographic Income Inequality

• French example
• Ile de France (Paris) has 28 of economic
  activity, 18 of population. Per capita incomes
  (not shown) are 158 of EU15 average.
• Méditerranée has 10 of GDP, 12 of population
  (GDP/pop only 86 of EU15 average)
• Outre-Mer (Guadeloupe, Martinique, Réunion,
  French Guiana) still poorer

Outre-Mer
Mediterranee
Centre-Est
GDP share
Pop share
Sud-Ouest
Ouest
Est
Nord-Pas-de-Calais
Bassin Parisien
Ile de France
0.00
0.05
0.10
0.15
0.20
0.25
0.30
30
Changes in Income Inequality

• Standard measure of income
• dispersion (standard deviation)
• in the EU15 has
• fallen across EU countries (large part due to
  cohesion four)
• but risen within most countries

31
Geographic Specialisation

• Do regions specialise in certain (manufacturing)
  industries?
• Use Krugman index of specialisation
• Shows which fraction of manufacturing has to
  change sector to make a nations share line up
  with EU15 average
• Shows most EU nations becoming more specialised

Source Midelfart-Knarvik and Overman (2002)
32
Summary of Facts

• Europes economic activity is highly concentrated
  geographically (within and across countries)
• Core enjoys higher incomes and lower
  unemployment rates
• Income inequality (in terms of per capita GDP)
  has come down across nations but has increased
  within nations
• Manufacturing activity has become more
  geographically dispersed (but only a little)

33
Theory Comparative Advantage New Economic
Geography
34
Theory Overview

• Two major approaches linking economic integration
  to change in the geographic location of economic
  activity
• Theories of comparative advantage suggest nations
  specialise in sectors in which they have a
  relative ( comparative) advantage
• The New Economic Geography (NEG) suggests that
  integration tends to concentrate economic
  activity spatially
• General line of argument
• Comparative advantage will help to explain
  cross-nation facts
• NEG will help to explain within nation facts

35
Theory Comparative Advantage

• Start by thinking about situation under autarky
• Since no trade, production and prices of goods
  largely determined by available factors of
  production (and technology levels)
• Focus on labour supply three categories of
  workers low, intermediate and high educational
  attainment
• Supply of these factors varies substantially
  across the EU (figure)
• Sectors use these at different levels of
  intensity (e.g. textiles unskilled intensive,
  pharmaceutical/finance high-skilled intensive)
• Consequences for autarky prices?
• What happens with international trade (or EU
  integration)?
• Who exports what?
• Importance of relative factor abundance every
  country must have a comparative advantage in
  something!
• Industrial structure in the EU should become more
  specialised

36
Levels of Educational Attainment in the EU15
Low-education labour
Medium-education labour
High-education labour
Portugal
83
Spain
58
Italy
44
Greece
25
Ireland
15
UK
13
Belgium
-4
France
-9
Netherlands
-16
Finland
-30
Austria
-35
Sweden
-42
Denmark
-50
Germany
-52
-80
-60
-40
-20
0
20
40
60
80
100
Figure shows share of workers as compared to EU15
average. Source Midelfart-Knarvik and Overman
(2002)
37
Theory Agglomeration and the NEG

• When productive factors can cross borders
  (international or inter-regional) integration may
  have very different effects
• Scale economies and trade costs generate forces
  that encourage geographic clustering of economic
  activity
• "Overall clustering" some areas with lots of
  economic activity, others empty ?
  core-periphery
• "Sectoral clustering" each sector clusters in
  one region, but most regions get a cluster
• Basic idea is that lowering trade costs affects
  both
• Agglomeration forces lead industry to cluster
  geographically
• Dispersion forces encourage industry to
  disperse geographically

38
Agglomeration Forces

• Many agglomeration forces
• Technological spillovers (e.g. Silicon Valley)
• Labour market pooling (e.g. City of London)
• Demand linkages (a.k.a. backward linkages)
• More firms mean more local demand (from firms and
  workers)
• Agglomeration increases consumer choice
• Supply or cost linkages (a.k.a. forward linkages)
• Larger choice of intermediates
• More competition among suppliers
• New Economic Geography focuses on demand supply
  links since they are clearly affected by economic
  integration (lower trade costs)

39
Dispersion Forces

• Many forces lead to a tendency of firms to avoid
  agglomerations of economic activity
• Rents and land prices (City of London vs.
  Docklands)
• High cost of other non-traded services
• Competition with other firms
• The NEG focuses on the last one, local
  competition
• Clearly related to trade costs (why?)

40
The Simplest Model

• Put agglomeration and dispersion forces into one
  diagram
• Only two countries or regions (e.g. North and
  South)
• Initially assume away all dispersion forces
  except increased competition
• Only agglomeration force is larger market size of
  North (has more purchasing power)
• The simplest agglomeration-and-dispersion-force
  diagram
• Equilibrium (E)
• Off-equilibrium points (A, E)
• Effects of freer trade?
• How would diagram change with more agglomeration
  forces?

41
Putting the Two Approaches Together

• Facts on mobility of factors of production in the
  EU
• Cross-country labour mobility within the EU is
  very low
• Within-country labour mobility somewhat higher
• Capital mobility generally high within nations,
  lower across nations (despite the SMP)
• Broadly speaking, factors mobile within nations
  but immobile across nations. Thus
• Agglomeration forces weak across countries but
  comparative advantage active
• Agglomeration forces stronger at the regional
  level
• Can this help explain our stylised facts?
• What about unemployment?
• Can explain regional differences (need low
  mobility wage rigidities)
• Harder to explain general core-periphery
  differences

42
EU Regional Policy
43
EU Regional Policy

• EU always had poor regions (Mezzogiorno, etc.)
• Much spending on poor EU regions by national
  governments
• Very little spending by EU/EEC before 1973 (1970
  3 of budget)
• Some indirect aid through CAP
• Some increase in 1973 (Ireland joined) but no
  major reorientation of EU spending priorities
  (1980 budget share 11)
• Accession of Greece (1981) and especially Spain
  and Portugal (1986) changed situation
• Shift in voting power in Council of Ministers
  towards poor countries
• Parallel increase in budget share (figure)

44
Increase in Regional Spending
100
Structural Funds
90
Poor Vote-Share
80
CAP
70
60
50
40
30
20
10
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
45
Instruments Objectives

• For historical reasons, EU has five Funds,
• Four Structural Funds Spending in any
  qualified region
• European Regional Development Fund
• European Social Fund
• Financial Instrument for Fisheries Guidance
• Guidance Section of the European Agricultural
  Guidance and Guarantee Fund
• Cohesion Fund Spending only in Poor-4
  (Spain, Portugal, Greece and Ireland).
• The five funds work together under an overall
  strategy
• Many programs, initiatives, and objectives, but
  over 90 is spent on three priority objectives

46
The Three Objectives

• Objective 1 (about 70 of structural spending).
• Spending on basic infrastructure and production
  subsidies in less developed regions.
• Generally defined as regions with incomes less
  than 75 of the EU average (Nordic exceptions -
  low population density).
• About 50 objective 1 regions have ca. 20 of
  the EU population.
• Objective 2 (about 10 of structural spending)
• Projects in regions whose economies are
  specialised in declining industries (coal mining,
  fishing, steel production, etc.)
• Spending should support economic and social
  conversion.
• About 18 of the EU's population lives in
  Objective 2 regions
• Objective 3 (about 10 of spending)
• Measures to modernise national training
  employment promotion
• All regions eligible, except for objective-1
  regions

47
Objective 1 2 Regions
48
Guiding Principles

• Specific choice of projects financed by regional
  policy funds is solely responsibility of national
  governments
• But spending is subject to six basic rules or
  guiding principles
• Additionality
• Concentration
• Programme planning
• Partnership
• Monitoring and evaluation
• Consistency and complementarity
• Details on national allocation of funds decided
  by Commission (but overall outline major decision
  of Council of Ministers and European Council)

49
Impact of 2004 Enlargement

• New members are much poorer than EU15 (figure)
• Major problems for existing regional policy
• Cost of structural spending could rise
  substantially
• Effects on EU15 regions
• Copenhagen European Council meeting in 2002
• Substantially lower allocations to new regions
  than to old ones
• How much lower? ? extrapolate from spending on
  old regions (figure)
• Example Poland should get 380/person, got only
  214 Lithuania should get 411/person, was
  allocated only 69
• Changes in political power in Council likely to
  shift spending priorities in the medium-term

50
Income Levels in the EU25
Regions below 75 in EU25
Regions below 75 in EU25
Regions statistically above 75
Regions statistically above 75
Regions above 75 in EU15
Regions already above 75 in EU15
Others
Others
51
Actual and Predicted Spending Levels
CC10
450.00
Lithuania
EU15
400.00
Luxembourg
350.00
Poland
"Equal treatment" spending
300.00
Poland
per capita cohesion spending
Linear (EU15)
250.00
200.00
150.00
100.00
50.00
Lithuania
0.00
0
10,000
20,000
30,000
40,000
50,000
Per capita income (PPS)
52
Empirical Evidence

• Stressed three determinants of location of
  economic activity
• Comparative advantage
• Agglomeration economies
• Regional policy (objective 12, in particular)
• Empirical research suggests all three matter (see
  BW for references)
• Importance of factor endowments seems to increase
  over time
• Supply linkages become more important, demand
  linkages less
• Only significant EU structural spending since
  mid-1980s but location of high-skilled industry
  seems to be affected

53
Learning Outcomes

• Know basic facts about Europes economic
  geography
• Understand theoretical frameworks
• Comparative advantage
• Agglomeration and the New Economic Geography
• How and to what extent can these frameworks
  explain the initial stylised facts?
• Cornerstones of the EUs regional policy
• History
• Instruments, objectives and guiding principles
• Impact of eastern enlargement
• Empirical evidence